Unlisted market rewards the brave who dare to venture into the tough world of counter-cyclical investment

By Peter V O'Brien

Friday 7th September 2001

There is a thriving market in unlisted equity securities for companies requiring additional capital to expand existing activities in areas as diverse as wine, cheese, rural services and finance.

Mention of "unlisted" could raise fears of little liquidity for investors wishing to sell, small size and relatively high risk.

That could be so in some cases, but the unlisted market included such companies as apple exporter Enza, rural services group Pyne Gould Group (whose wholly-owned subsidiary Pyne Gould Guinness is merging with main board-listed company Reid Farmers), Turners & Growers (of which Sir Ron Brierley's Guinness Peat Group owns 45%) and until its recent listing on the main board, biotechnology company Blis.

Blis is one of a stable of biotech companies associated with South Island entrepreneur Howard Paterson, who has linked into the commercial activities of the University of Otago.
Wine companies have a long history of raising capital from a relatively small group of investors, who are usually wine enthusiasts, to expand production and sometimes move to Stock Exchange listing.

Returns from non-listed companies can be good in terms of capital gain.

Given the status of some unlisted companies and their size, the NCM system has solid competition for money from equity investors who have an entrepreneurial streak.

Such people could do worse than follow the investment steps of Mr Paterson and Sir Ron.

Prices for unlisted stocks are published at intervals in daily newspapers, usually supplied to the publication by a broking firm. Computershare's Sharemart stocks are published weekly in The National Business Review.

There is nothing new about brokers dealing in "unlisted" securities. Apart from the fact they are able to deal in virtually anything, the unlisted market is a direct descendant of the "unofficial list" of days gone by.

People who have a penchant for the unlisted market (and possibly for NCM companies) may also follow the counter-cyclical view of investment.

It is a hard view to follow, because it requires investors to back themselves against the bulk of the market, a situation that requires mental toughness and possibly a fair amount of self-confidence, bordering on arrogance.

While buying a stock everyone else is selling, or investing across the market when other people, including the professionals, are getting out, can lead to a short-term gain, the profits usually arise from the patience to hold on until the turnaround.

Companies often hit problems, an example being rural services company Wrightson. The share price was 43c at the end of 1999, having been down to 32c that year.

It closed on August 24 this year at $1.12, an increase of 183.7% in 20 months, a movement that should satisfy the busiest of investors.

Much of the improvement came from the surge in commodity prices and farm incomes, but the company's profitability also gained from internal reorganisation, including disposal of earlier corporate policies.

Betting against other investors regarding an individuals stock is one thing; betting against them regarding the whole market in a general slump is another.

The counter-cyclical approach still has merit, because the cycle eventually turns, but the time during which patience is required is longer, as is the need for deep pockets.

Counter-cyclical investing should be confined to companies with solid balance sheets and cash flows that allow them to weather the tough times.

Organisations with shaky financial structures should be avoided because they usually fall over when the jolts come.

Other choices include interest-bearing capital securities, such as convertible preference shares, convertible capital notes and similar products of fertile corporate minds.

Convertible, interest-bearing securities have benefit investors through providing reasonable income while allowing them to participate in any capital appreciation in the head shares. (Conversely, they participate in any deterioration in the head shares.)

The substantial success of GPG's recent $250 million capital notes issue showed there is still life in convertibles, irrespective of how much of the success could be put down to Sir Ron's image among New Zealand investors.

Comments from our readers

No comments yet