Chris Lee & Partners Ltd

Taking Stock 28 November 2024

FEW New Zealand retail investors will have heard of Snowball, an organisation that offers access to high-risk shares in unlisted companies that would not qualify for an NZX listing and might find banks unwilling to lend.

That most investors are unfamiliar with Snowball is a good sign, in my opinion.

I respect detailed information, analysis, and evidence of potential and sustainability when I invest. Crowd funding does not provide the information I require.

Curiously, Snowball and a few other crowd-funding organisers are legitimised by a Financial Markets Authority license to make these offers.

Snowball measures how much it has raised – some $200 million in 10 years – for the companies it represents.

I would much prefer that it measured and reported on what has happened to that $200 million. That is, how much has been lost, how many crowd-funding private offerors have survived. I would wish Snowball reported this monthly to promote transparency and credibility.

Snowball has this week announced it will try to grow its business in a new area, offering retail access to a private equity firm’s range of products. It will charge the private equity people to promote their products.

Again I am cautious, unsure what analytical skills the people behind Snowball bring to the process, or what value Snowball adds.

Private equity and private unlisted debt funds have grown at an astonishing speed as worldwide regulators of listed securities have become increasingly rule-bound and litigious.

In simple terms, banks have backed off from the riskier form of corporate lending - leveraged buyouts, mergers and other acquisitions - leaving room for risk-takers.

The banks’ caution is related to the extremely high values at which new buyers have priced their targets.

Any wise lender would be on red alert to these high valuations, perhaps many of those buying believing that interest rates will fall, trade wars will not happen, and Trump will fuel another round of low-cost debt-based activities.

Private debt offers are now collectively in the multi-trillions.

A wise investor might contemplate why the banks are content to hand over this high-margin lending to non-bank fund managers.

My view is that such offerings are for seasoned, wealthy, trained investors, able to afford the high risks, hopefully offset by the potentially double-figure returns.

Those retail investors who do want access to high return, high risk should know that most of the funds that feed these products are from KiwiSaver and other pension funds, where the allocation of other people’s money is done by highly paid people, incentivised to chase high returns.

One has to hope that the FMA is tracking every single offer it has allowed and will at some stage provide the public with the details they need to form a realistic picture of the success and failure ratios.

_ _ _ _ _ _ _ _ _ _

THE parliamentary select committee enquiry into banking is being trivialised by the behaviour of various backbenchers whose inquisitiveness is not prompted by knowledge, and by the media, which displays the trivia.

It seems few questions hone in on the cupboard where the scariest skeletons live.

One regular attendant records with humour that when the television cameras are scheduled to turn up, best shirts and ties appear and then some excitable look-at-me character hops up and asks the big questions of a bank CEO: “How much is your salary? How much of your expenses are paid to you?”

I am unsure whether he also asks what sort of car the chief executive drives and whether she buys her lunch at Subway or a Parnell café?

The TV cameras whirr during these crucial matters. 

Guess what is the first item on the TV News that night?

Nobody seems interested in whether the lending to small businesses would be easier if the capital required for that lending was eased.

Nor is the follow-up question of how much provisioning would increase if business lending grew quickly.

My wish is that New Zealand's best-ever banker, Sir John Anderson, was alive and was there to be addressed by these theatrical people.

I can just hear him. “I am not here to listen to this sort of childish, irrelevant questioning.

“The answer is I do not know or care what I am paid and have no idea what my expenses are, and as for my lunchtime sandwich, my wonderful secretary organises that. Next question please, and may it be from an adult, if there are any in the room.”

Anderson, sadly, died a few years ago after a contribution to New Zealand finance rarely matched by any top business leader.

The bank enquiry, rather like the Commerce Commission enquiry, serves the purposes of showing the public that “something is being done” about the big bullies from Australia.

Yet nobody is likely to ask the National Australian Bank why it lent its subsidiary, the BNZ, $1 billion to help the BNZ avoid defaulting on its commitments in 2008.

When the government sold the Post Office Savings Bank in the 1980s to the ANZ Bank, and when all the community savings banks (bar two) were merged into Trustbank and sold to Westpac, the politicians and the regulators of the day were expressing their opinion on banking ownership.

Clearly the sellers wanted the big bullies to beef up our banking system, whether they were from Australia, the USA, China, India, or France.

Enquiries now might usefully address regulations.

The media and the politicians who want to know about bank salaries might just be another example of our pandering to the lowest common denominator.

_ _ _ _ _ _ _ _ _ _

PERHAPS the example I recorded, of TV News displaying juvenile understanding of what is “news”, might also provide insight into the hard decisions being made about TV1 staffing numbers.

If you present baby talk to adults, the adults will not pay attention.

When the audience disengages, advertisers must find another medium to attract its target.

When TV1’s revenues collapse, there is naturally less money for the salaries pool.

At that point, an adult manager of the medium must pose these questions.

1. If the salaries pool is $50 million, should we employ 600 people at $83,333 per head, or 400 people at $125,000 per head.

2. If the unions are serious about looking after the media, might they suggest there be new expectations about the price put on television reporting and presenting, so that jobs can survive, salary cuts being a logical response.

These questions might make us recall those nonsensical events when news presenters were paid far in excess of skilled people like the Attorney-General, the Chief Executive of the Housing Corporation, surgeons, or our best scientists.

I am fairly sure the Attorney-General could read the news with the necessary solemnity and accuracy that an adult audience would expect.

Those days of absurd “celebrity” salaries have gone, I am told. Allegedly they were justified by commercial considerations because, it was said, a telegenic newsreader attracted more audience and therefore more advertising support.

Fairly clearly, the advertising revenue no longer is linked to the charm of any presenter. The revenue depends on an audience - the lower the audience, the lower the salary pool.

So the commercial story has died.

If television produces enough revenue to pay its staff $83,333 per head, but not $125,000 per head, what should the union be advocating?

_ _ _ _ _ _ _ _ _ _

THE Santana Minerals annual meeting in Auckland on Tuesday heard details of its consenting timetable, its expectations for permission to mine, and details of its plan to build an open pit mine in a somewhat distant valley of rotten rock, on a farming family’s private land.

It must be said that when the exploration process began under two of New Zealand’s finest geologists, the goal was to find a resource of a million ounces at a grade of one gram per tonne and sell the mined gold at around NZ $2500 per ounce.

As those at the meeting heard, the exploration process struck a reef yielding more than 2 grams per tonne (double the grade) and found a resource of considerably more than a million ounces.

But the miracle was the unanticipated rise in the gold price currently (at time of writing) NZ $4600, not NZ $2500.

The difference in returns would be immense if the gold price neither rose, nor fell, from its current trajectory.

All Santana investors who transact through our business, and get their research and information from us, will receive a detailed account of the annual meeting, and a summary of coming key events.

Edward and I attended the meeting and met afterwards with directors.

We expect the summary to be distributed this week. We will be urging all NZ shareholders to transfer their shares, at no cost, from Australia to NZ now.

What we can say is that if the consent is granted, if the mining production is as modelled, and if the gold price remains elevated, Santana would be an early success for a government so keen to lift its tax and royalty revenues.

If Cromwell is to be the centre of what could be one of New Zealand’s largest companies it would need to get its skates on now, to cope with the consequential economic activity.

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INFRATIL has opened an offer of 6-year bonds, with a maturity date of 13 December 2030. This would replace the IFT260 bond, which matures on 15 December 2024.

The offer comprises both a Firm Offer of up to $50 million and an Exchange Offer, intended for holders of the IFT260 series up to $100 million.

The Firm offer is open now and closes at 11am 3 December and we encourage any clients seeking a firm allocation to contact us by 5pm Monday 2 December.

The Exchange Offer opens on 4 December and closes on 10 December to eligible holders of IFT260 bonds maturing 15 December 2024 who will be able to apply for new bonds using the online portal at www.infratilbondexchangeoffer.com.

Exchange offer applications made through the website above for new bonds will be satisfied in full.

Infratil will pay the transaction costs.

The minimum interest rate for the new bonds is 6.00%p.a. with the rate set (applicable to both the firm and exchange offer) on 3 December.

Investors wishing to participate in the Firm Offer should contact us on or before 2 December.

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KIWI Property Group (KPG) has announced its intention to issue a new 5.5-year senior, secured green bond.

KPG owns and manages a property portfolio valued at $3.3 billion, with a high occupancy rate of 98.4% and a weighted average lease term of 3.8 years.

Although the interest rate for these secured bonds has not yet been announced, we anticipate a rate of approximately 5.40% per annum, based on current market conditions. These bonds are expected to have an investment-grade credit rating of BBB+.

KPG will likely cover the transaction costs for this offer. Therefore, brokerage charges to clients are unlikely but will be confirmed next week.

If you would like to register your interest, pending further details, please contact us promptly with the amount you wish to invest and the CSN you plan to use.

Please note that indications of interest do not constitute any obligation or commitment to invest.

_ _ _ _ _ _ _ _ _ _

Kiwibank (KWB) has announced it is considering making an offer of 5 year fixed rate notes.

The notes are expected to be rated AA by Fitch and A1 by Moody’s.

Details of the offer are expected as early as the week beginning 2 December.

No interest rate has been set but is estimated to be in the vicinity of 4.50%.

Brokerage is expected to be charged for the issue.

If you would like to register your interest, pending further details, please contact us promptly with the amount you wish to invest and the CSN you plan to use.

Please note that indications of interest do not constitute any obligation or commitment to invest.

Travel

Our advisers have no further travel plans this year.

Office closure

Our offices will close on December 20 at midday, and reopen at 9am on Wednesday, January 8, 2025.

We will continue to respond to essential emails during this time.

Chris Lee

Chris Lee & Partners Ltd

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Taking Stock 21 November 2024 

FOR those who follow economics and investment, the arrival of Alan Bollard as guest speaker at an adult education meeting in Central Otago would be celebrated.

As guest speakers go, he would be from the top shelf, a former Commerce Commission chairman (1994–98), Secretary to Treasury (1998–2002), and Reserve Bank Governor (2002–2012), now a university professor.

As a member of the adult group, you would expect Bollard to be deeply concerned about the trajectory of the world’s debt levels.

As noted in Taking Stock last week, the Trump plan to blow the US deficit from US$2 trillion a year to $3 trillion, while providing tax cuts and introducing extreme tariffs on imports, is a plan that must produce higher inflation unless the laws of gravity are reversed.

My conclusion is that the majority of US voters who liked Trump’s tariff plan must prefer inflation and ever-greater debt, implicitly discounting the burden on future generations to service this debt.

Bollard is a learned economist, once the head of the NZ Institute of Economic Research, and is married to Jenny Morel, once an energetic enthusiast for venture capital. They would be committed to the concept that growth and productivity are the right answers, not exponential increases in government debt.

Bollard told the Central Otago audience recently that his concern about Trump’s economic plan was that it was inflationary and relied on even more debt.

The global bond market, which matters somewhat more than Kapiti Coast investment advisors, or even former Reserve Bank governors, has expressed its view, loudly.

The 10-year bond, here and in the USA, is around 4.5%.

Clearly, the bond market’s benchmark implies a long period when, as an example, mortgage rates must be high.

The loud bleat for drops in short-term rates might base its shrillness on the allegedly low (in my view false) inflation figures and anticipate an imminent cut in the overnight cash rate. (Inflation for many is much higher than the chosen index indicates.)

Swap rates and the 10-year bond rate insinuate doubt about the trajectory of interest rates.

Why would a bank or a pension fund lend at mortgage rates of 5%, if the risk-free 10-year bond settled at 4.5%? The extra 0.5% return over of the mortgage return would easily be offset by the lower risk capital requirement and admin support cost of a 10-year bond.

It has long been said that you can bet against the equity market, and many do (by shorting it) but no capital market participant has learned much if he wants to bet against the bond market.

As a truism that is as staunch as the other old saying that "you can bet against bond markets for a long time, but they always outlast your solvency".

Bollard’s warning was timely. In the words of an investment adviser like me, he was saying that if Trump implements his plans inflation will be reignited.

To investors that means one should not sacrifice liquidity to lock in long-term investments returns now.

The ANZ and others may well be right that business growth will one day be restored but one must always remember that, whatever rates might do, the ANZ wins.

As an aside, Trump’s tax-cut promises - also inflationary - depend on tariffs and more debt.

The promise to boot out of the USA those largely South American and Asian workers who have not been granted working visas is an absurd commitment.

Increasingly, Americans are retiring from work earlier, and increasingly stepping away from service sector jobs.

The thought that service sector workers can be expelled and replaced by America’s unemployed is about as lucid and savvy as the thought that America will benefit from re-opening coal mines while stripping support from renewable energy projects.

The adult education meeting in Central Otago that was privileged to listen to Bollard’s speech has now received guidance from an experienced, highly educated public sector leader, no longer bound by rules about speaking the truth.

Listen to him.

_ _ _ _ _ _ _ _ _ _

MENTION of Bollard may jangle some nerves of those who endured the ravages of the 2008 global financial crisis.

In NZ the global crisis resulted in a savage decrease in our share market, lasting nearly three years, a collapse in our property development market, a nasty fall in the values of properties, and it exposed the rot in our contributory mortgage and finance company sector.

The finance companies that had funded the surging property development market were found to have been governed and managed mostly by knaves.

Worse, they had been supervised by trust companies with virtually zero skill or understanding, audited carelessly, overseen and regulated by incompetent and lazy people at the NZX and the Securities Commission and, worst of all, wilfully ignored by politicians until it was too late.

It would be unfair to apportion much of the blame to Bollard and the Reserve Bank, though they certainly failed to influence the politicians or a poorly-led Treasury.

The country failed to rescue billions from the bonfire, largely because Key had neither the experience, wisdom, nor motive to put “chump change” (in his words) ahead of election successes.

A foreign exchange dealer with an unadmired greedy American bank was unable to understand the offers of people who were competent, experienced, and wise, Duncan Saville, an international fund manager, being the obvious example of a rescuer with a full-sized cerebral organ.

Of course we must also acknowledge the incendiary behaviour of hopeless consultants, C-grade legal and corporate advisers, receivers, statutory managers and valuers, many of whom were as self-centred as any politician. Few, if any, are held in respect today.

Bollard and the Reserve Bank did insufficient to earn praise during this debacle, the RB dysfunctional in its relationship with Treasury.

But as is the case in most disasters, it is fair to put most of the blame on the villains who created the fire, and not judge as harshly those who failed to extinguish it.

Nor should we discuss Bollard during a conversation about the current oafish plan for the Crown to guarantee finance company investors for a charge roughly equal to their corporate entertainment bill.

I have not asked Bollard for his view on this madness, but I would bet my best bow tie that if he were governor, he would be pricing risk appropriately.

_ _ _ _ _ _ _ _ _ _

INVESTORS should note that the Australian deposit guarantee is more generous than NZ proposes, covering in total A$250,000 (maximum, per deposit) invested in a bank, building society, or credit union.

Please note there is no mention of any guarantee of any finance company.

The guarantee fees are displayed as follows: -

Credit ratings

AA minus – AAA - 0.7% per annum

A minus - A plus - 1.0% per annum

BBB plus – unrated - 1.5% per annum

The current NZ proposal, which I hope is reversed by Finance Minister Nicola Willis, is to charge finance companies in NZ less than AAA banks pay in Australia.

My view remains that NZ should not guarantee any finance company but if NZ must take this risk, it should price the guarantee fee based on an in-depth risk assessment, beginning with a base fee that acknowledges any credit rating.

Finance companies with weak shareholders (individuals with no material wealth), meagre capital (less than $100 million), might have an attraction for investors chasing a high return if we ever did have sufficiently vicious penalties for those who cheat (including jail).

As our weak laws apply today, the finance companies should be funded only by other institutions, like banks, with the skill to price risk accurately.

_ _ _ _ _ _ _ _ _ _

ONE of Trump's goals is to integrate a non-fungible token (Bitcoin) into our settlement system, legitimising the virtual currency so favoured by those who do not want their transactions to be visible.

I met last week with a bullion depository owner who attends conferences in the USA, listening to presentations on commodities and new ideas.

A decade or so ago, he sat beside a conference attendant during a plenary session that was focused on the future hopes of Bitcoin. His conference neighbour subsequently had a gentle punt on Bitcoin, at the time US$12 per coin, buying 200 coins, carefully storing his unique 16-digit access code in his computer.

The “coins” lost value. The buyer lost interest.

That was not the only thing he lost.

He lost his computer and the 16-digit code.

Despite subsequent expensive efforts his code has not been discovered. The “coins” have disappeared.

Ah well, win some, lose some.

Today, 200 Bitcoins would be “worth” at US $80,000 a coin, a mere US$16 million.

Perhaps this recollection explains the wisdom of the NZX in offering a Smart Bitcoin fund, where the punter has no responsibility for storing their “coins” or password.

The Smart fund does all the tricky stuff.

The fund has risen sharply in value since Trump was elected.

Note, Bitcoin, in most parts of the world, remains an unregulated fungible token. Its followers have done sensationally well in recent weeks. Now is not the time to recall the days when tulip bulbs sold for more than country estates, I suppose.

_ _ _ _ _ _ _ _ _ _

SANTANA Minerals holds its AGM in Auckland next week.

Those attending will no doubt be seeking answers to the questions left dangling by its release last week of its Pre-Feasibility Study (PFS).

Investors should know that by ASX regulations a PFS must be reliable to an extent of 70-80%, meaning the assumptions must be made reasonably.

A Final Feasibility Study must be 80-90% reliable.

Of course the biggest assumption relates to the future of the gold price. I am unsure how you can attach a percentage of certainty to that figure.

Edward and I will attend the AGM and report back to our clients on anything useful we learn.

The project remains the most interesting project in which I have been involved for many years.

The new PFS discloses that Santana aims to mine 147,000 ounces on average for each of its first three years, assessing the total cost per produced ounce at NZ$1,620.

The gold price of NZ$4,300 implies a margin of NZ$2,680, per ounce, which should convert to nett profit before tax.

One can perform one's own arithmetic but very clearly if this margin were realised as per the PFS the thousands of New Zealanders who hold a meaningful number of the shares would be more gruntled than disgruntled.

_ _ _ _ _ _ _ _ _ _

Infratil Limited – 6-Year Senior Bond

Infratil has announced its intention to issue a new 6-year senior bond. Full details of the offer are expected to be released on 28 November 2024. Infratil is an infrastructure investment company with significant holdings in Digital Assets, Renewable Energy, Healthcare, and other infrastructure assets. It anticipates earnings for FY2025 to be approximately $1 billion.

While the initial interest rate has not been announced yet, we expect it to be approximately 6.20% per annum based on current market conditions. Infratil will cover the transaction costs for this offer, so clients will not be charged any brokerage fees.

The offer will comprise two separate parts:

New Firm Offer: Expected to open on 28 November 2024 which will be open to new and existing investors. The Firm Offer is expected to close at 11:00am on 3 December 2024, with payment due the following week.Exchange Offer: Expected to open on 4 December 2024 (following the Firm Offer). Under this offer, all New Zealand resident holders of the IFT260 bonds maturing on 15 December 2024 will have the opportunity to exchange some or all their maturing bonds into these new bonds.

If you are interested in being added to the list for these bonds, please contact us promptly with the desired amount and the CSN you wish to use, and we will pencil you in on our list. 

If you are an existing IFT260 bondholder and would like to exchange your bonds into this offer, please inform us at the time of your request.

We will send a follow-up email next week to anyone who has been added to our list once the interest rate and terms have been confirmed.

Chris Lee

Chris Lee and Partners Limited

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Taking Stock 14 November 2024

The Trump election is over, leaving two important topics for those with investment portfolios to consider:

1. The inevitability of yet further increases in the use of debt to fund popular short-term solutions.

2. Irreversible changes in democracy of high significance to future generations of investors.

Increases in global debt fuel inequality and constrain the rights of today's younger people. Housing affordability is one obvious victim. Rising debt is an important factor in rising inflation.

It seems that the huge increase in sovereign debt everywhere (tens of trillions printed and borrowed) followed Covid.

Mistakes were made everywhere.

Here in NZ there is no possible reversal of the $10 billion mistake Robertson and Treasury made when the government bought back from the Australian banks’ government bonds at a premium price without an agreement to sell back to the banks at the same price, after the feared (but unrealised) Covid crisis was over.

There were many other such errors made by inexperienced or ideological so-called leaders in NZ.

And globally other errors contributed to the royal flush of inflation, rising asset prices, misallocation of Crown funds, the fuelling of corruption, and the consequential rise in short-termism and inequality.

The ground was prepared for populism, led here by forum groups and thus the second Ardern government which had no understanding of the inevitable consequences of their poor decisions. To be fair, they received poor advice and did not have the internal resources to contest the advice.

The consequences are low growth, higher unemployment, low productivity, and now that debt is seen as the sole solution, higher inflation.

Last week’s rise in bank interest swap rates, and 10-year government stock rates, confirm the market response to the plan Trump represents.

Global debt levels are mathematically unsustainable at today's debt servicing costs.

If rates have to rise to combat the inflation that will follow ever-higher debt levels, investors and fund managers will do their own maths, and invest only at rates that reflect growing dysfunction.

The 10-year bond rates, here and in the US, are a grim reminder that printing money is a synonym for creating inflation.

No amount of cost-cutting, as Elon Musk is to be tasked with doing in the USA, will deliver the standard of living that today’s voters demand, as reflected in the landslide victory of someone promising immediate solutions.

Very clearly, Trump’s triumph is a victory for those short-term thinkers who want the restoration of decent public services and liveable wages, with no plan to fund them other than with debt.

Just as clearly, the voters in the US support the concept of minimal taxes for those with the biggest fortunes.

So lesson one from Trump’s victory is that inevitably we will have higher debt-servicing costs in coming years as tariff/sales tax changes feed into prices. Debt servicing eats into tax revenue.

My investment response to this is to increase short-term deposits and buy bonds from only the strongest issuers and only when the bond offer is generous enough to cover future interest rate levels.

I would be fairly certain essentials like electricity, rates, water, food, health charges and (for me) travel costs will rise.

I would rather own power company shares than long-term illiquid bank deposits, or weak bonds.

The second conclusion I reach is that, linked to inequality, democracy has changed, perhaps irreversibly.

For many years one could describe loosely, the “swing” between left and right being the aspirational voters, measuring their optimism (vote blue) or their fear (vote red).

If there were 20% of voters in the middle, and 40% on both sides, the voting swing was highly relevant. Effectively that 20% delivered a democratic outcome.

But the decades of rising asset prices, and rising debt levels, have been reflected in the US voters’ current choice of miraculous quick-fix promises versus sustainable long-term solutions.

Inequality has been the driver of this shift, it seems.

Short-termism is accepted.

Historians teach us that there have been only three effective solutions to inequality in centuries of mankind’s law-of-the-jungle mindset.

Those solutions have been plague, famine and war.

The solutions were effective because those three catastrophes devastate those in the population who were in number the heaviest victims – the young and the poor. They are the ones who go to war or cannot hide from the ravages of disease or starvation.

The young and the poor provided essential services to the feudal lords, with little power to negotiate rewards.

When the lords lost their workforce through war, or famine, or plague they had to regain the workforce numbers they required. Wages and working conditions improved. History shows us this has been true for centuries.

Obviously that led to eras when there was more emphasis on sharing the spoils of feudal lords, inequality easing.

Yet the plague of Covid produced a different immediate outcome, as the globe’s leaders collectively failed to find any solution other than more paper money production. Asset price rises and inflation were the outcomes.

Where does that lead today’s investors?

They are told that technology will solve decarbonisation and address construction prices, food production (dockweed mince, anyone?), and health management and even the delivery of crucial education.

Trump tells us the army in the USA will quell any who oppose short-termism or his ideology.

Investors will naturally feed funds into the technology sector giants, which will seek to convince us that artificial intelligence will expedite solutions.

Short-term gains, such as has occurred for those who have funded new data centres or data protection, have boosted investor portfolios.

Personal security – gated villages, retirement villages etc – will presumably be a rising investment sector, if social dysfunction grows.

Requiring a further leap in logic, and a longer-term outlook, is the rumoured planning of a new global currency, commodity backed, that cannot be sabotaged by currency printing-machines (or ever rising fiscal deficits).

Short-term investors may well focus on essential services, technology and logical trends (like personal security).

Long-term investors may well want to be a part of the commodity-backed new currency, when (if?) it emerges. Is the astonishing rise in the price of Bitcoin tokens a signal that the token may become a currency, other than in Venezuela?

The financial advice sector will be challenged.

A century of historical returns would remain a useful guide only if the globe is successful in solving ever-greater challenges, like weather-related threats to coastal settlements.

You might conclude that Trump’s short-termism and extreme selfishness is the problem.

My view is that democracy has changed and is likely to further exaggerate the rise of back-pocket voting. It seems the voting power is already in the hands of the disenfranchised.

Do we need war, plague or famine to enforce on us change?

Stress leads inevitably to corruption and other stupid examples of selfishness.

If Trump, and his lookalikes, are the solutions, history has taught me nothing.

_ _ _ _ _ _ _ _ _ _

ONE example of short-termism is the current Government-approved strategy of guaranteeing those NZ savers (up to $100,000 per deposit) who place their money in a bank, a credit union, a building society or, (can you believe it?), a finance company.

The short-term thinkers believe this would enable the non-banks in this group to build a more diverse finance sector.

The guarantee would enable the weak to fund their lending at a price not reflecting risk.

Incredibly, the current government leaders have decided the weak will pay very little more than the strong to the provider of the guarantee – the taxpayers of New Zealand.

Equally illogical is the fact that the Commerce Commission, which wants a more diverse sector, prefers that the weak pay the same for the guarantee as the strong, for at least two years.

Fortunately the Minister of Finance (and Prime Minister- in-waiting?), Nicola Willis, has enough commonsense to insist that the weak pay a fee that at least partially reflects the far greater risk that they will fail and cause a payment under the Crown guarantee.

Yet she stops well short of pricing the fee to match the risk of the guarantee being required, as it was after 2008.

My solution would be very definite if I were negotiating the fees.

I would instruct all organisations to negotiate a private sector guarantee, at whatever best price they could achieve.

I would then consider each application and might offer a tiny discount recognising the private sector would want a high nett return from the price it offered. I might decline to compete with the private sector.

I would expect that most non-banks would then discover that the true cost of a guarantee would reflect high risk and would therefore be unaffordable. Insurers do not offer guarantees out of some misguided belief that they have a social responsibility to diversify the finance sector.

For an indication of what the true cost should be, I suggest you consider the dishonest promotions around the likes of Bridgecorp and Capital & Merchant Finance (CMF) before the finance company sector collapsed.

Bridgecorp and CMF lied in advertisements that their mortgage lending was fully insured with Lloyds of London and quoted the AAA status of Lloyds. Their lies fooled some investors into believing they were taking no risk.

The truth was that Lloyds charged a relatively low fee because the conditions it imposed meant that virtually none of the lending qualified for the guarantee, so Lloyds had no risk. From memory the insurer paid out virtually nothing when the mortgage loans collapsed.

The NZ media was very fortunate it was not sued, as was Diplock’s Security Commission, for allowing those companies to claim the mortgage loans were “guaranteed”. The loans were CONDITIONALLY guaranteed. The conditions were virtually never met.

Also lucky not to be sued were the utterly incompetent people who pretended they were credit rating authorities, and ascribed to Bridgecorp and CMF, “credit ratings” based on clearly false information.

Simply put, we do not want finance companies to exist on public funding unless they have very strong shareholders, ample fully-paid capital, excellent cash flow, credible lending policies, competent auditors and supervisors, and a standard of management that was trustworthy and competent, all overseen by a market regulator with sharp teeth.

The Crown is simply barmy to offer a cheap guarantee to poorly-capitalised moneylenders. If you have doubts, look at building society profitability numbers.

It is not too late for Willis to intervene and price the guarantee to reflect the risk.

The taxpayers deserve a high level of wisdom when accepting future liability.

_ _ _ _ _ _ _ _ _ _

IF any investor needs to know the power of index funds and how its decision-making is robotic and sometimes idiotic, that investor simply needs to check out the price and daily volumes in the September trading of Santana Minerals’ shares.

In September Santana announced its market capitalisation had reached a level that took the company’s shares into a minor small cap index beginning September 25, 2024.

Over a period of a fortnight after the announcement the share price rose from an equivalent of 56 cents to 82 cents, with volumes each day more than double any comparable period. 

(These figures recognise the subsequent 3:1 split. Before the split adjustment the price rose from $1.62c to $2.46, a rise in a fortnight of around 50 percent.)

Following the admission date (Sept 25) the share trading volumes returned to their normal range and the share price at the time of writing is just slightly up at A$0.62 cents.

The index funds, fairly obviously, were gamed by the companies and individuals who knew of the index qualification, prepared for it by buying early, and gained by selling at the higher prices. This was similar to the experience of Simplicity and other index funds when Synlait Milk was entering an index, forcing index funds to buy at “whatever it cost”, several years ago. Synlait’s share price rose from around $7 to $15, while the robots were buying.

Index funds are a fact of life. They buy when their rule book says they must buy. KiwiSaver funds mostly track an index.

The issue of fair value (i.e. fair price) is not the driving criterion, though it should be, if the rule book was written wisely.

Santana Minerals’ investors know that “fair” price will be established only after the publication of its prefeasibility study (expected as early as this week), the success of its consent application (to be sought in February 2025), and then by the successful extraction of gold, the value determined by the gold price when extraction occurs.

Investors should know that if there were an ability to sell the PROJECTED production at today’s price, the board might sell as much as they could.

At current prices, Santana’s profitability would be fantastic.

There is never such a buyer of what is “estimated” production, nor should there be. One can sell forward only when one has proven production figures.

So patience is required. Risks still exist. The price is what it is.

Meanwhile those with skill in assessing Santana’s future, and more likely the day traders such as the huge Australian fund manager, Regal, set the price of the share, the price having very little to do with the future value if Santana converts to a miner at today’s AU price.

Later in November Santana holds its annual meeting. Edward and I will travel to attend the meeting. In the days after it, I will write confidentially to our Santana investors, recording my take on the information provided.

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Travel

Our advisers will be in the following locations on the dates below:

15 November – Cromwell (morning only) – Chris Lee

25 November – Christchurch – Fraser Hunter28 November – Napier – Edward Lee29 November – Napier – Edward Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee and Partners Limited

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Taking Stock 7 November 2024

THE growing debate about the NZ use of private equity and venture capital funds has been regularly discussed in Taking Stock.

Largely this has been because of the quite dreadful communication by various fund managers, failing to explain the trend, failing to be transparent about the risks of such investing, and failing to explain why such investing is suited to retail investors trapped in KiwiSaver funds.

No one doubts that highly skilled, experienced people buying unlisted companies can have enough big wins to overcome mishaps. Taking Stock highlighted the success of Direct Capital with its private equity experience.

It also highlighted the abysmal performance and the false information that was displayed by Powerhouse Ventures, which most importantly destroyed promising start-ups as well as incinerated investor money.

And let us not get started on an offshoot of this, crowd-funding, an activity that should not have been allowed by any country that wished to protect retail investors.

All of this was wrapped around a recent discussion led by Icehouse Ventures, where relatively skilled people have had some successes and some failures, and by the New Zealand Growth Capital Partners Fund, a venture capital fund now run by the admired British investment banker Rob Everett, who did his penance running the Financial Markets Authority for seven years.

He ran it well with often complete goofs on his board, in amongst useful directors.

One such goof was once ordered to be silent at board meetings by a chairman who had clearly heard too much of vacuous comment from a person who had inveigled themselves onto several boards without any evidence of a relevant skill set.

Everett now runs the NZ Growth Capital Partners Fund which is reliant on Crown funding and invests in partnership with the private sector, seeking to advance New Zealand’s bright but unproven ideas.

Everett is nothing if he is not pragmatic.

Wisely, he acknowledges that venture capital is at the far end of the risk/return scale, an apparent acceptance that the risks, the illiquidity and the often-extreme incubation period makes it quite unsuitable for those of modest means.

Comprising the odd peacock but mostly run by barely visible men, the KiwiSaver sector has ample self-interest in allocating to the private equity and venture capital sectors. The fund managers always win, the investors, not so much.

Conflicts of interest are often a threat. Happily, the FMA knows of this risk.

Both sectors are far from transparent, both report fabricated “returns” reliant on invisible valuers’ estimates of progress, and both can be labelled “long term portfolio investments” when the maturation period becomes almost infinite, when the valuers cannot ignore failed ideas.

Perhaps we will gain more insight into start-ups like the currently high-flying Crimson education idea, rightly funded by those who can afford the risk.  Crimson this week advised its current capital-raising was made at a $1 billion valuation. We will patiently observe to see if its growth and profit endorse this.

It is fair to note that the KiwiSaver fund owners benefit personally from enhanced fees by allocating to the two sectors and by allowing the “valuers” to assess the growing “value” of incubated companies, often inflating the “non cash” returns.

Of course, private equity usually buys into established businesses and leverages them while they cut costs and prepare to flog them off, with trade sales or with offers to list the companies.

Perpetual Guardian Trust was an example of this. Its planned trade sale was to a couple of Australian lads with no clue about squeezing an extra dollar out of a sunset industry. The sale collapsed. Silly boys. They lost their non-refundable deposit.

The planned IPO never reached first base when a socially responsible investment banker advised that the alleged value of the group could not be entertained by his firm. (We need many more with such an investor-first approach.)

Direct Capital earned my admiration for its mostly consistent approach, neither over leveraging its chosen companies, nor seeking to flick them off before sunset.

Venture capital funding is even more fraught with risk.

By definition these start-ups who seek “angel” investors have no access to personal wealth, nor access to debt facilities that would fund their development.

Banks, if they are run with even half a brain, do not undertake lending without having the fallback position of security that is easy to value, and easy to sell.

Venture capital funds need immense capital, highly skilled analysts to understand and select the start-ups, and very committed long-term funding from people able to handle a wipe-out.

In theory there might be one KiwiSaver fund manager with the skill and experience to do this, Milford having the scale to achieve this, but no other that I can identify has anything like the scale and skill to hold a meaningful portfolio of these high-risk assets.

KiwiSaver funds with the loudest voices pretend that they have scale. Perhaps they have access to external, smart people, perhaps even believing their own claims. But the money they invest belongs to three million people, few of whom would be risk-takers.

Certainly both the ACC and the NZ Super Fund have the scale and the intellectual resources.

All others might need “pot luck” to achieve what is claimed to be the fair return for the risk. I suggest many are “betting on the blind”.

Most assuredly, Powerhouse Ventures explains my scepticism.

I am grateful to one company director who itemised the promising start-ups that were badly served by the quite shameful failures of Powerhouse, created to assist start-ups.

Powerhouse had rights to commercialise good ideas, including those developed at Canterbury University. Among the start-ups it could have “powered” up were:-

Crop Logic - an online crop management system for growers that assisted optimal nitrogen and water scheduling, predicting yields and maturity date. (The listed carcass now seems to be a mining outfit.)

HydroWorks - highly efficient turbines for electricity generation using proprietary computational fluid dynamics software, targeting in-race streams for small hydro applications, often in irrigation races. Collapsed spectacularly amongst dishonest promotions when Powerhouse listed in Australia. (Note, it did not seek to list in NZ.)

ArcActive - a battery technology aligned with HydroWorks research, well before E vehicles had been contemplated.

Avalia - working on cancer solutions with the Malaghan Institute.

Invert Robotics - technology enabling robots to climb vertical industrial surfaces for inspection of stainless steel tanks in food preparation, as an example. Now believed to be owned in Ireland.

Solar Bright - solar powered LED lighting for roading and industrial environments, including a black ice warning for motorists. (Road markings turned blue as road temperatures fell.)

Others like Tiro Medical (breast cancer diagnosis) may still be functioning.

But Powerhouse’s appalling governance, its dreadful lack of transparency, its incompetence, and its impecunious original shareholders simply destroyed value and left investors whistling.

My disrespect for those who use retail investor money for these sorts of ideas would be hard to reverse.

My opinion is that no KiwiSaver fund, filled with retail investor money, should be allowed to invest any meaningful amount in investments that require incubation and support at a level quite beyond the skills of the fund manager.

Such a risk fund should use money provided only by people who choose that level of risk/return, after assessing the skills of the fund manager. Such funds would not be in any KiwiSaver mandate. They might be accepted by those who invest in highly ambitious funds used carefully by wealthy investors who can afford a wipeout.

In my opinion none of the banks and none, bar Milford, have earned the type of respect that would meet my understanding of how retail investor money should be used.

I see no harm in the Crown funding NZ Growth, I applaud Direct Capital’s transparent standards, I admire the ambition of Icehouse, and I defer to the demonstrable skills of the NZ Super Fund and the ACC.

But please do not allow journeymen to be compared to these leaders and certainly do not be duped into believing that investing in opaquely-valued companies can be satisfactorily monitored or valued, or liquidated, in a manner that would meet the expectations of modestly heeled KiwiSavers.

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WHEN in Germany three months ago, I talked with auto industry old timers who seemed quite overwhelmed by the imminent problems of the German auto industry.

Taking Stock recorded what I learnt.

Last week Volkswagen announced its plans to close THREE of its German manufacturing plants.

In its 90-year history it has not closed a single plant.

The European Union announced a 45% tariff on German-designed, Chinese-assembled BMWs, Mercedes-Benz and Volkswagens.

Volkswagen's agony seems to revolve around its rush into electric vehicles, possibly regarded as part of its punishment for the laboratory cheating with diesel engines in 2014.

The public in Europe seems set on buying hybrids, not electric.

Meanwhile Toyota, which one imagines is led wisely, is focusing on hydrogen fuelled cars.

And Porsche is to stop making electric Taycans in favour of hybrids, refitting at high expense its next models to acknowledge what is saleable in large numbers.

Elon Musk, the man behind the electricity powered Tesla brand, opines that within five years all of the world's cars will be made in China. He claims China’s labour costs, their adoption of the best technology, and their lack of costly labour and climate change laws, will be an unbeatable combination.

China meanwhile churns out electric cars and leads the world in the take up of EVs.

Confused? Me, too.

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WHEN Spark had its annual meeting in Auckland last week one shareholder, if not a misogynist most certainly not an ogynist, spoke strongly about the board's stuff up years ago when Spark sought to compete in broadcasting sport, blaming the current female leadership.

The sports adventure was horrible, the technology inadequate, the take up by clients low, and the social response ugly.

Spark Sports was a bit like Georgie Pie, more like a five-second wonder than a five-minute wonder.

The grump sought to blame the current chairman and chief executive, both female.

The most obvious flaw in this argument was that Spark Sports was built before either of these people were involved in Spark decision making.

He would have been on much more stable ground had he blasted the current team for Spark’s quite stupid decision to spend the money from its cellphone tower sales on a share buy-back programme.

Spark bought back its own shares at prices close to $5.00 after it had gathered up hundreds of millions from its sale of cellphone towers.

Today we are all aware that the shares can be bought for $3.00, the buy back a disastrous waste of cash.

Yet I ignore the destruction of value caused by this brain-dead decision.

My view is that almost NEVER should a big company reduce its capital by spending cash flow on buying back its shares.

Capital is precious. It is most precious when tough times threaten. At that point the institutions successfully drive a capital raise down to a low price.

Think about Nuplex and how it had to raise capital at around 23 cents per share after the global financial crisis.

The rights issue saved the company, but the price achieved was barely 10% of the price that prevailed in preceding months. Ouch.

AMP Office, now Precinct, raised capital at 62 cents, a large discount.

Fletchers recently had to lick the boots of institutions by accepting $2.70 for its capital raise.

Even our star company, Infratil, accepted $4.70 just two years ago.

Cap-in-hand, begging bowl in the other, companies that need to raise capital always get crushed.

Capital is precious, indeed. You might raise more when your share price is too high. You might buy it back, if ever, when the share price has collapsed, perhaps by index fund sales.

Spark will always need capital if it is to grow its technologies to maintain its market share.

Those who made that call to buy back capital earned the burst from grumpy shareholders.

Footnote: Everyone’s favourite old bloke, Warren Buffet, has declined to spend the US$325 billion his company now holds in cash, to buy back his company shares. He will sit on the cash, waiting for a bargain rather than paying extreme amounts for the shares in his company.

Further footnote: Buffet has sold more than half of Berkshire Hathaway’s holding in Apple.

Any fund manager paying attention to his analysis of price versus value?

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Travel

Our advisers will be in the following locations on the dates below:

8 November – New Plymouth – David Colman13 November – Ellerslie – Edward Lee14 November – Albany – Edward Lee15 November – Auckland CBD – Edward Lee14 November – Arrowtown – Chris Lee (FULL)

15 November – Cromwell (morning only) – Chris Lee28 November – Napier – Edward Lee29 November – Napier – Edward Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee

Chris Lee and Partners Limited

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