Chris Lee & Partners Ltd

TAKING STOCK 28 September 2017

 

OUR MMP election methodology was chosen by a democratic vote so the outcome of the election is pretty much what the country wanted.

One could say that we voted to create the equivalent of an electoral college, where the chosen people now decide who will govern.  The people and parties we selected now make the decision of who will govern New Zealand.  Presumably we all like this process.

Capital markets seemed quite calm when markets reopened, the currency rates barely changing. 

Whatever the make-up of the next government, there seems to be enough of the status quo to avoid any likelihood of capital flight.

However, the health and care sectors will be at the top end of the list of those who are demanding change.

At the most basic level – the family general practitioner (GP) – there is seething discontent, GPs believing their dedication to their patients is being cynically exploited by politicians and bureaucrats.

Clearly, there will be a rupture of the past relationship between GPs and the Crown, resulting in much higher charges for those who can afford it, and much lower levels of GP availability to those who rely on government-subsidised GP visits.

I sat recently with a highly-educated, highly-motivated city GP who took me through the problem and the economics of running a practice.  He will be changing his model.

His basic premise was that GPs spend many years achieving knowledge, they maintain that knowledge, they work with great dedication, yet they are grossly under-rewarded because so many of their patients are subsidised by a Crown-dictated amount that is insultingly inadequate.

Government subsidies, in reality, are GP personal subsidies and that is not sustainable unless there is a surplus of GPs.  There is not.  There is already a huge shortage.

The average age of GPs is high – over 60 years of age.  Many are on the verge of retirement.

The flaw in the system begins with the vote-catching policies that lead to the majority of patients being given free or subsidised care.

A year ago two million New Zealanders had a Community Services Card which accesses subsidies.

Politicians have promised that figure will rise to 2.7 million in the next year.

Children are seen for nothing.  Adult cardholders pay a variable, but tiny amount.

The Crown pays the GP $192 per annum for each subsidised client, a figure that assumes the normal doctor’s fee is $48, and that the average client sees his GP four times a year.

There are two problems with this logic.

The first is that four appointments at $48 per 15 minutes ($192 per hour) does not adequately cover the costs of a GP’s salary, his training and compliance costs, his staff, his premises and his required technology costs.

A city GP might – often does – find his take home income for the year is much less than $100,000, possibly less than some of his staff.

No GP would be unaware that other professionals, like opticians, audiologists, optometrists, surgeons, not to speak of investment bankers, lawyers and accountants, work in much more orderly environments, earn a whole lot more, and with much fewer ongoing educational requirements and risks.

The second problem is that if a service like a visit to a GP is not valued (priced at real cost) it is easily abused, as one saw in England in the 1970s when doctors’ visits cost nothing.

Lonely people booked in for a chat, a cut finger merited a visit, and every sniffle was referred to the GP.

Here in New Zealand now, parents pay zero for children’s visits, so much time is spent putting a Band-Aid on a scrape or explaining that a runny nose will self-repair.

The GPs, now facing ever-growing patient lists because of doctor shortages, are set to address the problem of having the majority of their time being spent inefficiently.

Expect our incoming government to face GP practice closures as GPs revert to private practice, declining subsidies, and focussing on patients who pay their own way, and arrive only when there is a real need.

I hear of a model that would charge an annual up-front fee – say $1000 or $2000 – guaranteeing priority access and treatment at no further cost, as often as needed.

Another model is the $150 a visit, paid on the day.  Indeed, here in Paraparaumu we have one private medical clinic at which you cannot make an appointment and where each visit is $100 cash.

Those unable to pay will be forced to use public hospitals, at which point the new government will find that its promises of free care require much more Crown money, and no transfer of the true cost to the GP.

Perhaps the kindest GPs will do some pro bono work, perhaps setting aside half a day a week for some sort of roster.

Do not imagine these changes are years away.

The aging of our GPs could be addressed by recruiting from less wealthy countries like Sri Lanka, India or African countries where English is the main language.

We have been through this process with nurses.

Until such a programme alters the supply of the GP service, the solution will be private practices, and much greater use of public hospitals.

That is the outcome of dishonest political promises to ‘’subsidise’’ health.

The subsidy has been funded by the doctors!

A second problem in a similar sector is the funding of aged care.

This area is seriously underfunded by the Crown’s health subsidy for rest home care providers.

When the Crown announced that all caregivers needed to be paid $20.28 per hour (on average), $3.70 more than previously, the Crown took on the funding responsibility.

Retirement villages with private care provisions, and rest homes, immediately adjusted the wages.

The Crown, which sets the costs for care residents, was to pay for the increase, calculated to be $2 billion over the next few years.

Surprise, surprise.  The Crown has not taken the simple course of asking each care provider to verify the additional cost and has instead invented complicated ‘’averages’’, which grossly overpay Ryman, and others, and grossly underpay small private rest homes.

Instead of paying the actual cost, the Crown wants to differentiate what it pays to the various skill grades in care, often referred to as Level 4, Level 3 caregivers and unqualified caregivers.

Further they want to pay less if the caregiver spends only half his/her time on care, and the other half doing non-care tasks such as bed-making, laundry or cleaning.

Applying the wizardry of what is probably a bureaucratic (Treasury?) formula, the Crown attempts to pay ‘’average’’ accounts and asks the sector to accept that there would be some winners and some losers.

If ever evidence was needed that the asylum has been captured by zombies, this process must be the final word.

According to information leaked, of the roughly 360 providers, 100 are being underfunded, while around 260 are being overfunded with just one provider allegedly overfunded by nearly $8 million.

As Rymans is by far the largest provider, I assume it is Rymans that enjoys the Crown’s totally unnecessary formula.

Let me remind you why we need 360 rest home or care providers.

It is because the Crown chose to exit that aspect of care, declaring that the hospitals would cover injury and sickness but would not provide care for simple old age (geriatric) conditions.

So the likes of Silverstream Hospital in Upper Hutt, where stroke victims were nursed 40 years ago, were closed.

The likes of Ryman, Metlife, Summerset and more recently Oceania were born.

They succeed because they provide care at cost but use giant noshers to take a bite out of an estate when the resident/patient dies.  This supplies their handsome profits, under the guise of real estate/earnings.

The Crown created the problem.

The private sector stepped up.

The Crown was willing to pay the private sector for the cost of caring for people but capped what the private sector could charge.

When the country was clearly running out of beds, as the aged population swelled, the Crown demanded more beds.

The private sector declined because the capped charge-out rate did not cover the costs.

The Crown then agreed to a formula that allowed wealthier people to pay more for a ‘’premium’’ room, in effect subsidising the underpayment of those for whom the Crown was paying.

Then the Crown legislated a massive wage increase for the thousands of caregivers.

The wage increase might have been around $4,000 for each of the caregivers.

The Crown was supposed to pay but, as usual, it then invented some unnecessary system to calculate costs.

The result is that some 60 care providers believe they will be forced to close.

Guess what?

The Crown will then need to revert to the providers, beseeching them to produce more care facilities.

John Cleese would have a field day, describing this farce.

 _ _ _ _ _ _ _ _ _ _ _ _

BECAUSE of my job, and my voluntary role as chair of the country’s original, and arguably best-structured village, I regularly receive reports provided to residents of villages all around the country.

I was intrigued recently to receive a detailed survey of some 180 residents in one village.

Listed below are some key findings.

Average age of the residents: Men 84, women 83

Favoured amenities (in order): In-house care when required, garden environment, swimming pool, sports, library.

Satisfaction ratings of services offered:  Average 91, highest rated service 98.25, lowest rated 83

(100 = perfection).

Most important services:  Availability of care 98, environment 95, security 94.

Key factors in decision to move in: In-house care when needed 97, availability of full care 96,  security 95,  remaining independent 95,  environment 94,  reputation of village 91

(The costs were amongst the least of the considerations).

Asked to  suggest improvements the survey responded by suggesting faster broadband, deeper swimming pools, better car parking areas, improved transport options and better inorganic rubbish collection.

Does anyone still believe that retiring to a village is a move into what television journalists crassly described as ‘’God’s Waiting Room’’?

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IF OUR country’s sole reporter of financial and business news (the National Business Review) is correct, Warren Buffet has conned international finance markets.

The NBR last week reported that Buffet had won a million-dollar bet, made in 2008 with a hedge fund manager, that over 10 years the US S&P index fund would outperform the average of 100 hedge funds because index funds charge lower fees.

Buffet has claimed the million and sent it to a charity.  (The hedge fund manager conceded early!)

The NBR has published each year’s returns from the hedge funds and the S&P index.

If the NBR’s figures were correct, the hedge fund did far better than the index funds, so Buffet would have been the loser and should be paying.

Someone needs to tell the loser of the bet!

The NBR graphs showed that, on average, hedge funds lost 37% in 2008 so an initial $100 was reduced to $63.

Since then the annual increases for hedge funds, according to the published graph, have been 24%, 12%, 13%, 13%, 31%, 10%, 1%, 11% and 11%, meaning the $63 would now be worth $200.34.

The index funds, according to the graph, showed a 2008 loss of just 21%, followed by successive movements of plus 22%, 10%, then a loss of 8%, followed by gains of 7%, 9%, 2%, nil, 5%, and 5%, producing $127.93.

Buffet has either conned the hedge funds by exploiting their gullibility, or else Buffet is owed an apology and a correction of the graphs allegedly prepared by the index fund manager Vanguard, but published in the NBR.  I suspect it is the latter.  The graphs displayed must have been reversed.

The argument that robot-managed index funds will outperform research based investment is based on the contestable opinion that the sheer bulk of buying and selling  plus lower expense usually defeats nimble research based managers.

Many perfectly good voice boxes are worn out by debating this argument.

The lie, that timing does not matter, will always be shouted out by index salesmen, and the general public will always be susceptible to the ‘’information’’ published in advertisements and the opinions published in the media.

Right now the weight of advertising is linked to what is published so we endure the obsequious media deference to those who have worked out how to charm the media and win its support.

Friendly people, bearing red wine bottles to interviews, backed by advertising budgets, will generally be rewarded with favourable coverage.

However those exploiting this should watch out for the next market downturn, when the moods will change.

Index funds do very poorly when markets fall.

Will today’s salesmen be here to endure the anguish, or will they have moved into real estate, or have taken a year ‘’out’’ to sail around the Med?

 _ _ _ _ _ _ _ _ _ _ _ _

SAM Stubbs was CEO of Hanover Finance and its group of companies in 2007, resigning in December 2007, seven months before Hanover entered a moratorium.

The moratorium resulted in total collapse, investors receiving a few cents in the dollar from a group that had hundreds of millions of investor deposits.

Stubbs, earlier a Goldman Sachs asset manager in Hong Kong, had been in the job for around a year and was principally charged with trying to either list Hanover on the stock exchange or sell it.  He had accepted a hospital pass, most unwisely.

At one stage the highly vulnerable, and later seen to be disastrously misvalued, Babcock and Brown was being lined up to buy Hanover from its owners, Mark Hotchin and Eric Watson.

It is fair to assume Stubbs, with his good bedside manner and his charm with the media, concluded that Watson and Hotchin should drain their own sewerage pond, without Stubbs’ help.

He resigned a few months before the collapse and a year later went on to a sales role in Tower, also a flawed business.  Stubbs now is building a tiny KiwiSaver company which intermediates clients’ money to the American giant, Vanguard.

His new company’s point of difference is that for its double intermediation role it charges low fees, does no research, requires very few staff, and is largely promoted by newspaper journalists who seem to enjoy Stubbs’ charm.  Stubbs is a media favourite, currently.

While Stubbs was following these paths the AXA sales manager Ralph Stewart was pushed into AXA’s CEO role for the period leading up to the AMP/AXA merger, at which point he was redundant.

For a brief while he held a senior role with the ACC but, like Stubbs, he has moved to create his own brand, now selling the somewhat outdated concept of annuities.

An annuity is an insurance-like product which feeds regular money to its policy holder, effectively returning the investor’s own capital back in monthly lumps, with a tiny bit of nett income earned from the capital, diminished by costs and hefty fees.

In my opinion unwisely, some newly-retired people hand over their retirement savings to the likes of Stewart’s company which invests the money in shares, property, bonds, and other income producing securities.

The annuity provider commits to pay out monthly cheques at ‘’guaranteed’’ amounts.

For example a lump sum paid into an annuity of, say, $100,000 at retirement age 65, might enable the retired person to be paid $400 per month till that person dies.

Usually if the investor lives longer, say to 100, the investor in effect wins, the annuity provider loses but if the investor dies at 80, the annuity provider wins, keeping the capital not paid out.

Stewart’s idea is to pay a little less than $400 a month, using the savings to buy insurance on the investor, in case the investor lives to a great age.

In return for smaller monthly pay-out his offer is to return any unused money to the estate, instead of retaining it for the annuity provider.

He charges 2% per annum to offer the service. He sells through a sales force, mostly from the insurance sector.

If returns remain low, his maths will be working on an average nett return on shares, bonds etc of, say 4%, so in effect the investor is agreeing to a long term 2% return, is agreeing to lose access to his capital, and is preferring a monthly known amount to the tiresome task for an investor of putting his money into the bank at 3% and consuming the capital as he sees fit.

It seems a poor choice to me.

Last week we learned that Stubbs and Stewart are offering to combine, with Stubbs offering to pay back his KiwiSaver money when clients reach 65 by buying a Stewart annuity.  A cynic might hear the clip, clip, clip, and there are no horses’ hooves in sight.

I guess a kind response is to wish them both good luck.

KiwiSavers as they near 65 should not be in index funds, and retired people have far better options than fee heavy annuities, in my opinion.

It will be interesting to watch how much effect the supportive newspaper journalists will have on the selling successes of these products.  Advertising budgets will be generous.

I repeat my view that our financial markets regulators should never have allowed journalists and reporters to be offering financial advice.

They have no training, experience or knowledge with which to offer advice.  People without access to real information are frequently duped.

My discontent over this has not swayed the rules.

I guess we need a year of negative returns to highlight the danger of having newspaper reporters promoting financial products and dispensing advice.

 _ _ _ _ _ _ _ _ _ _ _ _

TRAVEL

I will be in Auckland on October 16 and 17 and Christchurch on October 23 and 24.

David will be in Palmerston North and Whanganui on 10 October and New Plymouth on 11 October.

Kevin will be in Invercargill on 19 October.

Anyone wanting to make an appointment should contact us.

If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.

Chris Lee

Managing Director

Chris Lee & Partners Limited

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TAKING STOCK 21 September 2017

 

AT A time when the trust companies are saturating radio and newspapers with advertising, imploring people to write their wills or form family trusts, there is a corresponding need to balance the message.

The Public Trust, no longer a public service but a simple commercial entity, is telling us that it has written more wills and structured more trusts than any other provider of that service.  I am sure that is correct.

Perpetual Guardian Trust (PGT), owned by a former Macquarie fellow, British entrepreneur Andrew Barnes, is urging people of the dangers of dying intestate (without having prepared a will).  I am sure that is correct.

Both companies are to be applauded if their motivation is to ensure the public will get help in framing a will.

However neither company has taken the further essential step of warning people to get independent legal advice before signing a trust company will or a deed for a family trust.  I regard this failure as negligent.

Neither company has undertaken to step aside from the unrelated role of managing money or administering the will or the trust.

Nor has either company committed to drafting every trust or will so that poorly behaving trustees or administrators can be readily replaced.

Accordingly, it is important to discuss these issues in the hope that no unadvised citizen falls into the trap of allowing a trust company to administer an estate or a trust, and definitely never allowing a trust company to manage the funds in the estate or trust without fear of dismissal.  Their fees will never equate with value-add.  Their track record in administration is patchy, to be polite.

Trust companies make their multi-millions by grossly overcharging for estate and trust administration, and from the other less visible income that derives from funds management.

For example PGT charges 5% for the first $250,000 it manages, with a rate declining to 1% when the sum exceeds half a million.

That is, 5% for the first $250,000, 2% on the next $250,000 and 1% on the rest.  The fee should instead be based on an hourly rate, perhaps of $60 per hour.

An estate that unwisely allowed a million-dollar property to sit under the administration of a trust company today would pay an annual fee of $22,500 for the administration of the asset.

I regard these fees as grossly excessive and compare them with the fee that applies when a professional person (lawyer or accountant) performs this role.

For managing an estate or trust with a million-dollar property asset, lawyers would typically charge much less than $5,000 per annum.  Most lawyers would have the inherent and additional value of being skilled in legal procedures around property.

If the assets were in cash, shares or bonds no trust company could offer a competitive advantage, indeed any value-add.

The most competent and knowledgeable people in these areas are sharebrokers and fund managers, certainly not trust or will administrators, or even lawyers.

It is possible that trust companies have improved in recent years in their behaviour, though it is fair to say they needed to improve.

How well I recall the case I helped bring against the old NZ Guardian Trust, whose behaviour was simply deplorable.

In that case NZGT in Auckland persuaded a 90-year-old bedridden widow to change her standard will into a testamentary estate and appoint NZGT to administer it, for annual fees of around $35,000, for another 60 years, a total of around $2 million in fees.

The family who were the beneficiaries were appalled when this chicanery was exposed.

You can simply guess the ‘’bonuses’’ this unethical salesmanship earned for NZGT’s executives.

Happily, with the help of a smart lawyer, we managed to embarrass NZGT into reversing this contrived arrangement.

I also recall NZGT, in its inappropriate role of fund manager, placing client money into its own brand of funds management, including large sums into a so-called Guardian Mortgage Trust fund that in fact was a property lending fund, lending on developments as well as established property.

Disgracefully, NZGT used this fund for ‘’cash’’ allocations, meaning it had to provide for urgent daily cash needs of beneficiaries.

Of course when the 2008 property market became illiquid there was no ‘’cash’’ for beneficiaries, as the Mortgage Trust was frozen.  The beneficiaries were frozen out for years.

In that respect NZGT was a carbon copy of the ghastly Money Managers, which used its First Step property development fund for ‘’cash’’ allocations.  Neither organisation would attract staff that I would regard as appropriate.

You will see why I have zero respect for the trust companies of that era, and understand my ongoing refusal to place the funds management function with the very people who recommend the design of wills or estates.

Perpetual Trust was also grossly abused by its past owner (George Kerr), who instructed the Perpetual Mortgage Trust to lend him $20 million for an urgent personal need a few years ago.

Fortunately the Financial Markets Authority caught the whiff of this deal and forced Kerr to sell his Heartland Bank shares (for 49 cents) so that he could repay this inappropriate borrowing from the Mortgage Fund.

The Public Trust behaved just as poorly, allocating money to its own brand of managed funds, where, like Perpetual and NZ Guardian Trust, any funds management skill and experience could be found only with the most powerful microscope.

In recent years the trust companies have changed ownership, Kerr selling to a British entrepreneur, Andrew Barnes, who has since sought to on-sell at a substantial profit to an Australian entrepreneur after merging Perpetual with NZGT, Foundation trust and Covenant Trust.

Barnes, previously the managing director of a British wills company, had migrated from the big boys’ pond of London to a smaller puddle in the Australian market where he gained control of Australian Wealth Management, a tiny, ambitious fund management business later to subside after an unwise investment in a company which itself failed, resulting in Barnes’ decision to exit from AWM.

Barnes then migrated to an even smaller puddle (NZ) where he bought NZGT from a like-minded entrepreneur George Kerr and constructed a convoluted deal.  The deal rewarded Kerr and his company PGC (Kerr owned 75% of PGC, which owned Perpetual Trust) when Barnes succeeded in selling the group he created.

Goldman Sachs sought to sell Barnes’ new group to the public but thankfully at least one major investment bank opposed this transaction so eventually Goldman tracked down a buyer in Australia.  The unacclaimed Aussie buyer placed $30 million in trust as a deposit on its offer to buy PGT from Barnes for A$200 million, a figure many, especially me, believed was ludicrously excessive.

The astonishment was based not just on the high multiple of tax-paid profit that PGT would be attracting but also on the obviously opposite view of the long-term future of trust companies.

I perceive that trust companies will not remain in funds management and will be much more strictly regulated in coming years.  There is in my view no chance that trust companies will continue to get away with fees based on the wealth of the client or the size of a fund.  Revenue and profits will subside, many believe.

Anyway the PGT sale fell over and the buyer, a newcomer from Australia with no presence here, is now seeking the return of the deposit, implying that Barnes and his British company have failed to sell PGT, and will simply remain the owner unless Goldman Sachs finds another buyer.

The Australian buyer believed his purchase was conditional and that PGT’s seller, British-based Barnes, had not satisfied the conditions.

Barnes disputes this and wants the $30 million to be released to him.

A court will have to adjudicate, I expect.  Barnes is experienced in litigating disputes.

All of this is relevant to investors only for as long as trust companies continue to seek a role in funds management, rather than revert to the design of simple wills and trusts.

Of course the trust companies also perform a profitable role in administering the trust deeds of retirement villages, where Trustees Executors has some market significance, and in managing the deeds of KiwiSaver funds, where fees are based on asset size rather than time or value-add.

Again my expectation is that the fee income from these activities must fall to a rate based on value-add, rather than total assets.

In the case of the retirement village I chair, our trustee is paid appropriately – a few thousand dollars per year, less than ten.

KiwiSaver fund managers have told me there is next to no value-add in this trust company oversight, which they regard as box-ticking in nature, simply ensuring their models adhere to the promised rules.  So why are the fees so extreme?  Do the regulators need to intervene?

KiwiSaver funds are licensed by the Crown so it seems improbable that any fund would ever have an inappropriate deed.  It would be suicidal for a KiwiSaver fund manager to ignore his deed, so the trustee’s role is superficial and not worth anything like the 13 million PGT makes from overseeing the deeds of retirement villages and fund managers.  (I do wonder if those costs are just passed onto clients and residents by the villages and KiwiSaver managers.)

It is for all of these reasons that I conclude that trust companies should be the service provider of last resort, probably only for people with no competent, functional family, or no access to lawyers, accountants or financial advisers.

Nor do I believe that any trust company should be owned by an individual entrepreneur, such as John Grace, who owns Trustees Executors, or Barnes, whose company, Bath, ultimately owns PGT.  Grace is of American heritage, Barnes is British.  Do we need these functions to be provided from entrepreneurs whose homelands are hardly the gold standard in financial market administration?

I see the likes of the TSB as the right owner.  It is owned in New Zealand and supervised by our central bank.

Indeed, TSB’s presence in capital markets, as an institution, is real and is respected.  It part owns a vanilla fund manager, Fisher Funds, which would be experienced in managing shares and bonds for those estates or trusts that might have their funds managed by a recognised outside, independent party.

A trust company clerk could report on the paperwork for a token fee and have nothing to do with asset allocation or asset selection.  Costs would be greatly reduced.  Double intermediation would not occur.

My opinion is that the trust companies should be required by market regulators to warn all clients that their proposed wills or trusts must be independently overseen before clients sign any documents.  This should be akin to the legislation commanding independent advice, on matters such as the Matrimonial Property Act.

The regulators have a fit and proper person regime so we can assume that all those practising in the trustee sector are constantly monitored, and would be delicensed if necessary.  Had that regime applied 10 years ago, the trust companies might have thwarted the worst of the finance companies.

I expect the market itself will put an end to the nonsense of setting fees based on funds under management (FUM) rather than on the modest hourly rates that the skill levels would require.

I expect the decision to bail out of PGT’s proposed public issue of shares reflected a difference in the opinion of various capital market people, on the future revenues of PGT.

In 2016 PGT made a profit after tax of around $8 million.

Given it may make more sales of wills in future but should soon be reviewing downwards its fees, eight million might be an optimistic long-term profit potential, though Forsyth Barr and Goldman Sachs are more hopeful about its growth prospects.

In my view TSB might want to consider PGT as a service provider it could buy, providing the price reflected reduced profit potential, perhaps leading to a value of around $90 million, a figure which took into account the virtual certainty that the fee-setting formula must change.  I would regard $90 million as a very full price.

It remains a high priority of mine to keep these issues in front of the public as the quantum of calls we get from the general public and clients, complaining of trust company administration skills and charges, is high and has always been high.

Are we overdue for an intervention by the Financial Markets Authority, and will that alter the metrics for trust company valuations?

 _ _ _ _ _ _ _ _ _ _ _ _

THE FMA might also be considering an in-depth review of the dangerous (in my opinion) ambition of crowd funding companies.

In New Zealand the likes of Snowball, PledgeMe, and Equitise have all opened up shop, none of them yet profitable, but all of them ambitious.

Their money making potential does not depend on clipping the tickets of those who seek donations from the public to help others overcome bad health or bad luck.

For this activity, little regulation is needed.  Public requests for help traditionally have been orchestrated by radio stations, newspapers, charities, and in the past, television, the latter organisation remembered for its Telethon appeals.

I suspect today’s younger generation would be unlikely viewers of the Telethons of the 1980s.

Begging on the streets, or public requests for help, ought not to bring nett returns to those who facilitate these opportunities, be they councils, charities or internet platforms.

The real targets of ambitious crowd funders must be unsophisticated, I would say naïve, investors, without access to advice, for selling investments is the only area with real income potential, from ticket-clipping.

As we have seen in the past two years, crowd funders have convinced regulators that any company without a prospectus or any other meaningful documents can beg for investment money, up to a current maximum of two million dollars, via a crowd funding platform.

The crowd funder’s reputation would be established by the ultimate returns to investors, and is presumably monitored by the market regulator (FMA).  The monitoring may need more grunt.

The crowd funder can charge the begging company any level of commission it can successfully negotiate.  A $2m fundraise might earn $100,000 for the crowdfunding platform.

The unadvised investors would assume that the crowd funders employ expert people with years of capital market, money lending and/or investing experience and knowledge.

The investors assume that this experience and knowledge would lead to disciplined dedication to due diligence, ensuring that no investment offers are from organisations that have no gravitas, no credible hope of success, and that all offers accurately describe the plans of the offeror.

I have not met all the crowd funding platform operators but I have met some.

I see some sincerity, occasional but rare patches of relevant experience, and I have seen ample ambition.

The commercial offers I have seen either looked like angel investor opportunities, or more often they have looked like the last chance saloon, situated at the edge of a cliff.

For example Powerhouse Ventures, having failed to impress any of the major capital market firms, reached out to Equitise and accessed the wallets of a few investors.

Those investors will now wish they had not succumbed.

So too did HydroWorks exploit a crowd funder, quite disgracefully selling convertible notes via Equitise at a rate around 12% when HydroWorks’ own major shareholder felt it needed to charge HydroWorks 48% to get a fair return for risk.

HydroWorks also sold shares through Equitise.

Those who invested in these notes and shares will have lost every cent they contributed.  Is the FMA investigating?

Here was an unlisted public company raising money which its own shareholders would not offer, via a crowd funder allowed to clip tickets on an offer made without a prospectus to unadvised, retail clients.

Yet when HydroWorks earlier issued shares, only habitual professional or wealthy investors could subscribe.

Crowd funders have used this model with some success in Britain, where the activity is now accepted, though its ultimate success is unproven.

My view is that New Zealand should not permit this sort of use (abuse) by companies in desperate need of funding.  Retail investors need protection.

To me the process is open to abuse by cynical companies exploiting platforms that are overseen by naturally ambitious owners, chasing growth and ultimately dividends.

There should be an independent approval of each offer by a regulator, if we are to avoid dozens more of the HydroWorks problems.  Box ticking is not the answer.

I see no evidence that the crowd funders are clever at filtering the good from the poor.

Indeed I believe the offers like HydroWorks should be reviewed, and if there were words like ‘’all funds raised will be used for growth’’ then both the offeror and the platform should be accountable for the use of clearly incorrect wording.

HydroWorks used the money raised to pay off angry creditors who were refusing to supply their products or services until their invoices were paid.

It is now said that two NZ crowd funders are to head to Australia, in search of more lucrative deals.

The Australian regulators until now have been more rigid than has been the case here.

If the ambitious NZ companies believe Australia will produce bigger revenues, and ultimately profits, then I extend my sympathies in advance to Australian investors.  The model, I believe, is flawed.

New Zealand needs to re-examine this hands-off area of fundraising for start-ups or for those companies which cannot raise required money from shareholders, friends, investment bankers, bankers or professional investors.

Australia should make it tougher still, given the country’s regulators will know little about offshore entrepreneurs who own the platforms.

Crowd funding for investors is like cigarette smoking – it could be dangerous to your wellbeing and should be advertised as such, in big letters, or simply banned.

Accountability, and meaningful disclosures, overseen by regulators and by experienced operators with expertise, might help, as might a requirement that crowd funders display sufficient capital to meet the potential cost of accountability.

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TRAVEL

 

 

I will be in Auckland on Monday 16 October (Albany) and Tuesday 17 October (Mount Wellington), available to meet existing and new clients, and am available in Wellington most Wednesdays.

I will be in Christchurch on Tuesday October 24 and Wednesday October 25.

 

Kevin will be in Invercargill on 19 October.

David will be in Palmerston North and Whanganui on 10 October and in New Plymouth on 11 October.

Anyone wanting to make an appointment please contact us.

If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.

Chris Lee

Managing Director

Chris Lee & Partners Limited

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TAKING STOCK 14 September 2017

 

THE liquidation of the listed tertiary education provider Intueri is another of the excessive number of examples of poorly researched companies to deceive New Zealand investors in recent years.

Intueri’s listing was sponsored by offshore brokers UBS and Macquarie, somewhat rudely regarded as ‘’the sausage factory’’ by some in capital markets, after a due diligence process that clearly failed to unveil the truth about Intueri and its prospects.

The Australian vendors of a business premised on selling immigration cards under the veil of education gained a huge sum of money from the sale, while the NZ investors, largely comprising fund managers and KiwiSaver providers, were buying into a deeply flawed concept.  (How often Aussies exploit our trust!)

Intueri figured it could make profits for investors by charging people in desperately poor areas of India to come to New Zealand, attend a New Zealand based education presentation, achieve a ‘’certificate’’, and then meet the criteria for a working visa and ultimately citizenship.  Intueri believed it would gain access to Crown education budgets by ‘’educating’’ these immigrants.

Agents in India were paid to recruit ‘’students’’ whose education would be in skills where NZ had a shortage.

One imagines there was ample room for this ‘’shortage’’ criteria to be gamed, and that the finder’s fee was not refundable.

The ‘’students’’ needed to attend the ‘’courses’’ for a few weeks, long enough to qualify the educator for a government grant.  That period might have been a month.

Once ‘’certificated’’ the foreign student could obtain employment (picking fruit?) and then seek permanent residence, obtaining access to our various social services, the most attractive of which might have been free medical treatment.  Meanwhile Intueri gained Crown grants for selling ‘’education’’.

Desperately poor areas of India were probably canvassed more aggressively than richer areas.

Those fund managers who invested in Intueri cannot be expected to have travelled to India to observe and analyse the recruitment process but might have been expected to think about the skeleton of the transaction.

The original Australian entrepreneurs who created the scheme were being paid out by NZ investors to buy a concept of profits from tax subsidies being applied to educate impoverished foreign students.  Does that sound like a sustainable model?  Really?

One might understand if the education was being provided to credible students wanting to learn a skill, taught in English, which might have an international application.

If NZ was recruiting students to teach them to be pilots, or to teach modern agricultural science, or even how to play or coach cricket or hockey, then one could imagine the value-add, if one tried hard enough.

The core assumption would surely be that the student paid the full price, achieved a valuable certification, and returned to the world richer for his NZ educational experience.  Call that value-add.  Malta offers this sort of education but the cost is paid by the student, not the Crown.

 It would be interesting to learn of how many students with Intueri met a pure description of a student seeking new skills to take back to their own country.

Gaming the tax payer for subsidies, and selling the sizzle of NZ working visa and potential citizenship under the guise of education, would be a cruel and cynical underarm deception, if that is what the Australian vendors were really selling to NZ investors.

Due diligence is a process that hardly ever can be described as linear.

Capital markets are happiest when investors accept that the due diligence process is professional, competent, thorough, proven, and supervised by a muscular and perceptive regulator.

In reality it is often performed to ‘’tick boxes’’ and to ensure that no one ends up with gravy on their tie.  Appearances can be more valued than a genuine attempt to detect flaws.

All of us are deceived at different stages of our lives, usually by people skilled in the art of presentation.

To use a gut-wrenching example, it was easy to be fooled by Allan Hubbard, a born-again Christian with the knowledge of how to take the scent out of horse manure, and present the manure as gourmet food.

Only someone very willing to be fooled could not detect the differences between real Bluff oysters and the mountain oysters that the likes of Bridgecorp’s Rod Petricevic, or Money Managers’ dozens of dreadful people were selling.

The funds management industry, highly paid and comprising perhaps handfuls of genuinely smart people, ought to use Intueri’s demise as the catalyst for a review of the due diligence process.

Perhaps in Intueri’s case, their process needed to include visits to the neighbours of the Australian vendors of Intueri, and interviews with the foreign students, before they arrived in NZ.

 _ _ _ _ _ _ _ _ _ _ _ _

NO participant in capital markets should underestimate the relevance of the staggeringly large sum of money paid by PricewaterhouseCoopers (PwC) and its insurers over its audit behaviour with David Henderson’s Property Ventures Group (PVG).

Whether this undisclosed sum was $80 million, $150 million or more, as various parties speculate, the amount paid was accepted by the hard-nosed liquidator Robert Walker, and his litigation funder LPF, as being enough to discount the legal risk for the claimants, and the potentially greater cost, of legal risk, real costs, and reputational risk to PwC.

The liquidator knew he held four kings when he entered the negotiations.

I suspect PwC and its insurers knew they held a pair of twos.

For capital market participants the lingering questions will be why the PwC South Island senior partner Maurice Noone ever elected to offer the services of his international brand to a company (PVG) that virtually every South Island corporate person regarded as being a leper, a danger to the banking world, a danger to every contractor or sub-contractor, a danger to its creditors and anyone unwise enough to fund it, or interact with it.

PwC simply needed to sit in a Christchurch bar after 5pm for five minutes to feel the vibrations about PVG, before signing an agreement to link itself with PVG.  That has been the case for decades.

So why did Noone agree to a role that some might believe gave PVG the credibility that PwC expects to sell when it puts its signature on any financial statement?

Were the audit fees $50,000?  Maybe $100,000?  Was this a good return for risk?

Noone has often been marketed as PwC’s ‘’rainmaker’’.  He held a very senior position in an organisation that makes millions for its partners by offering analysis and opinion to the Crown, to local government and to major businesses.  Its brand is sold as though it is priceless.

What was it thinking when it took on the PVG audit and, having stepped into such a dangerous back alley, why was it not ultra-cautious and tediously thorough as it stepped around the hazards?

The enormous settlement achieved by the liquidator was the only credible outcome, an impost for a most unwise error by PwC, the impost negotiated to enable PwC to close the file from public scrutiny.

The negotiated settlement will be good for the creditors of PVG, who Walker represents.  For PwC it buys the firm out of a public High Court trial that might have led to ground-breaking case law on the expected conduct of auditors.

All investors will regret the lost opportunity to have new case law on the modern requirements of auditors.

Sadly every time the issue arises there is a confidential, out-of-court settlement, denying a High Court judge the opportunity to define acceptable audit behaviour.  What a shame it was not the Crown making the claim.  It might have declined to settle.

One cannot blame Walker for settling, for this inevitably large sum.  His job is to do his best for the creditors, not to facilitate new case law.

Nor can one blame PwC or its insurers.  No major audit firm wants to discuss in public the frailties of its audit processes.

To be fair to PwC, I should record the views of one anonymous insider, who believes PwC today is better organisation and has a revised and better set of standards, and a better culture than was the case when PwC was behaving ‘’disgracefully’’ in the LDC and F&I days.

It is invigorating itself at partner level, requiring existing partners to retire from their ‘’partner’’ status at the age of 55, to create a pathway for younger people.

For example, the partner in charge of receivership, John Fisk, will retire soon when he hits 55.  I expect Maurice Noone is planning his exit.

I hope PwC brings in a number of divisional heads who will study PVG and its behaviour and use it as proof for the need for change.

 _ _ _ _ _ _ _ _ _ _ _ _

ANOTHER major accounting firm which will be on edge will be BDO Spicers, which is sure to be questioned over its role in the Powerhouse Ventures IPO in Australia last November.

BDO Spicers accepted the role of ‘’investigating accountant’’ which in effect required BDO Spicers to substantiate the financial claims in the prospectus.

The investigating accountant would have conducted due diligence and attended due diligence conferences before ultimately it certified that the prospectus was not misleading.

The PVL directors might have placed some sort of reliance on this certification, though it remains to be seen whether their defence of a poor prospectus can rest on the opinion of the investigating accountants.

Ernst Young were the auditors of PVL.

Before an IPO prospectus is endorsed by regulators there is a due diligence conference at which every line in the IPO is examined, to ensure it is not capable of deceiving investors, and to ensure it is not materially wrong.

There is no need to dwell on the giant error in PVL’s prospectus – the claim that HydroWorks was worth nearly $20 million, based on a dubious valuation that was a year old and itself based on obsolete information.

The Australian regulators have now received a formal complaint that the IPO prospectus was misleading. 

Expect the regulator to salivate at the opportunity to investigate, especially if the target might be New Zealanders.

Obviously a major issue which will interest all investors would be the ability of directors to rely on this investigating accountant’s certificate.

An equally obvious issue would be the investors’ expectation that the directors would have themselves verified the legitimacy of the valuation process for assets like shares in HydroWorks, PVL’s single biggest asset.

If these subjects get resolved investors will benefit greatly by learning what are acceptable standards expected of directors and investigating accountants.

My guess is that investors would benefit more by learning these definitions of acceptable standards, than by simply benefitting from any confidential settlement to seal the details of the matter.

In this instance the Australian regulator, not a liquidator, will decide what processes should be followed.

A liquidator fights for money.

A regulator fights to ensure behaviours and standards comply with the regulations.

How full our jails would have been in 1987 had the regulators then had the laws and the energy that one expects to see today.

_ _ _ _ _ _ _ _ _ _ _ _

THE design of the convertible note instrument being offered by Precinct Properties Trust (PCT) has clearly been welcomed by investors.

PCT offered institutions and the clients of sharebrokers a total of $125 million of 4.8%, four year convertible notes, the real appeal being the feature that provides investors with a potential reward if PCT’s share price appreciates by more than 10 cents by the date of maturity.

If the share price in 2021 exceeds $1.40, the whole of that excess will be paid as a bonus to investors, probably by way of an issue of shares.

The welcome of this design is visible in the demand recorded on opening day.

Bids for the $125 million exceeded $300 million, meaning heavy scaling for all applicants.

I have a cynic’s view on how much of the demand was fictitious, simply bid to offset scaling, but nothing alters the fact that the issue was extremely popular.

Partly this might be explained by PCT’s low gearing, by the anticipation that its Britomart properties will be increasingly valuable, and another explanation might be the length and quality of its tenancies, and the excellence of its executive.

The instrument itself is popular and is likely to be copied by other issuers who want low-cost debt and are willing to hand over share price gain.

Obviously if PCT had offered a 6% coupon it would have raised all the $125 million without any need for a bonus related to share price increases.

If it wanted to raise money at 2% it would have needed to set the share price level at which the bonus begins at a level much lower than $1.40.

I expect many companies to offer similar convertible notes.

The key for investors will be to assess what likelihood there is of a price increase by the maturity date of the note, in PCT’s case, four years.

Investors would be wise to consult with those who are genuine capital market participants, with knowledge of the securities and the quality of the issuer.

Had Intueri or Veritas or PVL offered such a note, there would have been a very different response from our household!

 _ _ _ _ _ _ _ _ _ _ _ _

THE enthusiasm for crowd funding in New Zealand came to a peak when New Zealanders decided to prevent private ownership of a beach in Golden Bay.  Crowd funding on rare occasions has also achieved some social objectives, perhaps helping tourists who have been ripped off.

I can see there is some sort of value in creating a platform for those who are moved to help out victims of bad luck and no doubt those who bought the beach will always feel proud of their involvement.

However there is a dark side to these platforms.  Investors, rather than donors, should be cautious.

In my view the platforms need much stricter regulations to prevent them being exploited by ugly, greedy entrepreneurs.  I will be writing to the regulators seeking a review of the supervision of these ticket-clipping models.

The problems appear when the platforms are used to raise money for commercial operators who can meet the very low bar set by regulators.  Often this fundraising is inaccurately called pre-IPO funding.  It should be described as ‘’blue sky’’ investing.

Companies with cash needs that would not be met by founding shareholders, friends, banks or professional investors are allowed to raise real money – perhaps up to two million – by begging for public support, rather than producing a prospectus overseen by regulators, and underwritten by accountability.

We have seen cynical entrepreneurs exploit naïve people with unregulated offers that have ended with losses and tears for the unadvised investors.

Those that provide platforms – the likes of Snowball, Equitise, PledgeMe etc. – clip the tickets and no doubt have some sincere people who seek to advertise the offers only after they have done their best to perform some version of due diligence.  I have not been convinced that there is sufficient skill level available for the due diligence process.

No doubt regulators have to balance the inexperience of the operators and the inexperience of those who succumb to the offer, with the desirability of allowing entrepreneurs to pursue their dreams, without going to great cost.

The regulators may consider that asking for donations to help someone suffering from bad luck is not much different from asking naïve, unadvised investors for $100 to build a new airport or a casino on Somes Island in Wellington Harbour.  I am not so sure.

The reality is that many well-meaning people have been cynically rorted by desperate entrepreneurs, enabled by ticket-clipping platform owners.

As is now visible to all, the pleas for debt or equity finance from the likes of HydroWorks and Powerhouse Ventures were made when the companies’ own directors, well able to invest themselves, would have exhausted more obvious and appropriate avenues for their fundraising. 

Crowd funders could reasonably be described as the poor man’s last chance.

I now read that two of our crowd funders are going to Australia to peddle their platform there.  I will be amazed if Australians feel they need our platforms.

To me this smells like the same sort of plan that led Hanover Finance to offering to lend on Spanish apartment blocks built in the desert or St Laurence’s simply disgraceful lending in Australia prior to 2008.

If I were Australian, I would be wondering why some fairly undistinguished New Zealand performers would be seeking a home in Australia, where the regulators will undoubtedly be attentive.

My guess is that the commercial offers made to kind but unworldly investors will repay the investors handsomely about once in every blue moon.  Perhaps twice.  And repay in cheese.

The regulators should re-examine the crowd funding concept, especially the investment aspect of it.

I sense there will be far more tears for investors, than returns that reflect risk.

 

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TRAVEL

 

Kevin will be in Christchurch on 28 September and in Invercargill on 19 October.

Chris will be in Christchurch on September 26 and 27.

David will be in Palmerston North and Whanganui on 10 October and in New Plymouth on 11 October.

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.

Anyone wanting to make an appointment should contact us.

If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.

Chris Lee

Managing Director

Chris Lee & Partners Limited

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TAKING STOCK 7 September 2017

 

THE risk of a global market correction is being widely discussed but at the time of writing the sheer volume of money, chasing yields no longer available from bank deposits, continues to underwrite share prices.

One school believes that the pursuit of yield, led by pension and annuity funds, will permanently underwrite prices, set at silly levels by the flood of mindless investment money provided by exchange traded funds (ETFs).

This time is different, say the pupils and teachers in that school.

Last week our firm wrote its quarterly confidential newsletter to advised clients, discussing the subject.

We noted that herd behaviour is fickle and often changes direction because of a relatively meaningless event.

That observation reminded me of five single events that have occurred in recent days and weeks, none of which would directly impact on large numbers of investors, but any of which would be capable of igniting fear.

That a huge company like Fletcher Building could be so poor internally that its construction performance had not alerted the executive and board to massive losses would scare some investors.

How could a company with such a confident board, and such a revoltingly overpaid executive team, conceal reality for so long?  Do they need to open the windows?

Is this a signal of one very poorly chaired, governed and managed company, or is it a sign of how directors and executives behave under stress?  Is the size of the undisclosed loss being replicated below the surface by other poorly governed companies?

Earlier, the sale of a small cluster of companies, in a sector that could be described as in its sunset phase, for an extraordinary sum (A$200 million) jolted many an investor.

How could Perpetual Guardian Trust attract an Australian buyer at such a huge multiple of a one-year profit figure that reflected years of poorer performance, addressed by acquisitions and cost-cutting?  Would you pay 25 x NPAT based on a single year of recovery?

Would anyone believe PGT was worth more than Carmel Fisher gained when she sold her fund-managing gravy train to the TSB?

If Fisher Funds, definitely not in a sunset sector and bought by a strong buyer (TSB), was worth less than PGT, did this imply the PGT buyer was extremely optimistic or simply unwise?  Many a market participant pondered this conundrum.

That the PGT buyer withdrew, failing to settle, arguing that very minor leasing details invalidated his contract, was almost irrelevant.

Are we seeing signs of stress, more evidence of a dysfunctional market, or simply a sign that optimists, often using other people’s money, push to buy assets at prices they believe will be justified later?  Should investors fear this sort of occurrence?

Is it another signal for market observers?

Then we had the ridiculous behaviour of Powerhouse Ventures Ltd (PVL), which stumbled to a listing at the end of 2016, perhaps by encouraging its own people to invest with borrowed money to reach the minimum subscription (A$10 million) needed to avoid a full refund.

Powerhouse, chaired by Kerry McDonald (himself a National Australia Bank director), produced a regulator-approved prospectus claiming its biggest asset was a shareholding in HydroWorks, which Powerhouse said was worth around $4 million of Powerhouse’s claimed $20 million of investments.  The prospectus was signed off by BDO Spicers and the accounts audited by Ernst Young.

Within a few weeks McDonald has resigned, replaced as chairman by director John Hunter, who resigned a few weeks later, replaced by Blair Bryant, who resigned weeks later and was replaced by an Australian, Russell Yardley.  PVL investors were gobsmacked by all this change, suggesting panic in the boardroom.

Meanwhile HydroWorks’ board, comprising five directors, disintegrated, its parent company (PVL) required to provide half the directors but its PVL directors resigning from HydroWorks within weeks of the PVL issue.

The other two directors resigned as the board had by then become unconstitutional.

PVL, having trumpeted HW in November, responded by putting HW, screaming and scratching, into liquidation, in August 2017.

Now PVL’s founding managing director has resigned and quit on the same day in what PVL’s latest chairman implied was a strategy for going forward.  Of course.  Always planned.

Good grief!  All of this happened within nine months of providing a regulator-approved prospectus and raising money at A$1.07 a share, now priced at 30 cents.

Do you wonder if all these appalling contrivances might make an investor wonder about the Australian rules, their regulators, and the behaviour of small listed companies, let alone wonder about the wisdom of National Australia Bank’s director McDonald?

Might this event shake out a few more surprises?

Next up we had the improbable, back-door-listed Veritas, parent of the franchised meat packer chain Mad Butcher, disclosing that its bank, ANZ, will be withdrawing its loan facility in a few weeks.

Veritas, like Mowbray Collectables and many others, should never have been listed.

The imposition of stock exchange costs and a corporate structure on a low-margin, undercapitalised, small meat packaging operation was always going to swamp its franchise holders and shareholders with costs that would drain margins.

The poor beggars who borrowed to buy the franchises had no show of winning, in my opinion.  The only winner was the vendor of the franchise.

Veritas had poor leadership, made dopey acquisitions, had no obvious connections with the capital markets, and seemed to have no deep pockets to which it could turn when survival required capital increases.

Its founding chairman Mark Darrow was a young fellow who was sales manager for Brent King’s Dorchester Finance Company just a decade ago, and had no relevant experience or wealth to display to potential investors.  He resigned and is no longer involved.

The group is now in disarray, Mad Butcher franchises closing in different places, franchises receiving very little reward for effort, and Veritas shareholders observing losses, no dividends and now no bankers.

Is this a signal of anything?  Crazy expectations?

Then, perhaps the biggest signal of all, we saw this week the international accounting, auditing and advisory chain, PricewaterhouseCoopers (PwC) being forced to settle for what might be one of New Zealand’s largest ever settlement sums, a claim relating to its frankly dreadful audit behaviour of long-time serial defaulter David Henderson and his risibly incompetent and penniless company Property Ventures Group.

Named as about the fifth defendant in a claim for hundreds of millions brought by the outstanding and persistent liquidator Robert Walker, PwC, as I have long suggested, avoided an appearance in the High Court by joining with its insurers (Directors and Officers Policy, or equivalent) to buy its way out of the case.

To my knowledge the last large scale settlement was when Forsyth Barr, its insurers, and possibly other parties, agreed to compensate the victims of the Credit Sails investment, arranged by Forsyth Barr in or around 2005.

Investors were paid $61 million by the insurers and perhaps other parties, with Forsyth Barr’s own contribution said to be just five million.

In this case the Commerce Commission could be thanked for bullying the parties to pay rather than face possible charges for which penalties could have been much more serious than just money.

Until last week this settlement was the largest I could recall since the Crown’s $300 million settlement of a case involving Equiticorp’s sale of NZ Steel, and the illegal structure Equiticorp invented to buy NZ Steel from the Crown, which should have known the structure was illegal.  That was nearly 30 years ago.

PwC and its insurers last week bought their way out of a court case with a sum that I guess will have been nearer $100 million than the $60 million settlement for Credit Sales.

It is most disappointing that this case will not now produce court law on audit behaviour, but it was easy to forecast this outcome.  PwC would not have wanted the court to make public the dreadful audit behaviour.

The PwC audit enabled Henderson and PVG to appear solvent.

Remarkably, PwC’s senior man, Maurice Noone, was advising PVG how to meet solvency conditions while PwC was certifying solvency.

Virtually every seasoned capital market participant in New Zealand, and virtually every banker, knew the depth of the sand on which PVG was built.

Indeed I recall visiting Allan Hubbard at South Canterbury Finance in 2006, requesting his assurance that SCF was not lending to a list I provided of known poor performers.  Hubbard was most assuring.  Of course PVG and Henderson were on the list that I provided.

Regrettably, when Hubbard died, and the court cases started and the liquidators reported, we found that Hubbard had virtually used my list as leads for new lending opportunities, with Henderson’s companies prominent on that lending book.

Why PwC would chase the PVG audit revenue, which one assumes they did collect, will be a mystery for future corporate historians.

What we do know for sure is that the liquidator, the admirable Robert Walker, filed a claim against a list of parties on behalf of various PVG creditors, totalling more than $300 million plus hundreds of millions of interest.

The sole display of wisdom from PwC in this whole affair was its signing a settlement which I expect will have cost every PwC partner a six-figure sum, reflecting the excess that would be on most insurance policies.

Given PwC had already been shamed by its astonishing behaviour with the Nelson finance companies, F&I, and LDC, where a judge had observed PwC behaviour that he rightly called ‘’disgraceful’’, it is far from reassuring to note that PwC seems to have had stable executive teams.

What will market observers read into this settlement?

Are auditors providing any useful judgement?  Does PwC need a cultural change?

If you consider the uncomfortable conclusions investors might reach when they think of these five recent events, you might wonder the point at which investor confidence snaps.

The five cases question corporate governance, executive behaviour, the valuation of companies, the commitment of directors, the truth about asset valuations, the selling of the sizzle of a sausage rather than its substance, and now the skill and insightfulness of the nation’s most celebrated accounting firm.

The market seems to have observed these five fires, which might vary from bonfire size to blazing infernos, as being each easily handled by our volunteer fire-fighters with garden hoses.

The market is nearly always right.

Nothing much needs to be looked at here; business as usual; on to the next deal.

My hope is that the ‘’business as usual’’ response is simply the surface response, and that what it really reflects is that the legislators, the regulators, the courts, the institutions and the fund managers are all busily documenting how they will henceforth avoid being trapped by the processes that have clearly failed, as illustrated by these five examples of unexpected outcomes.

One cannot blame retail investors who rely on analysis by the daily papers or radio/television for comment on these issues.

The comments I have read or heard in the media have been shallow and obsequious, with the honourable exception of the NBR.

I guess advertisers must be respected.

 _ _ _ _ _ _ _ _ _ _ _ _

JUST as you may infer that capital markets, regulators and investors seem to have absorbed all of these unusual events, all occurring in such a short time, so too you might infer that there is no panic over the imminent change in government.

The momentum for change, so obvious overseas, has reached New Zealand.

It has been fairly obvious that if the numbers allowed Labour and NZ First to govern that is what would happen.

Capital market leaders to whom I have spoken seem to have forecast this change and seem to have accepted it as undramatic.

I am reminded of the European view of New Zealand, that our two parties of government are both centrist parties, both preach fiscal responsibility, and both tend to focus on economic and social policies acceptable to a majority.

Whereas 30 years ago we dabbled with the likes of Social Credit, neither major party now sets off deafening alarm bells, though the markets will not be so laidback if there were any repeat of the threat to nationalise the power generators and retailers.

I have previously written of the education models used in Malta and Denmark, where tertiary education is free and exam-passing students are paid to attend university, but bonded to work domestically, and steered into useful careers.

One cannot get a Bachelor of belly dancing in Malta.

A change to free education here, combined with a real focus on needed skills and apprenticeships, might be welcomed by all business sectors.

In my opinion Bill English will retire, remembered as by far our best ever finance minister.

One hopes that his successor will share the English focus on analytics, enabling pre-emptive responses to reduce the inevitability of fallouts for disadvantaged children.

It is impressive to observe the markets being so quick to accept that a change of government seems inevitable.

 _ _ _ _ _ _ _ _ _ _ _ _

THE great focus on the Auckland traffic problem, and the city’s shortage of housing, has tended to detract attention from what is also a deeply-troubled spot, Queenstown and its surrounding area.

The housing shortage and extreme prices in Queenstown have made life difficult for those who serve the multitude of tourists, yet earn basic wages.

First-time buyers are as much shut out of the market as anyone has been in Auckland, prices at the lower end still unaffordable.

The traffic problem is unsolvable, a two-lane road from the airport to the town centre being constrained by lake water and sometimes snow-covered hillsides.

When one arrives in Queenstown one can easily be gridlocked, sitting at traffic lights unable to move, irrespective of the green light.

Tourists, often from Asia or America, hire rental cars at the airport and set off, having never driven on the left, on narrow roads, without barriers, that twist and turn above the lake as the cars head to Te Anau.

Accidents occur at regular intervals.

Indeed when I was last in the town I breakfasted with a group of cheerful Americans who openly admitted to have driven on the right lane regularly and felt blessed that other drivers seemed to expect such errors and were skilled at ‘’dodging Americans’’.

Well there is one encouraging development for house hunters.

A new subdivision, five minutes from the town centre at Arthurs Point, is selling a range of townhouses at credible prices with three quarters of the first 26 homes sold to first-time buyers.

The developers have avoided sales to investors and expect the final number (88 homes) will be lived in by owner-occupiers.

The building programme produces a range of one, two and three bedroom homes at prices nearer half a million than three quarters.

Solving the roading problem seems a greater challenge.  There is talk of a back road from Millbrook to Queenstown.  I guess that in Japan or America they might clip on a top storeyed road along the lake.

Perhaps the answer is a public transport system using airships.

Queenstown now has more flights arriving from Australia than from any NZ destination yet its airport tarmac, like Wellington’s, is of minimal length.

As has often been discussed before, too many tourists may well be a much costlier outcome than too few!

 _ _ _ _ _ _ _ _ _ _ _ _

TRAVEL

 

Kevin will be in Christchurch on 28 September and in Invercargill on 19 October.

Chris will be in Christchurch on September 26 and 27.

David will be in Palmerston North and Whanganui on Tuesday 10 October and in New Plymouth on Wednesday 11 October.

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.

Anyone wanting to make an appointment should contact us.

If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.

Chris Lee

Managing Director

Chris Lee & Partners Limited

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