Alternative access to capital

There are opportunities to catalyse capital flows in New Zealand via financing avenues that are, to date, underdeveloped – including private debt and securitisation. These could have a vital role to play in levelling up local market capabilities.

DAVISON In 2019, the Growing New Zealand’s Capital Markets 2029 report produced by EY on behalf of the Financial Markets Authority mentioned growing the private capital system as one of its six recommendations. We are increasingly talking about private capital as one of the mega trends, especially in the context of governments and banks trying to use their balance sheets as efficiently as possible. Where does the rise of private capital, and particularly private debt, fit into institutional banks’ strategies?

TUCKER If we view it as competition that is the wrong way of looking at it. These should be portfolios with different risk appetite and different capacity to play in the capital structure.

We should be, and we are, thinking about how we can work side-by-side with this type of capital. Bank balance sheets will have constraints. Contemplating the volume of capital we will need to support infrastructure and housing, we are not going to do it alone. Further, if we are thinking in a vanilla way about bank debt, we are not going to solve the problems. We need other forms of capital that can be complementary to balance sheets. There are things that banks can do that private capital cannot, and vice versa.

THOMSON I agree with this. The potential challenge is that banks face a regulatory regime that private capital does not. If it starts playing in our space we should consider what this might mean. This is not a problem that will arise tomorrow, but it is appropriate for us to think about what it will look like in 5-10 years’ time. 

DAVISON The securitisation structure creates a natural attachment point for senior and mezzanine capital. Is securitisation something New Zealand can use more?

TUCKER Securitisation can work here and we have been able to get it to work before. We just need to think about applying the same thinking to a broader range of asset classes. I remember coming back to New Zealand over a decade ago and wondering where the securitisation market was. We have not grown it as far as we could.

This somewhat answers the question we were considering earlier, about how we start to use domestic pools of capital like KiwiSaver more effectively, including bringing them into more deals. It is not just the specialised credit funds, it is also a broader base of domestic fixed-income investors.

BART THOMSON

The potential challenge is that banks face a regulatory regime that private capital does not. If it starts playing in our space we should consider what this might mean. This is not a problem that will arise tomorrow, but it is appropriate for us to think about what it will look like in 5-10 years’ time.

BART THOMSON COMMONWEALTH BANK OF AUSTRALIA

FORD It comes back to strong economic growth and creating opportunities for different forms of capital to come here. For example, longer-term offshore or onshore vibrant tech companies that are going to attract private and venture capital. We want vibrancy within the market in order that we keep attracting capital and have room for everyone to participate. This is the way we should be looking at the market, rather than worrying whether it is too crowded.

We want activity to be pulling in capital and we want offshore capital to come here because it recognises that New Zealand has plenty to play for, and great stability and liquidity.

DAVISON A lot of New Zealand corporates have issued in the Australian market and this has clearly been a very successful funding option. But the reality is that the New Zealand debt capital market has struggled with lack of credit diversity for quite a while, to the extent that local institutional investors are also increasingly using trans-Tasman mandates. Does it concern panellists to see big New Zealand corporates doing their financing offshore, and institutional investors effectively doing the same?

MCKINNON Most of them are going because they require funding diversification – because they have significant funding needs. They are heading to where there are deep capital pools. This is part of global capital markets and we must ensure we are participating in it to support New Zealand companies.

THOMSON It clearly makes sense for individual companies But the underlying theme to me is scale in New Zealand, and specifically wanting to get sufficient scale in this market to make it an attractive place to borrow.