New Zealand’s equity markets are set for a shake-up. On 13 December 2024, Commerce and Consumer Affairs Minister Andrew Bayly announced a package of reforms “to unlock capital for the benefit of New Zealand’s economy” and reduce the compliance burden for companies listed or listing on the NZX.

The package is made up of three strands of work that will begin now, with further work planned for 2025. The current strands are:

1. Making it easier for KiwiSaver funds to invested in unlisted assets, such as infrastructure projects and New Zealand businesses.
2. Reducing the costs and barriers faced by companies listed or listing on NZX.
3. Reviewing the climate-related disclosures regime to see if changes are required (you can read about this in our article here).

The longer-term reforms will assess takeovers law, continuous disclosure requirements and auditor settings.

Breaking down IPO barriers

The Government is concerned that NZX listing requirements are deterring IPOs and making the NZX uncompetitive with Australia. It intends to change IPO rules to remove the requirement for two years’ worth of GAAP-compliant prospective financial information (PFI). IPO candidates will have two options:

• Do not prepare PFI and explain why
• Prepare PFI in a flexible format, clearly outlining assumptions and calculations.

This change, set to take effect in early 2025, will align New Zealand's IPO rules with Australia's.

KiwiSaver changes

Despite over $110 billion in KiwiSaver accounts, KiwiSaver investment in private (unlisted) assets is currently only 2-3%, significantly lower than other countries. The Government’s KiwiSaver proposals could be a game-changer both for KiwiSaver members and New Zealand businesses. The Government believes that enabling greater investment in unlisted assets like local businesses and infrastructure projects will bring multiple benefits:

• Broader investment opportunities for KiwiSaver members
• Enhanced risk diversification
• Increased capital access for New Zealand businesses
• Potential support for critical infrastructure development.

Currently, KiwiSaver providers struggle to invest in private assets while still keeping the high levels of liquidity required to provide for transferring KiwiSaver providers and withdrawals. This has resulted in KiwiSaver providers favouring lower risk, shorter term investments. The Government wants to encourage investment in private assets while keeping the rules allowing transfers or withdrawals.

The Ministry of Business, Innovation and Employment (MBIE) has released a consultation paper covering the following issues:

• Liquidity risk management
• Reporting categories
• Valuing private assets
• Fee reporting.

Liquidity risk management

KiwiSaver members’ transfer and withdrawal rights make liquidity particularly challenging for providers. Private assets, particularly infrastructure, may need to be held long term to deliver returns and may not have a ready market. Fund managers investing in private assets need liquidity management tools (LMTs). Feedback from KiwiSaver providers suggests that the KiwiSaver Act 2006 limits the use of LMTs needed to manage private asset liquidity risks, particularly side pockets and redemption gates.

Side pockets

Side pockets would allow fund managers to transfer most of a KiwiSaver member’s funds to a new provider (or to the member) while isolating (side pocketing) a specific asset and waiting until the manager can achieve the best value for it before selling.

Redemption gates

Redemption gates would allow fund managers to slow or halt KiwiSaver withdrawals from the fund over a period of time. This would prevent forced liquidation of assets in an adverse market situation and help to prevent ‘runs on the fund’. Redemption gates would be opt-in, most likely built into the fund offering.

Proposed approach

MBIE is proposing that KiwiSaver managers be explicitly allowed to override the current transfer and withdrawal provisions when “necessary” to manage the liquidity risk of investments. It is seeking feedback from providers on their LMTs and whether they would support the proposal. MBIE acknowledges that developing the proposed approach would require detailed design considerations, including:

• Whether legislative changes should be general (all LMTs) or specific (limited to side pocketing and gating)
• When LMTs should be able to be used
• Whether there should be regulatory conditions placed on the use of LMTs
• Disclosure arrangements for side pocketed or gated funds and how to communicate these to members
• Whether any changes should extend to all managed investment schemes as well as KiwiSaver schemes.

Reporting categories

KiwiSaver managers have raised concerns that the lack of private asset categories puts KiwiSaver providers who invest in private assets at a disadvantage. Investment in private assets generally results in higher fees, but without clear disclosure categories, providers investing in private assets appear to have higher fees without good reason. This makes it harder for KiwiSaver members to properly compare providers or make fully informed investment decisions. MBIE has proposed four options:

Option 1	Create a new category for private assets, which would not differentiate by jurisdiction.
Option 2	Create a new list: Cash/cash equivalents Fixed interest (New Zealand, international, unlisted) Equities (New Zealand, international, unlisted) Property (listed, unlisted) Infrastructure (listed, New Zealand unlisted, international unlisted) Commodities Other. This roughly mirrors the asset categories used in Australia.
Option 3	Adopt the categories in Option 2 but require the category to reflect the underlying assets held (particularly relevant for schemes investing in index tracking or other wholesale funds).
Option 4	Adding sub-categories to current categories: Add unlisted debt under 'NZ Fixed Interest' NZ unlisted equity under 'Australasian equities' NZ unlisted property under 'Unlisted property' Reporting infrastructure under 'other' or a separate 'Infrastructure' category for better visibility of all NZ private assets.

Valuation requirements

The Financial Markets Conduct Act 2013 (FMCA) requires KiwiSaver funds to price assets according to the valuation methodologies set out in their governing documents. In practice, funds price assets daily to enable processing of transfers and withdrawals. The daily value determines the withdrawal amount. Some providers’ governing documents do not have valuation methodologies suitable for illiquid assets, and it can be difficult to amend the documents. MBIE is seeking feedback on whether to amend the FMCA to clarify that KiwiSaver providers can modify their trust deeds to allow for valuation of private assets.

Fee disclosure

To ensure KiwiSaver members can make informed decisions about, and compare, funds, funds must be transparent around fees and returns (pre-fees, pre-tax, and final). One fee measure used is the total expense ratio (TER): the total management and operating costs divided by the value of the fund’s total assets. Some providers have raised concerns that the TER disincentivises investment in private assets because fees for private asset investment are often higher, particularly if KiwiSaver providers outsource to specialist fund managers. This results in a less favourable TER, which can discourage some KiwiSaver investors. Other stakeholders see the TER as a key measure for fee transparency and value for money. MBIE is seeking feedback on the extent to which the TER calculation impacts fund managers’ investment decisions.

Next steps

The Government's proposed capital markets reforms represent a significant effort to revitalise New Zealand's investment landscape and unlock new opportunities for both investors and businesses. By removing IPO barriers, enabling greater KiwiSaver investment in private assets, and addressing liquidity and reporting concerns, these changes aim to create a more competitive and dynamic investment landscape.

Submissions on the KiwiSaver consultation paper close on 14 February 2025, and both providers and businesses should consider how these changes could impact them. If you need help making a submission on the proposals or want to know how they might affect your business, contact one of our experts.