SOE shares should go to KiwiSavers says Brian Gaynor, who warns Treasury not to be hoodwinked by investment bankers

SOE sell-down could see a mighty river of dividends flow into KiwiSaver funds.

By Gareth Vaughan

A significant chunk of the shares in state owned enterprises (SOEs) the National Party is pledging to sell should go to KiwiSaver funds, says an arch critic of the style of privatisations pursued by the governments of the 1980s and 1990s.

Brian Gaynor, executive director at Milford Asset Management which manages KiwiSaver funds, told interest.co.nz he had never been opposed to government asset sales per se. Rather it was the way SOEs were sold in New Zealand in the 1980s and 1990s that was at fault. Gaynor said National's mixed ownership model, which would see the Government sell no more than 49% of Mighty River Power, Meridian Energy, Genesis Energy and Solid Energy through sharemarket floats, plus reduce its 76% Air New Zealand stake, should be more palatable to the electorate.

However, execution of any SOE sell-downs would be key.

"I’d like to see schemes introduced here which have been introduced elsewhere where there’s a priority given to retail investors in New Zealand, either directly themselves or through their KiwiSaver funds," Gaynor said. " And that they [retail investors] possibly be given the shares at a discount."

How about bonus shares?

Another idea was for a bonus option, used in Australian privatisations, where if they hold their shares for say three years, retail investors get additional shares.

"There’s a whole pile of innovative things you can do. But unless you make the shares primarily available to the New Zealand public and give them an incentive to hold, quickly they will probably sell out and quickly we’ll end up with the same position as Contact Energy where we get overseas companies that will take an ownership position," Gaynor said.

The last big state asset sale was that of Contact Energy in April 1999. It raised NZ$2.3 billion from 227,000 initial shareholders. However, in a major difference to what National is now proposing, a 40% stake was sold to Edison Mission of the US for NZ$1.2 billion, or NZ$5 a share. The remaining 60% was sold through an initial public offering raising NZ$1.1 billion at NZ$3.10 a share. Of the latter, 30% went to foreign investors, 24% to New Zealand and Australian institutions and 46% to retail investors.

Contact now has about 81,000 shareholders and is just over 51% owned by Australia's Origin Energy which bought its stake from Edison (which had increased its holding from the initial 40%) for NZ$1.675 billion, or NZ$5.67 a share, in 2004. Contact shares are currently around NZ$5.90 a share.

SOEs perfect fit for KiwiSaver & Australia's 'public capitalism'

Ideally, Gaynor suggested, many of the SOE shares should go to KiwiSaver funds.

"Because KiwiSaver funds are long-term funds because people can’t get their money out till they’re 65 and these are the ideal type of assets (for them). They’re long-term, stable, low risk assets."

"Second thing, if they go into KiwiSaver they’re unlikely to be sellers of the shares because money’s flowing into KiwiSaver funds every week and if you don’t like a stock but you’ve got a KiwiSaver fund with money coming in every week, you just don’t buy any more and as the size of the fund goes up the shares in any individual company become a smaller percentage of the total portfolio."

Gaynor, who recently told interest.co.nz that New Zealanders need to stop selling all their assets to foreigners or resign themselves to being "serfs in their own country", said Australia had executed privatisations much better than New Zealand. See a 1999 Gaynor column here entitled How asset sales went wrong.

"They (Australia) have always done it completely different to us. It has been public capitalism rather than selling it off to one big overseas company," said Gaynor.

A notable recent example is last year's sell down by the Queensland State Government of rail operator QR National. Retail investors were given incentives comprising a retail price discount, a maximum price per share and an entitlement to loyalty bonus shares. See more details here. Gaynor notes other major Australian privatisations such as that of ASB's parent Commonwealth Bank of Australia, Telstra, Qantas and CSR were handled in a similar way.

In contrast when selling 100% shareholdings in state assets, previous New Zealand governments allowed a small group of mainly overseas investors to make big profits when with some foresight this money could have been kept for the benefit of domestic investors and taxpayers.

'Don't be hoodwinked by investment bankers'

Gaynor added that he wasn't convinced the Government would execute the sales well with the risk a "very naive" Treasury would have the wool pulled over its eyes by investment bankers advising on any sell downs.  Treasury is already looking for an array of advisers.

"Although they (Treasury) might start out with the right intentions they get gamed because there are smarter people around than the officials in Treasury who are going to be in charge of it," Gaynor said.

It was important that retail investors both got shares and an incentive to keep them. But that's not the way investment bankers were likely to be thinking.

"There’s a huge conflict because if you’re an investment banker you’re normally connected with a broking arm so you want a lot of shares traded. So it’s to your disadvantage to have incentives for people to hold the shares for a long time because that means the sharemarket trading tends to be less," said Gaynor. "Unless a government department insists, you end up being dictated to by the investment bankers."

As for Treasury itself, it has released documents and advice given to ministers on the proposed mixed ownership model. However, there's no detailed Treasury information available yet looking at how this particular form of SOE sell down has worked overseas with Treasury spokesman Angus Barclay acknowledging it differs from the style of previous privatisations in New Zealand.

Barclay said Treasury officials have looked at some of the experiences from overseas to see what lessons can be learnt and applied this to the mixed-ownership model proposed for New Zealand. Although none of this was yet publicly available, over the coming weeks and months Treasury would be " pro-actively" releasing documents relating to its work on, and advice about, the mixed-ownership model.

"We want this stuff out in the public so people can make up their own minds on the basis of good information," Barclay said.

'80s and 90s asset sales helped get govt debt down ahead of the credit crunch'

Among the work Treasury has released is a report by John Wilson entitled Short History of Post Privatisation in New Zealand. It traces the modern origins of privatisation back to the Labour government of the 1980s and reviews the performance of nine companies central or local government sold down being Ports of Auckland, BNZ, Air New Zealand, Auckland International Airport, Telecom, Tranz Rail, Trustpower, Contact Energy, and Forestry Corporation of New Zealand. 

Wilson's report concludes that contrary to what the public view might be, the Crown didn't necessarily receive consistently poor prices, the reliance on "light-handed regulation", especially post the sale of Telecom, was "rather optimistic", the Crown was unable to avoid the cost of recapitalising Air New Zealand and the BNZ, but that the privatisation programme of the 1980s and 1990s is one reason why New Zealand entered the global financial turmoil of recent years with a relatively modest level of government debt.

Goff, once part of a government selling assets, now says he wouldn't sell

Speaking on TVNZ's Breakfast programme this week, Labour Party leader Phil Goff reiterated his party's opposition to National's partial privatisation plans. He said the only way to keep the assets both New Zealand and community owned was to vote for Labour in November's election.

"Why would you sell the power companies when they return to the New Zealand taxpayer NZ$700 million a year?" Goff asked.

"Contact Energy was privatised in 1999, (and) NZ$100 million a year flows out of New Zealand to foreign investors. Do we really want to do that with the other power companies as well? What’s in it for New Zealand? You sell the assets, you lose the assets forever, you lose that dividend stream. It’s crazy and 2-1 New Zealanders believe that," Goff said.  Here's a Labour back grounder covering Contact's number of shareholders, profits, dividends, directors' fees and share price performance since the sale.

When told by interviewer Petra Bagust that he sounded like he was scare mongering given the Government was talking about selling less than half the shares in the SOEs Goff, who was part of the 1980s Labour government that kicked off an asset sales programme continued by National in the 1990s, said: "Yes, that’s what they’d start with but we know they sold the whole lot off last time. And why would you sell half of an effectively performing asset?"

"If you’ve got a Don Brash/John Key government that’s exactly what they’d be doing, that’s what (ACT Party leader) Don Brash is pushing, that’s the advice Treasury is giving the government. That’s what they’d do. There’s only one way to keep those assets kiwi owned and community owned and that’s a vote for Labour."

Releasing the Government's Budget on May 19 Finance Minister Bill English confirmed National would go ahead with the SOE sell down plans should it be re-elected. English said they would happen over a three to five year period starting in 2012. Treasury estimates implementation of the mixed ownership model would free up between NZ$5 billion and NZ$7 billion of capital, which would be put toward other areas of government spending. New Zealanders would be at the front of the queue for shares, English said.

 

The floats will help reduce Government debt, increase investment opportunities for mum and dad investors and improve the companies’ financial performance, National says.

Positive impact on government accounts seen

Meanwhile, a report by analysts at investment bank Goldman Sachs estimates the proposed sell-downs would have a net positive impact on the Government's accounts of about NZ$306 million and suggests the partial privatisations could help halve the gap between New Zealand and Australia's Gross Domestic Product per capita.

The Goldman report also notes that New Zealand privatisations between 1988 and 1999, which raised proceeds of more than NZ$19 billion, were unique in the preference for trade sales. Some 60% of  assets were sold via trade sales compared with the Organisation for Economic Cooperation and Development (OECD) average of just 20%. Just 2% of New Zealand sales were via public floats, versus 62% across the OECD.

Goldman also noted that about 60% by value of New Zealand's public assets sold between 1988 and 1999 went to international rather than domestic buyers, and New Zealand's net equity liabilities represent just 4% of the country's net foreign liabilities with 96% stemming from households borrowing through banks to fund consumption and housing investment.

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32 Comments

Sensible suggestion providing risky assets are not included/passed off to kiwisavers.

Mighty River Power's wind farm proposal on the Wellington fault line is in the risky category.

Local paper has some interesting comments.

http://www.stuff.co.nz/manawatu-standard/news/5084301/Wind-farm-debate-goes-on

Gaynor is Wrong....if they are sold it should be open to all peasants whether they are in KS or not.

As long as as much as possible stays in NZ ownership. Perhaps allocate a fixed percentage to KS and the rest to the general public.

Sorry,I believe he`s right ,if we decide at the election we want National, so decide we want asset sales,at least this would minimise the danger of the"world" owning NZ.

Dangerous isn`t it,comparatively popular party with agenda,(asset sales) that a large  proportion of same population is not in favour of?

How do we the "owners" get the message through the arrogance?

No, no and ten million times no.  KiwiSaver funds should be invested in the way that the fund manager thinks most likely to deliver the risk and return that the KiwiSaver member wants, as indicated by the member's choice of funds.   If that includes SOE shares, fine, it will happen anyway. 

Treasury be hookwinked? surely not, just because they have been wrong about every other thing they have done or commented on, why would they possibly get this wrong as well?

This is a really stupid arguement. It all relates to whom gains the super profit from a foregin buyer completely taking the asset over.

NZ sharemarket investors are the same as any other lady of the night - they will sell to the highest bidder. Just look at CarterHoltHarvey - sold to Hart whom has used a butchers cleaver to destroy the NZ wood processing industry (Gaynor backs me up on this) or PGGWrighton - NZ sharemarket investors did not look long term at that one or to maintain some loyalty or F&P Appliances, Lion Nathan, Montana, Waste management, and the list goes on. NZ sharemarket investors are short take profit traders, they have about as much loyalty or care for the national good as the current CEO of the Highlanders has for the people of Otago and Southland.

So why should the NZ Gov't not take the takeover premium up front rather than giving the Kiwisaver funds, ACC, and private traders (whom are probably already in the top decline of wealth) even more money. The will sell out to anyone whom offers them a small premium without any care for NZ. Bonus shares or lock ins only delay the inevitable - once the shares are listed they are out of NZ control.

Oh and Brian, I did not see you or fund buddies, rushing to save PGGWrightsons, Synlait, TradeMe, Montana, Waste Management and all the other assets which have departed NZ ownership why would you save these assets from foregin takeover in the future?

Foregin buyers will get these assets. They probably will manage them better, definitely governance will be better. They will use super leverage and not pay any tax in NZ and they will asset strip and run them into the ground. There is money to be made in the short term by doing so.

So, if you are going to sell these assets, NZ govt, take the premium up front.

PS. - I am totally against asset sales. You never sell assets unless you have to. You never sell assets to fund operating losses. You never sell monopoly assets which when mismanaged will damage your national productivity.

O/T but on the energy front.

OPEC to Resist Calls to Aid Recovery With More Oil

http://www.bloomberg.com/news/2011-06-01/opec-to-resist-calls-to-aid-recovery-with-more-oil.html

 
“This will be one of the most important OPEC meetings of the past decade,” said Johannes Benigni, managing director of Vienna-based consultant JBC Energy GmbH, who says OPEC probably won’t make the 2 million barrel increase in quotas he thinks is necessary. “The easier choice would be to calm the market with a statement that a hike is not necessary. However, this is a risky strategy, and could drive prices to $150.”

 

John Key has promoted the Power Station sell off as a solution to problems in our capital markets. He does not seem to concern himself with the energy needs of New Zealand. This should be very troubling for all New Zealanders. We are 1491 km from our nearest large neighbour. If we don't get our Electricity supply right there is no one who can come and save us.

In contrast Germany announced this week that it would be closing all of its Nuclear Power stations and replacing them with renewable. Cynics have point out that it really doesn't matter how long it will take to get renewable up to speed as they can always import coal fired electricity from Poland and Nuclear from France- both countries right next door.
We really are on our own on this one. Electricity is not like oil you can't simply import it. You have to generate it.

If New Zealand businesses are to grow they need affordable dependable electricity supplies.

In The US  a decade ago they deregulated the electricity market in California , causing blackouts, lots production as Power Companies- Enron in particular manipulated the market (decreased supply ) to ramp up demand. It got to the point where California seemed more like the 3rd world, than one of the biggest economies in the world. But don't think it wouldn't happen here. The recent experience of one recent Saturday when Contact Energy manipulated the market to rip off Millions of dollars from manufacturers and fellow Power Companies.

These things matter, they actually matter more than helping our capital markets.

Once Government gives up 40% of the companies the market will rule, only it will not be a real market. It will be a market of millions of buyers and a handful of sellers. The market has no interest in increasing capacity to meet our needs or bringing on significant amounts of renewables. The markets only interest is in  getting a return on its investment. They do that via the wonders of supply and demand and the resultant price. The more demand and the lower the supply then the higher the price. Any action by any future government to challange the right of the market to that profit can and will be stop via the courts.

I really think the Government should be focusing on things that matter, education, health , jobs, affordable land, lowering the indebtedness of our country. raising our income from the rest of the world - without handing it mostly back through interest payments. Instead John Keys wants to save our capital markets by risking our electricity security. well done John.

 

 

I'm not able to remember it but I'm sure you are correct. If I'm not mistaken NZ once had the cheapest power in the OECD, a rolls royce telecommunications system and was actually in the top teir of the OECD.

Wonder if cheap power and good telecommunications are linked to productivity growth and strong GDP - could be a strong correlation.

This is a dumb idea. 

Good night. 

If Blinglish can't guarantee NZ control of the power companies, then I hope for the sake of the country that Goff and Russel make a wedge issue out of it. That is, if they - especially Goff - can get even a half-decent public relationist.

I'm not opposed to the idea of SOEs being put into KiwiSaver, but the powers that be are threatening to unleash the Dancing Cossacks 2.0 on it. We currently have in charge a Govt of the Good Ol' Boys Network, by the G.O.B.N., for the G.O.B.N.

The only ones to really benefit from this are the investment banks or consultants who clip the ticket on the way through. This is like selling the family jewels. At the moment the power companies are returning good money back to every New Zealander. Why sell them and only allow those that have Kiwisaver or money to buy the shares the right to benefit from them. And it's not like it's easy to create more competition to bring the price down for the consumer. Another hydro damn anyone? no problem. These are too important to sell.

I would say 500,000million upwards for the bankers  in this deal. That is simply too much money to walk away from. Get ready for them to do anything, say anything to make this sale process happen. Mkae out like New Zealand is basically bankrupt and scare us into  selling- no problem.

Great line from John Gappor in the FT Today talikng about IPO's- what the Power Co's will go through if John Key gets his way.

'The only thing on which companies and investors seem to agree about initial public offerings is not to trust investment banks.'

These guys cannot be trusted. Affordable electricity is what we are looking for. The current model is a mess, so instead of going back to something that worked, we have to throw everything into the pot and  hope.

Hope is not a strategy. Trouble is JK does not have one - for us anyway.

 

 

 

 

sure a certain % should go into these SOE based on the funds risk characteristics. I would prefer it if KS pumped a whole lot of capital into Kiwibank. This would provide KB with a nice steady supply of funds to keep expanding. And take back some of the slice that is Ozzy controlled. Dividends will stay on this side of the Tasman. It will also bolster our capital markets. My view is that electricity is overpriced. Prices are not sustainable. The power  company ROE are far too high for what they actually do. It's not rocket science and they aren't particularly well run. Nor do they have state of the art P&E. That reminds me. Auckland is due for another outage about now. (It's that time of the year again peasants)

If you are wanting to spend KS funds on a Bank, get them to buy shares in one of the existing Aussie bank operations and eventually take them over. Far better option than the flawed Kiwbank model where you get stamps with your mortgage. Kiwibank model has got too many flaws (cost to income ratio highest of all banks) and its branch network and support centres would need huge investment if it ever to thearten the Aussie ones (one of the reason why they can new look to take over the Govt Banking).

Regardless of whether or not this is sound, the issue should not be decided based on the popularity of a politician of the day... i.e.  a mandate should not be assumed simply because the opposition parties can't get their act together... or we have a 'really good bloke' as PM.

The consequences will outlive the politics. Make the arguments independently and require multi-party support - or a referendum on the issue (if we're up to it).

Acknowledge that the country's power supply is an issue in itself - not one that can be bundled up with other election promises.

Mr Key should not be afraid to argue the case on its own merits...  

 

Hows about the government takes its cash out by issuing Non-Voting, Non-dilutible, Last Ranking, B Class Preference Shares. They are entitled to the same stream of dividends as the ordinary shares however they have no ability to control to company.

Oh wait thats not what they want, they want to sell out, reverse mortgage the house, so the grand kids get nothing.

Monopoly Assets Sales are such a truely stupid, stupid notion.

It boils my blood.

NZ is fast moving into the real doledrums of OCED ranks. Import jobs from Aussie, exporting our best and brightest brains, a capital and tax system geered for property and completely no leadership - a Chesire Cat, whom clearly has greater masters and Goofy, a dog whom cant string two words together.

Apart from to make the brokers rich why are we selling NZ assets to NZers. My naive understanding is that the assets are currently owned by the people for the people with tax and dividends coming back to be spent.

Selling these assets is simply stripping future generations out of inheritance and it's the rich getting richer at the expense of the poor.

 

Roadhouse Blues

during the past few years Governments around the world have been moving risky assets from the private sector to the Goverment. This is a way of easing financial hardship and why the US (and others) are using QE and why our government is borrowing $300m a week.

The issue is as Government balance sheets deteriorate how can they improve them and restore the balance?

The sale of SOE is a means of rebalancing, or going someway to restoring our Governments BS. Investing in equity instruments by the public now is great for the Government as risk is moved back to the private sector. Also unlike debt instruments with shares there is no obligation to repay and dividends need not flow when times are tough. 

The alternative is stop borrowing $300m a week, watch our unemployment rate double, credit rating plummet, interest rates rise and economy fail.

 

 

 

Kane02 you have been brain washed.

Private losses on investment bets in countries such as America, England, Greece have been forced onto the public balance sheet under the notion that banks are to big to fail.

It's commonly referred to as privatizing the wins for the rich and socializing the losses also for the rich and it sucks.

When Greece breaks from the Euro $ and defaults on their debt as per Iceland other countries will see that they have options as well.

As for NZ borrowing $300m a week to keep the country afloat that is just National party policy  - to delay taking loses in the hope that they get re-elected and also that tomorrow we will be better able to repay the debt.

Because that, dear Roadhouse Blues be naked capitalism and them's the rules. The cynic in me strongly suspects that the tough times we are going through at present are being used as the excuse for Natl and Act to follow blindly their total free market ideologies. We would be having this argument, just different points, if things were going well, as our SOEs would be up for grabs then as well.

I would like to see a our essential's, power, water, health care, mineral resources and especially land being given different consideraton to, than say, a business like Trade Me. Since the advent of globalization we have become less and less able to compete against foreign money, some think that good, the rest of us think it insidious at best, evil at worst

Our open market has left the majority of us worse off, just look at house prices for a kicker. As unpalatable as it sounds, I really so actually think we need a capital gains tax, excluding the family home. I believe that the lack of such a tax is what has seen foreign money pour in here buying up homes and renting them back to US. It's not our fault that ourn earnings here cannot compete with that money and it should have had much firmer controls from the get go. I have been asked would I like to see people who have invested in housing lose money, to which I replied that the alternative is now a whole section of society won't even get the option to own. Why am I concerned, answer, I think it is self-evident that we are a better society when we can own our homes, think about it

Raegun you sound like a sensible person.

Naked Capitalism is just that, naked for all but the rich, in America the home of such thinking is   what? The top ten percent of people own 70% of the country.

Look at the mess they are in - it does not work for the people and is strongly against the ideal of a "free" society where people "are born equally".

I don't recall Telecom being great under the old state ownership. In 1985 it took 3 months to get a phone connected in Parnell.

A resounding NO from me to this idea.

I didn't join Kiwisaver because I'd never trust a future governemnt to not screw with the model. I was a bit surprised though with just how soon the tinkering would begin. So there's my disclaimer, I'm not in Kiwisaver.

This idea is just warped though.

It fits the kiwi mentality these days though.

Selling assets that only generate income from NZers at relatively high yields makes no sense.

If the Govt is strapped for cash since 49% to the NZ Super fund.  That way cash is available for the government to reduce debt but the strategic assets remain 100% NZ owned, and it saves those Investment bankers pocketing even 1 cent.

If these assets are genrating 8% or thereabout cash returns, why sell them at considerable transactional cost when the NZ Super Fund iis out there investing in companies earning much lower returns.

My view is that the only time you sell strategic assets with guaranteed cashflow is when you are both broke and dead.  Power companies are not the type of assets that should be sold (unless you know what you're selling is a pup).

 

So I can buy shares in my own tax money (SOE). Brilliant!

Why sell high yield long term assets to pay down cheap debt?  6 or 7 billion dollars more debt just delays a forecast surplus by a year or two.  WHy not just slash the public sector more, that can be rebuilt if needed in the good times.

Of all the assets, why sell the one acheiving great results?

As someone who switched from Labour to National last election, id consider going back to that pain for a term just to send a message.

As someone who switched from Labour to National last election, id consider going back to that pain for a term just to send a message.

Sad choice to have to make isn't it. I am not against asset asset sales per se, but a government selling core infrastructure assets that are making a good return so they can splash out on spending that fits with their political agenda is venal.

That they choose not to sell assets government has no business owning and that are also not making a reasonable return (e.g. Landcorp) suggests their pitch to sell the electricity generating assets has little more truth behind it than Nixon had in stating he had no knowledge of the Watergate break in.

I am still hoping a new political party that is not simply a retreading of existing politicians and/or party cultures might be set up before the election. I would be happy to vote for such a party - despite not necessarily agreeing with their policy - if they met those criteria and were honest. All they would have to do to get my vote is break the current self serving political party mould.

Fat chance. New Zealanders pride themselves on possessing all sorts of positive abilities, we know all of our existing political parties are only going to make things worse, but we don't appear to collectively have what it takes to organise a single political party worth voting for.

sell it all off - it will speed the coming of the day when we will take it all back

Brian is on the right track with his comments.  There is a high level of mistrust over the process and consequently who gets the benefit. 

The government and some commentators are saying we need to sell assets to help balance the books, but if you take a 5-10 year view it is just a swap between cash now or cash later in dividends.  Be in mind a sell down isn't all going to happen in year1 - it willoccur over a number of years.  Therefore there shouldn't be too much emphasis on this driver.

There is an argument that the current return on capital is low for a commercial enterprise.  There are two ways a new owner can increase this return either reduce the capital employed or increase dividends.  Assuming the government won't sell any holdings at a loss, capital won't be decreasing so dividends will have to increase.  Generally dividends will increase if income goes up or operating costs decrease.  There is no indication that any of the enterprises are being poorly managed so the scope for cost reductions will be small. (One would be suspicious of large cost reductions as they could threaten the ability to supply energy.)  Therefore expect income to increase which means price rises.

As an aside Roger Kerr ascerts that over time and on average privately owned businesses outperform publicly owned ones. I believe  he is probably right on this (he says it is backed by research which is more believable than the rhetoric you normally hear), but the key is the over time and on average.  This means individual cases can be failures or successes either way.  So it comes back to how the process is managed and how will benefit.

One group that will benefit are the investment advisors.  For a float that will be very popular , I struggle to see why huge fees are justified.  If you accept the argument that the government can manage its cashflow whether they see the cash now (and now is a 2-3 year timeframe) or over time, then a suggestion would be for a sell down only to NZ citizens and NZ funds (e.g. NZ Super Fund).  No need for expensive advisors as the need to 'peddle' the product isn't required.  There's $500M to be saved here (less the cost of Treasury managing the process).

The other suggestion is to sell the shares with restrictions on sale e.g. can't sell for 5 years.  This is likely to make the shares unattractive to those who want to make a quick $.