Catalist Review - The Stock Exchange Providing Unrivalled Access to Small Cap New Zealand Companies

Our review of Catalist covers the small cap stock exchange's background, investment products, fees, competitors, pros, cons and must-know facts and disclosures.

Updated 24 October 2023

Summary:

Catalist is the only licensed stock exchange in New Zealand besides the NZX.
Catalist gives investors access to New Zealand's growth businesses, i.e., businesses smaller than the average NZX-listed business but which may list on the NZX in the future.
Catalist's licence allows retail investors access to opportunities that would otherwise only be available to "Wholesale" or wealthy investors.
Although investments in small cap businesses can involve higher risks, these businesses can also grow much faster than larger businesses.
Catalist notes that you shouldn't invest 100% of your money in growth businesses; financial advisers often recommend that a portion of your portfolio be in these businesses to benefit from their larger growth potential. Catalist allows you to invest in growth businesses through a fully regulated market.

Catalist in a nutstell:

Head office: Parnell, Auckland
Market cap and listings: Over $600 million in market cap value for all their listed businesses and over 440 different offerings (as at October 2023, although many of the offerings are private).
Share turnover: Over $45 million in transactions completed (as at October 2023, and since launching in mid 2021)
Notable listings: TBC

Our review explains everything you need to know about Catalist. We cover:

Know This First: What's the Difference between Catalist and the NZX?

There are two key differences:

Catalist functions on a periodic auction basis rather than continuous trading like the NZX and most traditional stock exchange platforms. This means different investments are available at different times.
You can invest directly through the Catalist platform rather than using a broker (such as Sharesies or ASB Securities, which are popular with NZX investors). Setting up an account directly with Catalist is similar to setting up an account with an online broker like Sharesies, Hatch or Stake.

Periodic Auctions Explained:

Periodic Auctions open for a specified investment period, commonly a week for secondary trading or up to a couple of months for a business raising new capital. During this time, investors may submit their investment order or offer to sell if the auction allows secondary trading.
Once the period ends, all trades are executed as a single "batch trade" at a single price point. In secondary trading, the price is determined by the price at which the most volume would trade. All investors buy or sell at the same price at each periodic trading event.
Periodic trading encourages investors to take a long-term view in their investment decisions, which benefits both businesses and investors. Catalist is a hybrid between a traditional stock exchange like NZX and wholesale platforms that let wealthy investors invest in earlier-stage businesses. As such, it contains three markets:
- Private – for businesses that want to facilitate trading out of the public eye.
- Wholesale – for less regulated investments that are only available to wholesale investors.
- Public – for fully regulated trading available to everyone.

Important: How Periodic Pricing is Designed to Deliver Fairer Pricing
It's logical to perceive periodic trading as a limitation because they cannot transact whenever they choose. However, for growth business investments that don't trade regularly, periodic auctions tend to produce a fairer price for all investors – and, therefore, may encourage more trading (liquidity).
In a continuously traded market, the costs for investors trading small cap investments can be very high. Aside from the risk of getting a price that doesn't reflect the true value of the shares, the economic costs include:

Large bid-ask spreads.
High commission.
Significant market impact of individual orders.
The susceptibility of orders to 'front-running'.

Front running is where other investors take advantage of the temporary price movement a large order may cause to the detriment of the investor who made that order. This can discourage investors from trading, making liquidity even worse.

Periodic auctions are one of Catalist's key features in maintaining a fair and orderly market. They not only help to make investing simple but they're also designed to incorporate sophisticated protections that automatically enhance fairness for investors. Examples include:

All investors get the same price at the end of each auction – calculated from the total supply and demand.
'Sniping' is minimised – where a bidder submits a new best price in the last seconds of an auction to try to get ahead of other bidders – through a pre-closing period (during which investors can only improve existing orders by up to 10%), automatic auction time extensions, and an end time of the auction that is randomised by a few minutes.
Investors can use simple auto-bidding features to ensure they have the best chance of trading without actively monitoring auctions and worrying about other investors having the unfair advantage of knowing their best price.

The public market also has rules around related parties disclosing their interests and trading intentions, further supporting transparency and fairness.

Overall, Catalist positions itself as a steppingstone to the NZX. It aims to help growth businesses expand until they are sustainable enough where the fees and burden of continuous trading on the NZX are not materially detrimental.

While setting up an account is free, some offers on the platform have a minimum investment size. Minimum investment sizes are published on the relevant investment page for each business. Further, whilst it is free to invest in capital raises, Catalist charges a fee of $30 or 0.25% of the amount traded (if larger) for secondary market trading events.

How material information is disclosed at periodic auctions:
In preparing this review, Catalist has asked us to publish the following information given the risks around investing:

In 2021, Catalist announced the launch of its new licenced stock exchange, the Catalist Public Market, specifically designed for all New Zealanders to access New Zealand's growth businesses.
A key difference in licensed markets is the level of information disclosed to investors. A general rule in the Financial Markets Conduct Act 2013 is that anyone selling financial products has to be truthful about those products and can't mislead buyers. However, there's a big difference between being truthful and telling investors everything they need to know.
For most private investments outside a licensed market, there's no requirement for a business to disclose negative information. This includes wholesale investments (investments targeted at large and experienced investors) and offers made available to retail investors through crowdfunding platforms.
It's up to the investor to ask questions and do their due diligence. As long as the business doesn't lie or imply nothing is wrong, they are perfectly entitled to omit bad news. This is why the common mantra in private markets is 'buyer beware' – do your homework, ask questions, and be prepared that someone else might know something you don't.
However, just like on the NZX, growth businesses listed on the Catalist Public Market are legally obliged to tell you everything you'd expect to affect the price of the investment. This is supported by specific legislation that only applies to licensed markets with the potential for questions from the Financial Markets Authority (FMA) if the business breaches those obligations.
With information disclosure required before each auction, up-to-date information is available during each periodic trading event. This periodic disclosure makes it simple for investors to track the performance of their investments, as well as reduce the costs, resource requirements and the regulatory burden for the growth businesses, which is ultimately in the investors' interests.
From an investor's point of view, the disclosure through the Catalist platform greatly reduces uncertainty and confusion. Periodic disclosure only conveys what is pertinent when investors can trade, unlike continuous disclosure, where investors must constantly monitor a drip feed of new information. With periodic trading, investors are spared the confusion caused by an excess of potentially irrelevant information, and it streamlines the necessary disclosures for businesses.
And, as with any financial decision, if you don't understand what you're investing in, do not proceed.

Understanding Catalist's Background and Its Attempt to Solve Illiquidity and Access to Capital Limitations

Catalist is the only other licensed stock exchange besides the NZX. Their mission is to provide unrivalled access to New Zealand's growth economy by designing the platform to help smaller New Zealand businesses grow by connecting them with wholesale and retail investors.

Originating in 2019, Catalist's founder and CEO Colin Magee was inspired to help New Zealand growth businesses. During his time as head of conduct at the Financial Markets Authority (FMA), he noticed the lack of support New Zealand's growth businesses faced in New Zealand's capital markets - this largely boiled down to two key problems:

Illiquidity
Access to Capital

Illiquidity:

According to a study by the Federal Reserve Bank of New York, trading in continuously traded markets often sees buyers and sellers arriving in clusters. When there are many buy and sell orders, it boosts trader confidence, leading to more orders.
However, in small businesses on platforms like the NZX, this isn't always the case. The reluctance of investors to be the first to invest can lead to fewer orders, resulting in price volatility. This lack of liquidity can hinder the benefits of being listed on a major exchange.
One solution is periodic auctions, commonly known as "call auctions". Used on the NZX and other stock exchanges, these auctions set market prices at times of low liquidity. In these auctions, all orders are grouped together, with trading happening at one set price. This method ensures fairness, often resulting in higher trading volumes. It also cuts trading costs and boosts pricing transparency, thus attracting more investors.
Besides assisting investors, enhanced liquidity can benefit the listed companies, making future capital raising more achievable, which can then spur business growth.

Accessing Capital:

Most businesses under around $100 million market cap simply cannot afford to access the retail market that is the NZX, or the burdens of being listed outweigh the benefits. This means growth businesses are closed off from most potential investors and are restricted to bank debt or investment from "Wholesale investors" (Investors who meet certain wealth or experience requirements under the legislation).
While some platforms, such as crowdfunding platforms Snowball Effect and PledgeMe, provide growth businesses with some limited (and less regulated) access to retail investors, most businesses are restricted to wholesale investors, which locks out the average New Zealander from being able to invest in growth businesses.
By setting up a fully regulated stock exchange for growth businesses, Catalist can give growth businesses and everyday investors access to wider investment opportunities, in an environment subject to similar oversight to the NZX.

Investment Products Available

The licence granted to Catalist allows them to publicly list a range of investment opportunities, including:

New Zealand Fixed Income (Company Debt)
New Zealand Shares
New Zealand Funds
Some overseas investments are also currently offered to wholesale investors

Funds AvailableFor investors just starting to invest a portion of their portfolio in growth companies, the availability of funds, in addition to individual business shares and debt securities, is a significant benefit. There are a number of investment funds available on the Catalist platform. Further, a few Venture Capital (VC) funds are available on the platform.

VC funds invest in a portfolio of early-stage growth businesses, so investors can benefit from immediate diversification in various growth businesses. They also benefit from the close connections that those VC funds develop with their investee companies to help them grow. Catalist is currently the only platform that offers direct investment into VC funds for retail investors, from as little as $1,000.

Example of a fund investment available through Catalist:
Matū Group operates venture capital funds focused on New Zealand-based science and deep technology start-up opportunities. Matū Iramoe Limited is listed on the Catalist Public Market and gives retail investors access to their VC fund that would normally only be available to much larger investors.

Matū focuses on investments at the earlier stages of a company's life (pre-seed and seed) and reviews over 250 investment opportunities annually. A strong investment mandate guides Matū's investment and portfolio strategy. They look for:

Verified science and technology with defendable intellectual property
Global commercial potential to produce above average returns
Clear go-to-market pathway towards paying customers
Passionate inventors and founders
Opportunities for Matū to add value and support the company
Co-investment with known syndicate partners to reduce risk and extend networks
Connection to the Aotearoa New Zealand scientific and innovation ecosystem.

Their current portfolio of companies includes Mekonos, Alimetry, PowerON, Opo Bio, and Liquium.

Understanding the Fee Structure and Platform Features

Fees:

All investors interested in Catalist can sign up for a personal account for free. The sign-up process will feel familiar to anyone who has already set up an account with an online broker such as Sharesies or Hatch. Investors can invest in businesses when they raise new capital free of charge.
However, trading fees are incurred when an investor sells to other investors in a secondary market auction.
Regarding secondary market trading, investors must pay either $30 or 0.25% (whichever is higher) of the amount they buy or sell.

Platform Features (Financial Metrics):
The Catalist platform offers investors free account features to help track investments, such as a dashboard which provides information about each of your investments and financial metrics, which can help assess the success of your investments:

Return on Investment - ROI has the key benefit of simplicity, allowing investors to identify quickly how an investment is doing at a surface level glance. It serves as a yardstick for measuring success.
Multiple of Money - MoM is also known as cash-on-cash return. It compares the amount of equity an investor takes out on the date of their exit or could take out if investments were sold today relative to their initial amount invested. The main advantage of MoM is its simplicity, allowing anyone to quickly calculate their gross return. However, it should not be used as a stand alone metric as it does not inform you how well your investment has performed relative to the period your money has been invested.
Realisation Multiple - The RM shows an investor how much has been paid out to them. This metric only measures the money paid out to investors instead of predicted or unrealised returns that metrics such as ROI or MoM measure. RM is calculated from your cashflow in (investment) and realised cashflow out (returns) and thus is only calculated for products with realised returns, including selling your investment at one of the periodic auctions.
Internal Rate of Return - IRR shows what interest rate would have been needed for your original investment to reach its current value based on the time the funds have been invested. Imagine you deposited your money in a bank account five years ago; IRR calculates the interest rate derived from the difference in value between the original and current deposits.

Catalist's Competitors - NZX, Wholesale Markets and Crowdfunding

Catalist vs NZX

Catalist can be seen as a steppingstone towards the NZX as Catalist was not envisioned as the final place for businesses to remain listed. Catalist hopes to help grow businesses so they can readily move on to the NZX.
In this sense, Catalist is arguably not a competitor to NZX but rather is an intermediary for businesses wanting to grow up to their first $100 million in market capitalisation.

Catalist vs Wholesale Markets and Crowdfunding Platforms

Catalist also operates a wholesale market, but their approved licence allows their platform to reach investors beyond wholesale investors. Unlike wholesale or crowdfunding platforms, Catalist's provides investors with the protections equivalent to those they would expect in a traditional stock market.
These protections include full disclosure of material information when trading, oversight over trading conduct to reduce the risk of manipulative or unfair trading conduct, and the backing of the FMA to prosecute poor behaviour such as insider trading.
For listed businesses, one benefit of greater regulatory oversight is the ability to access significantly larger investments from retail investors on an on-going basis in a cost-effective way, ultimately benefiting the investor.

Furthermore, wholesale investment and crowdfunding platforms do not offer secondary market trading to new investors. The secondary market trading offered by Catalist:

Can increase liquidity by allowing new investors to participate in the business offering;
Allows businesses to refresh their investor pool without sacrificing additional equity.

Catalist in the Media

While the platform is under the radar of most investors, new listings continue to be added. We share recent and relevant Catalist media stories below:

Newsroom, March 2023:

"Catalist was established in 2021 to cater for small listings, but coming under the same sort of Financial Markets Authority-approved regulation as the much bigger NZX market".
One of the problems, is that Catalist is also relatively unknown - it’s fair to say the market is still growing and a lot of people haven’t heard about it.”
(Comparing Catalist to the NZX), "instead of smaller companies being expected to stick to the same strict (and expensive) continuous disclosure rules that apply on the main NZX exchange, his exchange uses what’s known as ‘periodic trading’. Companies’ shares don’t trade all the time – perhaps only for a week every quarter or a couple of times a year – and it’s only when trading is open that continuous disclosure rules apply".
"Oliver Mander is chief executive of the NZ Shareholders' Association. He likes the protection that the FMA disclosure rules gives for retail investors on the Catalist exchange, particularly in comparison to the lighthanded regulatory approach applied to alternatives like equity crowdfunding. Catalist is focussed on smaller companies, but the risks are disclosed; they are subject to disclosure."

Other features: Stories from the NZ Herald, Newsroom and Stuff.co.nz from June 2021 (when the platform launched) outline Catalist's original plans. Matu Group, which was Catalist's first listing in November 2021, and is profiled in this RNZ article.

Catalist - Understanding the Pros and Cons for Investors

Pros:
1. Periodic Auctions: Increasing Liquidity

Catalist's periodic auction encourages investor liquidity by executing all orders in one batch trade. (explanation provided above) This eliminates investor hesitancy as they know the auction price will be the fairest possible.

2. User Experience

Is seamless and simple, Catalist provides key financial metrics to track the success of your investments.

3. Access to growth businesses

Catalist's license allows the ordinary investor to access growth business opportunities that would usually only be available to the experienced or 'wholesale' investor

Cons:

Customer support is limited to email, and the team won't offer any form of financial advice as to what businesses or fund(s) to invest in.
Catalist isn't for the short term. The nature of growth business as high risk high reward means investors looking to invest are usually in it for the long run, so the periodic nature of auctions is consistent with that approach.

Who is Suited to Catalist?

Catalist is arguably more suited towards those already making some of their own investment decisions and are ready to diversify their investment portfolio by exploring riskier but higher potential return investment opportunities.
Catalist is not suited for those who have never invested; Sharesies, Hatch etc. are more popular with beginner investors than diversified funds. Some financial advisors suggest that 5% of your investment portfolio can be allocated towards businesses not listed on a traditional stock exchange, as these businesses can add high rewards to an otherwise diversified portfolio. Catalist operates within this space. However, it's not without its risks, just as is the case with equity crowd funding.

Frequently Asked Questions

Catalist's FAQ can be found here: Frequently Asked Questions - Catalist - here are some of the most commonly asked questions:

What happens to my money if investors prepay for a financial product but the price ends up lower than they had prepaid?

If you prepay for a bid that is successful, but the financial product sells at a lower price than your bid price, Catalist will transfer your excess funds back to you. You pay the same price for the financial product as every other buyer in the auction, alongside the fees that are displayed at the time you submit your bid. You should see any overpaid funds back in your bank account within 24 hours of the payment being made by us. Payments are only completed on days when the major banks are open for business in New Zealand.

What happens to my money if I prepay for a financial product but am unsuccessful in an auction?

If you prepay for a bid that is not successful, Catalist will transfer that money back to you. Catalist completes the transfers after the auction has closed and the closing price has been finalised. You should see the funds back in your bank account within 24 hours of the payment being made. Payments are only completed on days when the major banks are open for business in New Zealand.

Do I need a stockbroker to join Catalist?

No, you don't need to go through a stockbroker to buy and sell financial products listed on Catalist. You can open your own account on the website, and after you've completed the anti-money laundering checks, you will be able to trade.

How do I know that the person selling a financial product actually owns it?

Catalist maintains a record of who owns the financial products on their platform. Investors cannot submit offers to sell financial products unless the platform records them as the legal owner or entitled to act on behalf of the legal owner.

This means you can be confident that if you submit a successful bid to buy financial products, you will receive ownership of the financial products in accordance with Catalist's settlement rules.

Related Guides:

Investing in the NZX
Hoe to Invest in Shares