The outlook for the finance company sector: expect fewer open-necked shirts, car salesmen and gold-chain wearers, more mahogany panelling, pinstripes and bona fide bankers. That is the prediction of investment advisors who are expecting some rationalisation in the booming sector as ‘show pony’ operators, many of whom have a background in property, hand over to backroom boys with finance industry pedigrees.

The wild-growing finance company sector is in a period of transition, moving out of a loose, entrepreneurial phase as it develops more credibility in the investment community. That change may lead to some players selling out, with Hanover Group co-owner Eric Watson considered most likely to exit from at least some of his finance company investments as the industry goes through an upheaval. Watson’s Pacific Retail Group said in August it had a preferred bidder, believed to be GE Money, for its Pacific Retail Finance subsidiary.

The sale comes as the Securities Commission is poised to impose more stringent disclosure requirements, while an industry-wide review of regulations for non-bank finance companies by the Ministry of Economic Development is underway. Policy decisions on the review are expected by middle to late 2006 with implementation targeted for 2008.

The Securities Commission released a report on disclosure in May which recommended including more detail and clearer explanations in investment documents so investors can better assess the risk they are taking. The move is seen as long overdue by many investment advisors and even some finance companies themselves. “It’s so easy to open up a finance company with minimal capital,” New Plymouth-based financial advisor Peter Hensley says.

But concerns about disclosure have not slowed the flow of funds. The National Business Review banking and finance scorecard, released in May, showed finance companies’ assets grew $1 billion to $10.2 billion in 2004, double the rate of growth of the main trading banks. The debentures offered by finance companies, with interest rates a point or two higher than that paid by the main trading banks, are particularly attractive for retired investors who rely on a regular income stream to supplement their pensions.

Hensley says New Zealand’s ageing population means more investors are moving from growth-orientated to income-based investments. This combined with the property boom, is providing increasing funds for finance companies.

The attractiveness of finance companies has been highlighted by the lack of return on international shares by managed funds, Hensley says.

Fund managers, fighting to keep their place in investors’ portfolios, have attacked finance companies as risky, with ASB Group Investments head Rob de Luca controversially quoted in the Herald saying first-ranking secured deposits were anything but safe. Advisors say, even with increased disclosure, it is difficult for individuals to assess the risk they are taking.

But Paraparaumu-based investment advisor Chris Lee, considered to have one of the biggest individual books of any advisor in the country, questions the motivation of critics warning clients off finance companies altogether. “Saying it is dangerous to put your dough in them is as stupid as saying don’t live in New Zealand because there’s going to be an earthquake. There’s a world of difference between finance companies.”

Picking the trustworthy from the precarious is still a problem. Of the roughly 5,000 debenture applications Lee made in a year, only about ten clients asked for a prospectus to be sent to them. “Nobody is improving their knowledge of the sector.”

Lee rates his ‘top four’ finance companies as UDC (owned by ANZ Banking Corporation), South Canterbury Finance (owned by respected Timaru-based financier Allan Hubbard), St Laurence Group (headed by ex-Treasury and DFC banker Kevin Podmore) and Strategic Finance (now being run by ex-Hanover CEO Kerry Finnigan, with Jock Hobbs as key shareholder). Lee says he also puts client money into Hanover finance companies. “The biggest thing slowing [Hanover] down is that it is owned by two individuals who are entrepreneurs rather than bankers,” Lee says.

Meanwhile, Peter Hensley says he puts clients into finance company investments as part of the diversification of their portfolio but only after he visits the finance company management and asks questions.

“The larger ones we treat as having larger shareholding, more paid up capital, a different nature of liquidity and a better ability to manage their loan book.”

The most dangerous approach is when people just go for the best return. “A lot of people take their advice from the newspaper seeing who’s got the biggest interest rate — usually people who have been burnt by the investment advice industry who think they can do it themselves,” Hensley says.

Mark Thornton of small listed finance company New Zealand Finance says it is still hard for individual investors to make informed decisions about the risk of different finance company debentures. “[The investment statement] is 60-odd pages of reading. Not enough people do that.”

Maybe a less risky investment is buying into the growth of the finance companies themselves. Take New Zealand Finance. Just a small player with a loan book of only $70 million, the company’s share price has tripled since listing on the NZSX last October at $0.30 to $1.05.