UPDATE: NZX to spend up to $35 mln for fund manager SuperLife

NZX, the stock market operator, will spend up to $35 million buying fund manager and KiwiSaver provider SuperLife as part of a plan to capture the growing Kiwisaver market by launching a series of new exchange traded fund in the coming year.

The acquisition, which adds $1.27 billion of funds under management and 41,000 members, is expected to add to earnings over the 2015 financial year, and was prompted by the Wellington-based company's plan to launch a series of domestic and international debt and equity ETF's in the next 12 months. The SuperLife funds will be rolled into the NZX's $400 million Smartshares unit, boosting the business in scale and liquidity ahead of the new ETF products being launched.

"We looked at a range of different options for our Smartshares business, which is about $400 million worth of assets under management," chief executive Tim Bennett told BusinessDesk. "We see both a commercial opportunity for NZX, but also some market benefits from expanding the ETF portfolio. Fund management in New Zealand will grow as a result of Kiwisaver, and we think the passive funds, or ETFs, are under-penetrated, so that's an opportunity for us. ETF's provide a broader range of traded products for investors, and they provide liquidity."

KiwiSaver was set up in 2007 as a means to address the country's woeful savings rate, and its soft compulsion - in that people have to opt out of membership - has allowed funds under management to swell to $23.39 billion as at Sept. 30.

NZX will manage the merged entity separately from the capital markets business, creating a passive fund rather than an active investor in order to avoid perceptions of conflict, Bennett said. It's looking for a chief executive, and SuperLife directors Michael Chamberlain and Owen Nash will stay on as directors, with Chamberlain also joining the NZX management team.

"We're not making individual stock selections by any stretch of the imagination and we don't intend to be an active manager," Bennett said. "We are going to run this as quite a separate business - we are in the process of hiring someone to run it. It's based in Auckland, not in our office, and will continue to be for some time. We'll separate that out to ensure there is no perception of conflict or different objectives between different parts of the business."

In 2011, the Financial Markets Authority warned SuperLife over some of its sales practices. Bennett said he couldn't comment specifically on trading practices, but the goal of NZX was to building "a low cost, competitive Kiwisaver ETF fund offering".

NZX expects to launch its new growth market, NXT, which targets small-to-medium sized businesses with a lower disclosure threshold, early next year. Once the market has enough liquidity, the stock market operator would offer NXT-based ETF's too, Bennett said.

NZX will pay $20 million up front for SuperLife, of which $10 million will be in cash and $10 million in shares, which it expects to complete in mid-January. It will pay a further $15 million over the next three years if the business hits retention and growth of funds under management targets, of which $5 million will be in shares and $10 million in cash.

Separately, NZX also gave an update on its employment litigation with the Clear Grain Exchange developer Ralec, saying a trial date isn't expected before the end of 2015 and that it expects to pursue a number of interlocutory matters. It also said it is in talks with the Inland Revenue Department over proposed adjustments to historic matters that may have a tax impact of about $1.3 million, though the outcome is still uncertain.

Shares of NZX were unchanged at $1.22, and have slipped 1.6 percent this year. The stock is rated an average 'hold' based on three analyst recommendations compiled by Reuters, with a median price target of $1.29.