Golden Touch re-emerges amid darkness
For more than a decade BRUCE SHEPPARD gave us his Golden Touch, a six monthly booklet advising how to respond in the business and investment environment. Almost four years since his last, it makes a welcome return online
If you keep saying the same thing over and over, chances are you’ll eventually be right. A decade ago I was predicting an abyss based on demographics, wild debt fuelled consumption and idiotic lending. I was around six years ahead of reality.
So, where are we now? What is new? How do we respond in a business and investment sense? I’ll take it step by step.
Where we are now?
The world is approximately halfway through a degearing process (earning and not spending). This obviously occurs on a widespread basis when the cash stops flowing and the economy descends into a 1930s-style depression. The IMF (International Monetary Fund) now predicts such an outcome remains possible, if not likely.
Households are having the pain of degearing shared, as some governments are borrowing heavily to maintain economic activity. Others are printing money. It’s the same outcome - the pump’s primed. If we had not had the US and Europe printing money and the US and little countries like New Zealand borrowing at excessive rates, we would have had a social disaster.
The big threat is Europe. Will it fall apart? Politically, I think not. As a currency, however, the Euro looks doomed as a Europe-wide solution. The northern states of Europe will keep some common currency while the southern states will eventually revert to local currencies. Their economies are so different and common currency will always cause extreme distortion, which is a lesson for New Zealand. An ANZAC currency would turn us into a Greece.
The sooner Europe fails the better. It has to happen and the adjustment will take longer if this event is delayed. The depressed environment will last another three to five years, regardless. While Europe tries to face off what appears to be inevitable, the cycle will drag on.
The world is fragile and Europe is a dead man walking, but the global consequences are probably less than many think. While destroying a reasonable pile of financial wealth, a dismemberment of the Euro will allow a rebuilding with fresh opportunities.
Avoid Europe
So, avoid European debt, all debt, corporate, currency exposures and especially sovereign debt. If you feel you have to have an exposure to Europe, favour the Swiss or the Scandinavians.
As for the US, they are printing money like it is going out of fashion. Property prices have tanked, unemployment has stabilised (but remains stubbornly high), government accounts are in a mess and political infighting has made any meaningful response difficult. For different reasons, the US and Europe suffer the same inertia but, the US seems to be turning the corner. Corporate America appears to be in reasonable shape and the stock markets are flat lining even with all the bad news.
Australia is a tail of two countries. Western Australia digs stuff out of the ground and, where China goes, Australian mining goes. If you’re not mining, Australia is a little America. The eastern states are in recession. Against this backdrop, New Zealand isn’t so bad.
Don’t get me wrong. There is still plenty wrong with New Zealand. But most are considerably worse off than us.
NZ positives
We still have our own currency. We export food. We are independent of all power blocks. We have a number of free trade agreements. Our fiscal accounts started out better than our competitors and our interest rates were higher, meaning we could lower them more than those with lower rates. All those soft things that make New Zealand home for us remain attractive remain. When the glow of opportunities overseas lost their lustre, the comfort of clean beaches, good schools and public health and a benign climate are downright attractive. Sure, we have had more than our fair share of crap during the past year or so with the, Canterbury earthquakes, Pike River mining disaster, shipwrecks and, as Christmas 2011 approached, floods and land slips in the South Island.
In a severe global down cycle, there is something fundamentally safe about New Zeland. The structural negatives of being small and isolated actually become positives.
What is new?
Globalising businesses previously focused on the USA and Europe to find expansion opportunities and capital. If you had a start up it was New York, London or Silicon Valley that you went for second round Venture Capital money.
That’s no longer the case. China is where both the cash and the opportunities are. Chinese investors are quite different to US investors. New Zealand business owners who are prepared to come to grips with that could find the opportunity is worth the risk.
An interesting recent trend is in-bound greenfield investment, not from China but others - most notability the US. They are coming for two reasons:
1. All the good things about New Zealand relative to the US and elsewhere and (this is one I did not foresee) …
2. The opportunity to take advantage of our free trade agreements and our neutrality.
The Chinese are not investing in starting up Greenfield businesses that they bring from China to NZ. They are focussing on buying established businesses and land, and are also targeting New Zealand technology businesses. The approach to these is quite different to the approach to more traditional business. On a grand scale the Fisher and Paykel Appliances transaction was the first of these. It is fair to say that at the time I was critical of this transaction. Now, having actually completed one and nearing completion of another, I have a considerably different view of the model.
The first transaction involved the placing of an 18% stake in a NZ technology company that was struggling to raise capital in NZ. It was exporting services and hardware to the US and, of course, its market was suffering. It was not making money, but still had world-leading technology in its space, so you can appreciate that it’s a hard value proposition to sell.
Through Yi Ping Ge, our Chinese partner, we have an active portal into mainland China. We regularly get inquires for investment opportunities from this source, as well as the targeted big ticket stuff, eg. Crafar farms and the like, where we have interested parties that we represent.
A party was introduced to this company, the investment was made in less than a month, no board seats were requested, no strings were attached and they have offered to represent our company in China to expand our income. It was so fast and straightforward compared to the US venture capital model, I was astounded. And, so far, it was more “honest” than any deal I have done with US VCs - and I’ve completed a few of these over the years. The second one was even faster, we sent the IM through they agreed to buy in 24 hours and it is in the process of settling. They are fast and the deals are very clean.
Their approach has a consistency about it. They buy to keep, not to sell, so they never talk about exits. They like companies and boards that respect ownership, and they like and respect good governance processes. That’s why the first deal did not have a board member forced on it. They respected the board and the business culture of the organisation.
The 2nd sea change
A mid-sized US company is seeking to relocate a high tech business to New Zealand. The owner wants to relocate because it is clean, green and benign, in both an environmental and social sense. But, more importantly, he wants to get his product into the Chinese market, which he can’t do from the US. He wants a soft-landing in New Zealand, meaning he wants connectivity to universities, government, and other New Zealand businesses he can network with. His aim is to add value to an embryonic research sector here to expand overall output from New Zealand.
The 3rd and final sea change
The final change is global and structural. Governments have worked out that when a systemic failure occurs they are - whether written or not - the guarantor of last resort. As a result they have decided it’s time to set some boundaries and enforce them. In New Zealand this took the form of tougher Prudential rules for Insurers and non bank deposit takers, closer Reserve Bank supervision, the birth of the Financial Markets Authority, and the once in a generation review of Securities Law. I feel honoured to have been part of this process in New Zealand, having served on the transition board and now as an associate on the ongoing board. The bright side is this reform is not a purist government-led initiative. It is being lead by business, investors and government in partnership the consultative process is positive.
So, what to do?
Start Up to Keep not Sell
First, start-ups need to change their mind set, stop talking about selling and instead talk about keeping. Critical to this is good governance. It not only adds value, it adds to a company’s ability to raise capital.
Second, change the thinking about China, to how we thought about the USA 20 years ago. They are rapidly becoming the new financial hub, especially in the Asia Pacific region.
Third, don’t forget we are still in fragile times, so be prudent with debt focus on cash. Now is the time to innovate. Why? There is a labour surplus of skill emerging but it is a short term surplus. If we develop opportunities in New Zealand, we will keep skilled people when the next upswing occurs. If we don’t, they will leave for the USA, China or elsewhere when the opportunity arises.
The down cycles are what create great businesses; it is easy to be complacent in good times. Remember the saying, ‘When the going gets tough, the tough get going’. The next five years is New Zealand’s golden global opportunity. SMEs and corporates need to actively grasp it.
Where do you target? Forget consumer goods or even the delivery of such goods (ie. retail or IT solutions chasing more consumption spend). Target better, smarter infrastructure and productive capacity. The upswing in consumption is 10 years away.
Target IT and gadgets that streamline the provision of services, as labour will become the limiting factor over the next 25 years.
Why is Gilligan Sheppard uniquely placed?
Gilligan Sheppard has a unique bunch of skills and relationships that will be critical in maximising these new opportunities.
1. We are nimble and practical. Many of our bigger moribund with process competitors are not.
2. We are well connected to both Government and business. My involvement with the New Zealand Shareholders Association has had some benefits in that regard.
3. Our partners are actively involved in business outside of accounting and have wide networks of SME businesses leaders, most of which are in the technology area, delivering up networks that come together and do things. Doing this for more than 20 years has built through engagement, confidence.
4. We have a strong reach into both the immigrant community and to China itself.
5. We are part of an international network of like minded firms that facilitates cross border transaction effectiveness.
6. We have good connectivity to universities, both directly and via our networks referred to under Item 3, and we have a strong reputation for sound governance and principled business ethics.
7. In an operational sense, we have a strongly efficient compliance and tax advisory service.
Both I and the Gilligan Sheppard team are looking forward to 2012. It will be a year of changes, surprises, and opportunity. Make sure you are up for it. We are.
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