Playing hot potato with Mighty River risk
The manner with which Mighty River Power is being sold is hypocritical. Bill English claims that the partial sell-down will allow the government “…to reduce the potential for the taxpayers to carry the burden of commercial risks that go wrong”, while also maintaining that he is giving New Zealanders the opportunity to “…diversify their growing savings away from property and finance companies”.
It is true that the Mighty River sale will provide households with an additional option for diversification, but Mr English’s candy-coated sales programme is targeting some of the most naïve and ill-diversified investors in the country. A significant proportion of Mighty River investors will be making their first independent forays into equity markets and establishing an equity portfolio that consists of one solitary energy investment. The fortunes of this share will be ultimately depend on those very commercial risks in the energy sector that the government is trying to avoid.
I am not ideologically opposed to the government rebalancing its investment portfolio, but I do object to its “shares-lite” approach to marketing the Mighty River public offering. I fear that, by avoiding traditional broker avenues and allowing paltry $1,000 minimum investments, the government is making share investment appear too easy.
Investing in shares requires careful thought and analysis of the relevant risks and returns. It is not an investment product that should be pushed on those who have limited means to diversify, no understanding of how to value a share, and no direct access to the advice of a financial professional.
Advertising for the Mighty River offer does provide the usual legal disclaimers which say that prospective investors should seek out independent financial advice before investing, but this disclaimer is not enough for a government-directed share sale. People place a high level of trust in the government and are unlikely to take such a disclaimer as seriously as they would take one for investments promoted by the private sector.
Many New Zealanders only have a limited understanding of shares and a lot of people who buy into Mighty River will be unable to explain the ins and outs of what they have purchased. Although it would not be realistic to expect the government to hold everyone’s hand through the sales process, the government should have at least let the sale follow more traditional broker avenues.
Stockbrokers should have been given a firm allocation, and would be Mighty River shareholders should have then applied for a share allocation through a broker. This method would have helped mitigate some of the risk of investors getting out of their depth, as only those who have a client relationship with a broker would have had a shot at purchasing Mighty River shares. This type of investor presumably has had dealings with share investment in the past and has ready access to professional advice should they wish to use it.
The awkward addition of loyalty shares to certain types of investors is also unnecessarily introducing confusion to the sales process. Exact details of the scheme are yet to be announced, but the scheme is expected to involve the issuance of bonus Mighty River shares to New Zealand retail investors who hold their shares for a certain number of years following the public offering. The scheme is aimed at discouraging retail investors from selling their shares shortly after listing to make a quick profit should the shares list at a premium to their issue price.
Valuing the price impact of the bonus scheme will be complicated because it only applies to certain types of shareholders. Valuation models will have to take into consideration the proportion of the public offering bought by New Zealand retail versus other types of investors, as well as the probability that an eligible investor holds the share for the required holding period. These are hardly the types of issues that a first-time share investor is equipped to deal with when trying to ascertain what they are willing to pay for a share.
These types of issues raise questions regarding why the government needs to offer a bonus to stop people stagging the shares on listing. If the shares are priced right the first time, then the shares shouldn’t be expected to stag.
All this stinks of politics. The government is going to sell the shares at a slightly lower price than it could have, simply to reduce the risk of mum and dad investors losing out, and is then engineering a bonus scheme to prevent people from exploiting the mispricing.
The sooner the government stops sticking its nose into finance and goes back to busying itself with running the country the better. Any rebalancing of the government’s investment portfolio should be done through usual financial market channels. Following a sales process which shifts some of the taxpayers’ risk from the government’s balance sheet onto first-time share investors is pathetic. If the government truly believes that New Zealanders are financial naïve, and wants to help them learn to diversify their portfolios, then taking steps to increase financial literacy is a more first appropriate step.
Benje Patterson is an economist at Infometrics Ltd