Blog
Recently, Catalist was granted a licence from the Government to open a public stock exchange for businesses too small to list on the NZX.
Here, we sit down with Colin Magee, Catalist’s Co-Founder and CEO, to find out what motivated him to set up a new stock exchange for small and medium-sized businesses in New Zealand – and to ask some questions about how the platform works.
Tell us a bit about your backstory – where are you from, what’s your experience in the industry, how’d you find yourself in New Zealand?
I grew up in Cambridge, England and spent most of my career working as a finance lawyer in London, which included time at the international law firm, Clifford Chance, and a role as general counsel of an investment bank. My Kiwi wife and I moved to New Zealand eight years ago, to be closer to her family. I got a job with the Financial Markets Authority (FMA), where I worked for 5 and a half years, before starting Catalist in mid-2018.
What did your role with the FMA involve?
Most recently I was Head of Conduct, which meant I looked after the teams regulating conduct in New Zealand’s capital markets. That included oversight of the NZX, broker trading, market infrastructure, auditors, crowdfunding and peer-to-peer businesses.
What motivated you to start Catalist?
When I was at the FMA, a lot of people would complain to me about how dysfunctional the New Zealand market was for SMEs and for social impact businesses. There were three key problems that kept being raised:
First, the difficulty of raising capital of more than $2 million. Below that, businesses can often access support from friends and family, the banks, or use mechanisms that allow lower cost fundraising, such as angel investment or crowdfunding. However, above $2 million, only a select few businesses can hope to get funding from venture capital. Most of the remaining businesses either stay small, or worse, fail due to lack of investment. It’s simply not true that all SME owners want to settle for the good life – a boat, a batch and a BMW – rather than scaling their business!
Second, founders of SMEs and their early investors often find themselves locked into an investment they can’t exit easily. The ability to find new investors is hugely restricted, due to regulations that are designed to protect smaller investors from potentially higher risk (but higher reward) investments.
Finally, there is a great disparity in investment opportunities available to wealthy New Zealanders, compared to everyone else. We strongly encourage investors to have a diversified portfolio – which means no one should have all their investments in SMEs – but we’re here to give all New Zealanders the opportunity to invest in SME businesses with high growth potential. Through a well-regulated, transparent market, we can allow everyone the opportunity for potentially higher returns from SME business investments, while also supporting other positive outcomes, such as creating more jobs in our local communities.
You’ve been working on Catalist for over two years now – what are your key achievements so far?
Well, we were meant to launch our public market in April 2020, but Covid caused some delays in getting the regulations we needed from the Government. We launched the Catalist Private Markets in mid-2020, which gives existing investors, and wholesale investors, liquidity through private online auctions. That enabled us to help a number of businesses with private market trading and we got some great practical feedback on the auction design. We designed our auctions based on extensive research of academic papers on ‘call auction’ designs. We knew our auction model should create better liquidity for SMEs than anything else available in New Zealand, but it was great to see successful trading actually taking place.
The biggest achievement so far though, has to be finally getting our licence and legislation, which specifically approves our public market and allows us to give everyone access to a fully regulated stock market for SMEs. This has taken over two years, and involved getting a raft of new regulations, exemptions and approvals through multiple Government entities. Some people have asked whether the process was easier for me because I previously worked at the FMA, but I think that just meant they were even more conscious of not showing bias, so it probably made the process take even longer!
Catalist has been described by some as a key piece of infrastructure for NZ’s financial markets – tell us about the licence and what that means for New Zealand?
Yes, ‘infrastructure’ is a good way to describe Catalist in the way it acts as an independent platform to connect investors with listed businesses and facilitate a fair market, without favouring one over the other.
What this means for investors is they have more protections than they would have with an unlicensed market, and can take comfort knowing our periodic auctions provide a suit of legal and technological measures to ensure the market remains fair, orderly and transparent. Our licence also requires us to act as a front-line regulator to enforce market rules, with backup from the FMA, where necessary. This can give investors greater confidence than they would have outside a licensed market.
Catalist’s licensed market also requires a higher standard of information disclosure from listed businesses, compared to platforms aimed at the ‘start-up’ end of the market, like crowdfunding, wholesale investments or unlicensed trading platforms.
In return for providing enhanced transparency to investors, businesses can raise up to $20 million per year from the general public, without triggering what’s called a ‘regulated offer’ under the Financial Markets Conduct Act. Essentially this allows for simpler capital raising and lower costs for businesses listed on the Catalist Public Market. The licensed structure therefore has benefits for both SMEs and investors.
We built Catalist to help everyone in the market though – not just investors and SMEs, but also their advisers, the existing capital markets ecosystem and other stakeholders in these businesses. Considering 98% of NZ businesses are SMEs, in helping to grow these businesses, we intend the Catalist Public Market to stimulate job creation, grow the next NZX-listed companies, fund social impact projects and boost our economy. The significance of it is pretty huge – so we’re planning big!
What are some of the key features that differentiate Catalist from other capital raising and investment platforms out there, such as the Unlisted market and the former ‘NXT’ market?
One of the main differentiators is our periodic trading model. All trading on the Catalist platform is conducted through online periodic auctions, rather than continuously, which is how previous growth markets like NXT worked. We’ve seen markets like NXT shut down after trying the continuous trading model, because it didn’t create good liquidity for SMEs and was too costly – so we’ve taken learnings from this in the way we’ve designed Catalist.
Not only do auctions generate better liquidity for securities that do not trade very regularly (often the case for SMEs), periodic auctions also massively reduce the financial and regulatory burdens on listed businesses, without compromising the protections available to investors. Listed businesses only need to provide an information update to the market at each auction – and between auctions they can focus on running their business, which is in the best interests of both the business and investors.
Our other distinguishing features are to do with the benefits businesses can experience from being listed on a licensed exchange, such as lower-cost capital raising of up to $20 million per year, without triggering a regulated offer.
Won’t periodic auctions instead of continuous trading reduce liquidity for investors? How does this trading model benefit both investors and businesses?
I agree it can seem strange if you’re not familiar with capital markets, but for securities that don’t trade very often, periodic auctions can actually lead to greater liquidity than continuous trading. This is because auctions concentrate all buy and sell orders to a fixed time period for simultaneous execution at a single price, and in doing so, avoid the spiral of illiquidity that a continuously available market can fall into. In those continuously traded markets, where liquidity is low, investors are disincentivised from submitting new orders because statistically, they almost always get a worse price than the consensus price. We’ve actually written a blog post on liquidity and auctions, which I’ll link to here.
What’s the difference between the Catalist Public Market and the Catalist Private Markets?
The technology platform is the same for both, but in our private markets, we give businesses access to our platform to run their own private market, which can only be accessed by their approved investors. Private markets can be useful to allow trading amongst existing shareholders, employees who own shares in an employee share scheme, or to open up investment to new wholesale investors, for example. The markets are hosted on a completely private section of our website, but investors meeting the wholesale or eligible investor criteria may be able to apply to join certain private markets.
In comparison, the public market is open to the general public – similar to NZX’s main board – and anyone who has a verified Catalist account can trade in those publicly listed securities.
What does Catalist mean for social impact investments?
Social impact investments suffer many of the same problems as SMEs. By social impact investments, I mean businesses or projects that generate a measurable social or environmental return, in addition to a financial return. People choose to invest in these projects for the blended return of both positive impact and financial reward. These investments generally aren’t offered to the general public because the costs of complying with securities legislation makes it prohibitively expensive. The Catalist Public Market massively reduces the costs of raising capital of up to $20 million per year from the public, whilst also not compromising on the protections given to investors. This can have a transformative effect on the impact investment market by opening it up to mainstream investors – so watch this space for an announcement on our first impact investment to be listed on the market.
Tell us one or two random facts about you?
I like to get outside and to be on the water. Before I came to New Zealand I spent a lot of time rowing, and once represented England in the lightweight rowing category. Now you’re more likely to find me lifting hay bales around to feed my wife’s two horses, or splashing at the beach – but I enjoy anything that gets me outside.
By Michelle Polglase
