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Lilies of the field

Thu, 12 Aug 2010

Like rarely-blooming plants – the Titan arum comes to mind – private equity funds desperately need sharemarket booms before they will float their wares.

The media, and no doubt brokers, are desperate to report such events, only to find “this is not the right time.”

So it was this week with Hoyts, owned by Pacific Equity Partners. The Australian press has reported PEP had “halted well-advanced plans” to float the cinema chain at a time when box office business is strong.

That has been true for the past couple of years – but it doesn’t follow it will be the same next year. The industry is notoriously cyclical and fickle, depending on the public appetite for blockbusters and the occasional one-off hit.

The Australian box office topped the billion-dollar mark for the first time last year, thanks to Avatar and the extra revenue from 3-D screenings. But US trends show this year’s (northern) summer blockbusters are no match for Avatar.

Indeed, the New Zealand box office has dropped in recent weeks compared with last year.

A reminder of the poor record of private equity floats came last week when Kathmandu reported a much different outcome than predicted in the prospectus.

Share analyst Greg Hoffman, in his Intelligent Investor column, was justifiably scathing in his assessment, while noting similar outcomes from similar floats.

PEP also has RED Retail (Whitcoulls, Borders) on its books along with some solid food businesses. Sadly, while investors may be keen on new stocks, they will always be sold at the top rather than bottom of the market.

Ignoring the market
World sharemarkets – at least those in the northern hemisphere – are in a mid-summer rut, which is normal.

But with the key western economies treading water, attention has focused on China. A contradiction in share investing is that prices go up when governments are spending money.

But prices fall when governments are being frugal and attempting to rein in stimulus measures, which is the sensible policy advice you get from the likes of the IMF.

So it pays to ignore some of the day-to-day movements and look for policies and companies that will outlast the dominant thinking.

A couple of weeks ago, the IMF issued its annual assessment of China after what some reports said was an initial reluctance by Chinese authorities to publish (previous ones have been suppressed).

The key issue is the IMF’s views on China’s currency policy, which has been aired in this column before (more is here in an AFP report). But while the under-valued yuan is commonly acknowledged, it was the IMF’s comments on the economic stimulus policy that took my notice.

The IMF is urging China to phase out its spending this year and to slow monetary growth. It also urges that China “rely on more market-based instruments to achieve this goal, including via open market operations, higher interest rates and reserve requirements.”

Furthermore it wants more tightening of the property bubble, a tax on such activity and the development of other channels for financial market investing.

All this is good advice – just don’t expect it to be rewarded on Wall Street.

Healthy developments
Well away from the headlines, some major advances are occurring in the health sector as the government implements some far-reaching policies.

This week’s Healthcare Summit in Auckland was remarkably upbeat about the changes, despite the funding and patient pressures that affect all health systems.

That pressure becomes public when services are threatened or lost, such as Dunedin’s campaign to retain its neurological specialists.

Yet the system is highly regarded in most public satisfaction surveys and the hospitals have become more responsive to use of new technological and efficiency measures, such as the shared services agency (Health Benefits).

For example, the national DHB chairman, Peter Glensor, said the budgeted $45 million in procurement savings was exceeded by $9 million, with more promised for the current year. Speaker after speaker hammered the efficiency theme, with others offering solutions.

Interestingly, the one area of tension is whether the Pharmac model should apply beyond pharmaceuticals to medical devices.

Those attacking the proposal – both industry and practitioners – used efficiency and innovation arguments, saying the shutting out of competing suppliers and loss of innovation would cost more in the long run.

Local med-tech companies have the potential to match exports in the billion-dollar wine and kiwifruit industries over the next few years.

But the fear is that what happened to the local pharmaceutical industry under Pharmac – the loss of 50% of its research and other personnel in five years – would be replicated. The savings Pharmac might make, an industry advocate said, would be more than offset by the extra export income from a viable industry.

While the medicines industry is now all but reduced to animal health ¬ where Pharmac has no role – the med-tech industry employs 6000 and has 400 plus companies.

ACC’s back to basics
The biggest turnaround in business this year has been in the much-maligned and much-abused accident compensation scheme.

The reasons, outlined at the summit by chief executive Jan White, have come from a focus on the scheme’s original intentions, and a switch in priorities to assisting people in “what they can do” rather than “what they can’t do” in recovering from their injuries.

The bottom line is that instead of claims rising much faster than the population rate, and payments escalating well beyond what levies can sustain, both have come down sharply.

Dr White revealed the ACC accounts will show a $9 billion turnaround and ACC is well on the road to sustainability. (The figures are too complex to explain here and involve unfunded liabilities.)

The tighter criteria, through taking ACC back to the basics of work-related injuries, has seen a 4% drop in claims. In specific areas, such as physiotherapy, improved monitoring was aimed at achieving outcomes, with incentives for return to work.

This has meant a 27% drop in physio claims. Dr White said ACC would longer supported businesses that were totally dependent on its payouts, and staff was encouraged to seek new solutions, including private claims managers.

Sure, some of these moves have been unpopular, but those who pay the levies will be pleased to know ACC is on target to be fully-funded by 2019 and is no longer a soft touch for social policy.

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Lilies of the field