“You never want a serious crisis to go to waste.” This quote, which is often misappropriated to Winston Churchill, was in fact uttered in 2008 by the current United States ambassador to Japan, Rahm Emanuel, to a Wall Street Journal forum, when he was Chief of Staff to former US President Barack Obama.
Although we are thankfully nowhere near the dark days of 2008, the question of what opportunities exist for businesses to leapfrog their competition in recessionary times is nonetheless relevant in an undeniably challenging economic environment. Mettle asks six leaders of investment advisory firms how businesses should use a recession to advance their strategies and achieve greater success.
Most New Zealand companies are currently in good shape, but they still need to focus on the road ahead, says Brett Shepherd, Investment Banking CEO of Craigs Investment Partners.
“We are in a relatively unique environment of low unemployment and high inflation, which means that businesses will continue to primarily focus on two things. Firstly, they will ensure they have the right capital structure, and they will continue to improve their operational efficiency. Primarily, management teams will be focusing on operational efficiency. It’s about driving businesses harder, better, smarter, finding better ways to reduce logistics and third-party costs.
“At Craigs Investment Partners, our advice in the current environment centres on how we can help them access capital, both debt, equity and hybrids, what's available both locally and globally as well as M&A opportunities that may arise to give them a relative advantage both in vertical or horizontal integration or consolidation. The debt capital market is very active, very strong, so the ability for corporates to access retail or wholesale debt is also very strong, which gives them greater flexibility and means they are not as dependent upon core bank debt.”
Chris Simcock, Country Head for UBS New Zealand since 2017, says that capital management also dominates conversations that UBS is having with clients, and particularly in light of three things.
“One, more uncertainty around the economic outlook and how that impacts on company revenues; two, cost inflation within businesses and how that is being managed; and three, the rapid change in the interest rate environment, which is likely to put pressure on some balance sheets. Companies are taking a very close look at their capital structure, ensuring they have the financial flexibility to manage the current environment.”
Companies are taking a very close look at their capital structure, ensuring they have the financial flexibility to manage the current environment.
Looking backwards can help to leapfrog ahead
Sam Ricketts, Managing Director, Co-Head of Investment Banking at Jarden New Zealand, says that the last true economic downturn in the context of capital management was in 2008.
“Those that raised capital early in 2008 got the best outcome for their shareholders. Therefore, companies are now taking proactive measures to ensure their capital position is strong and their cost base reflects the current environment.”
This means, says Silvana Schenone, also Managing Director, Co-Head of Investment Banking at Jarden New Zealand, that a feature of these capital management discussions between Jarden and its clients is the need to streamline the cost base to ensure businesses are efficient.
“We are saying to clients that at this point in the cycle you need to ensure that you’re lean and agile, yet still taking into account what will happen next – resourcing your business to be resilient but also able to take advantage of opportunities.
We have seen professional services and technology firms trim their headcount, applying the realistic approach that is needed. Some people are reluctant to raise capital now, as it is not ideal timing, but the environment may get worse, so if they need it to ensure their balance sheet is healthy, they should not wait.”
You need to ensure that you’re lean and agile, yet still taking into account what will happen next – resourcing your business to be resilient but also able to take advantage of opportunities.
This is why all of our interviewees are advising their clients to look ahead six to 12 months. Says Shepherd: “We are asking how long they think this will continue and what actions they should be taking now to protect the business if a downturn continues. Capital raising will not get easier, therefore consideration should be given to whether now is the time to act.”
How long will this tougher economic environment last?
“I think we are like this for another 12 months,” says Shepherd.
“The Reserve Bank Governor has increased the OCR to 5.5% and indicated he does not see this decreasing until the end of 2024. Inflation continues and labour cost pressures will not
abate. So, this will hinder real GDP growth.”
Andrew Barclay, Managing Director and Chief Executive at Goldman Sachs New Zealand, says that he expects New Zealand’s growth to remain ‘low but positive’ over 2023 and 2024.
“The magnitude of the downturn will be moderate, but the duration could be protracted. Core inflation will be more stubborn than the market currently anticipates and hence interest rates will remain higher for longer. The likelihood however is that we are still in the first half of this cycle. On the present inflation trajectory this may permit a more accommodative monetary policy by late 2024 or early 2025 followed by some improvement in GDP.”
The technology transition is continuing at pace, so it’s important not to hold back investment too much as you could risk standing still whilst others surpass you.
Simcock takes a similar view, saying that there is “no doubt that inflation is persistent. We are seeing the top end of the rate hikes cycle, but in a tight labour market and some continuing supply chain problems, the Government is trying to stimulate the economy, so inflation will be reasonably difficult to bring back down to within the target range. Although we are seeing a change in the slope of rate hikes, we think the macro environment will be challenging through this year and next, with some sort of normalisation towards the end of next year and into 2025.”
For this reason, Simcock says that M&A activity has been subdued over recent times.
“We are seeing some M&A activity for sure, but not to the levels of the last 24 months. The debt markets are more challenging now; raising debt at an attractive price creates a big hurdle. However, on the other hand companies are being forced to sell, or are taking advantage of an environment in which there is logic for consolidation, or if their competitors are challenged.
What sort of opportunities should businesses be alert to during this period?
Justin Queale, Head of Investment Banking at Goldman Sachs New Zealand, says that many New Zealand businesses are entering this period of tougher economic conditions from a position of strength, so this may well present a unique period to capitalise on.
“We suggest using this period to consider options to invest capital into organic and inorganic growth options to position the business to be even stronger coming out of this period. The technology transition is continuing at pace, so it’s important not to hold back investment too much as you could risk standing still whilst others surpass you. Balance sheet flexibility, cashflow discipline and having access to various forms of supportive capital will be key enablers of any investment strategy.”
Simcock says that volatility creates opportunities and activity.
“For example, look at the consolidation we are seeing in the US with JP Morgan and the mid-tier banks. That will continue to happen. The Australian markets are also more conducive to this activity now than they were six to 12 months ago. There is lots of large equity capital market activity taking place in Australia.
“We are seeing some positive signs in the equity markets in Australia that will flow through to New Zealand, so that theme will play out here too as companies decide to access the market
for growth capital, or for primary issuance IPOs.”
This means, says Shepherd, that companies should consider acquisitions here in New Zealand and overseas.
“Companies will keep looking at acquisition opportunities, both vertically within the supply chain, or horizontally with competing businesses. In addition to looking within New Zealand, companies will be looking across into Australia for opportunities. Historically the success rate for New Zealand companies making acquisitions in Australia has not been outstanding, but there are now a number of examples of New Zealand companies expanding their core business into Australia in a targeted way, and that has been very successful.”
International investors are considering whether New Zealand is a market they want to invest in, and if so, if now is the right time.
In Ricketts’ view, takeover activity will increase.
“We are seeing situations of this sort in Australia: there is a large weight of capital out there and some values are very subdued, particularly in the property and retirement sectors. Some other areas are also trading materially below NTA. Those types of industries are at risk potentially.”
Shepherd adds that there is a significant amount of capital out there internationally looking for the right assets and opportunities, although there are some outstanding questions about New Zealand as an investment destination.
“The availability of capital is not a question. What international investors are all doing is both an absolute and relative decision. In absolute terms, they are considering whether New Zealand is a market they want to invest in, and if so, is now the right time. They are weighing up an investment in New Zealand against other global options.
That means taking into account the merits of New Zealand’s relatively stable legislative framework, strong economy, and the ability to grow and invest capital, against ongoing concerns about a creeping unpredictability of government policies and the risks around OIO are still a considerable detraction for global investors.”
In his view, New Zealand continues to be a great place for investment.
“Capital wants the opportunity to invest here, both into the public markets and private markets. I think New Zealand corporates are relatively well positioned to get through the turmoil of the next 12 months and come out looking strong.”
Time to think laterally
Outside-the-box thinking can lead to benefits, says Schenone.
“We are here to provide the context and thinking to see opportunities our clients might not see. For example, you don’t need to own all your assets to control them. There may be ways to think beyond traditional ways, such as taking a portfolio approach to assets; there is no one-size-fits-all approach. For instance, Spark took an opportunity at a time in the market when people were paying high prices for assets. It sold 70% of its towers at an attractive valuation. My view is to look at your portfolio of assets and ask if there’s a better way to utilise your capital, operate your business and ultimately secure good shareholders’ returns.”
Queale encourages businesses to think about how the worlds of sport and business collide with increased frequency.
“Some of the most important lessons we employ in business today were learned from competing in sports. Some clear parallels exist for what businesses can focus on in this environment. They include retaining talent which is as important in business as sport, especially in this market; focusing on mastering the basics is essential; thinking clearly under pressure, being calm and making good decisions in those challenging moments; balancing the need to execute week by week, with the longer term strategic objective of investing, innovating, growing and evolving to be stronger in the future. And humility in leadership keeps you well-grounded with the team around you – as highlighted by Keven Mealamu and senior All Blacks who set a standard with their cleaning of the changing rooms after All Blacks games.”
Another area boards need to consider carefully in an international investment environment is the evolving ESG focus and reporting requirement, says Simcock.
“ESG continues to become a greater focus across boards and management. We have seen that trend happening across Europe, and some companies in New Zealand have been taking action for a while. In the conversations we are having, it is becoming more and more pertinent to company thinking, and not just about reporting against criteria. It is about how
people are running their businesses, creating internal targets around carbon emissions. Looking at recent weather events, people are worried about how the climate will continue to disrupt their businesses. It is not a ‘nice to have’ any longer. Investors continue to expect ESG consideration and activity, and it will only increase. From an operational business perspective, it is not about feeling good about yourself. It is becoming clearer and clearer that businesses need to think about how they operate in the context of a changing climate,
thinking about their supply chains and the future cost and availability of insurance, among a myriad of business decisions.”
Therefore, says Ricketts, it is important for boards in New Zealand companies to think about the changing external environment, and to look beyond our shores.
“New Zealand is at the bottom of the world. Thinking can be a bit internal, but ultimately, we are affected by external factors. Boards need to take a global geopolitical and macroeconomic view of the factors that might impact their businesses: for example, what is the play in China and Taiwan, or regarding fuel security in New Zealand now we do not have a refinery? Are these discussions happening in the boardroom?”
Simcock says that this means everything comes back to the core settings that apply within individual businesses: “You have to ensure you have the appropriate settings in your business regarding
capital structures, the right settings to enable you to manage through difficult economic backdrop, as well as the financial flexibility to take advantage of the opportunities that arise.”
Barclay says that it’s great being able to draw perspectives from the many experienced people within our global investment banking network who are all supporting companies around the world navigate these similar challenges we are facing. One area Goldman Sachs is encouraging clients to focus on is the risk management within their businesses, capital structures and any strategic transactions. Or, as he puts it: “One of our colleagues at Goldman famously said, “If you don't invest in risk management, it doesn't matter what business you're in, it's a risky business.” I think that remains very good advice for the period we are entering.”
Schenone agrees and adds in closing: “It is a cycle. The key is to find the right balance between the best position to weather the storm by being lean and agile, and also being well placed to face a new cycle. Have a good look at where you are spending. Maybe there are some non-vanilla solutions, some hybrid instruments that can help you raise funds in different ways. It is time to think outside the box."
One of our colleagues at Goldman famously said, “If you don't invest in risk management, it doesn't matter what business you're in, it's a risky business.” I think that remains very good advice for the period we are entering.