Private equity and venture capital in New Zealand
A snapshot at September 2008
The New Zealand economy is export orientated, has a stable credit rating (AA+ stable), a benign regulatory environment and has experienced significant growth in recent years with real GDP growth being in the top quarter of the OECD since 2001.
The economy is characterised by companies which hold a dominant position in their market and are able to command high margins. As with most OECD countries, New Zealand is experiencing significant demographic change which is seeing the baby boomer generation looking to access wealth which predominantly lies within their businesses. Building on a world class science and R&D infrastructure, New Zealand has one of the highest rates of entrepreneurship in the developed world and is acknowledged in the life sciences, ICT, digital media and specialised manufacturing and design sectors.
Against this backdrop of potential opportunities, the ability of investors to invest in companies in New Zealand is constrained by the fact that a significant portion of New Zealand business, in particular from the high growth sectors, is not accessible in the public markets. Unlisted businesses make up a significant proportion of enterprise in New Zealand with some analysts estimating there to be well over $100 billion of enterprise value for firms turning over between $10 million to $100 million annually, compared to approximately $64 billion1 in the public markets. Private companies are, therefore, a major driver of growth in the New Zealand economy.
Figure 1 below highlights the fact that when compared to comparable economies, the New Zealand economy is dominated by the non-listed sector.
Figure 1: Ratio of market capitalisation of listed stocks to annual GDP as a %: 2002 -2006| 2002 | 2003 | 2004 | 2005 | 2006 | |
| New Zealand | 32.08% | 36.94% | 41.17% | 38.72% | 39.93% |
| Ireland | 44.28% | 48.54% | 56.88% | 60.02% | 70.01% |
| Australia | 88.62% | 96.00% | 114.11% | 117.51% | 138.76% |
| United Kingdom | 107.12% | 123.77% | 126.86% | 145.38% | 150.48% |
| United States | 105.60% | 130.16% | 139.37% | 136.49% | 147.75% |
Source: NZVIF, World Federation of Exchanges, IMF
This trend continues with the listed market continuing to be thinned out due to public to private deals, mergers and acquisitions (M&A), trade consolidation and de-listings activity.
New Zealand presents an attractive option for those investors seeking an investment into unlisted securities. The attractive nature of the market has been validated by offshore investors, with Australian institutional investors continuing to dominate inward investment28/06/10companies, favourable regulatory settings and the buoyant economic environment. The New Zealand private equity industry is showing strong returns and growth over the last five years, evidenced by significant investment by Australian funds into New Zealand private equity. In 2006, Australian private equity transactions in New Zealand accounted for 32.7% of all Australian private equity invested.2
The New Zeal28/06/10nded by Australian private equity players. A vibrant mid-market and early stage sector also exists in New Zealand. There are over 15 New Zealand managers (who collectively have over $2 billion committed to the local market)3 who are focused on the provision of expansion capital to private companies for growth and investments into innovative early stage businesses seeking capital to establish and grow their commercial operations.
Whilst the market in New Zealand has experienced significant growth recently, it is still in the early stages of development. The New Zealand market is following a similar trend that has been observed in offshore markets where private equity investment has become a significant component of the corporate landscape.
Offshore research by both the British and Australian Venture Capital Associations indicates that private equity backed companies generate stronger employment growth, are more innovative and have better management teams than their peers, making them more productive and competitive.4
Given that the New Zealand corporate environment is dominated by small and medium sized companies that are typically privately owned but have experienced little M&A consolidation activity and have constrained access to growth capital, there are significant untapped opportunities for investors in these businesses.
The opportunity for young innovative companies in New Zealand is no less compelling. New Zealand’s high level of entrepreneurship and innovation5 - as well as world class science and R&D infrastructure - has created a source of globally competitive intellectual property and new business ventures for local venture capital fund managers.
Given the local environment, it is also NZVIF’s expectation that new private equity and venture capital fund managers from both Australia and New Zealand will enter the market to take advantage of these opportunities.
Figure 2: Growth in Private Equity Investment in New Zealand 2002-2006
Source: The New Zealand Venture Capital and Private Equity Monitor 2002-2006
Large Cap Private Equity
In the New Zealand context, large cap investments are regarded as deals involving companies that have an enterprise value of greater than $150 million. Typically these transactions are funded by a combination of equity and debt (known as a leveraged buyout) due to the large size of the deals.
Large cap private equity investments in New Zealand have been concentrated in the food and beverage, distribution and services and retailing/e-tailing sectors. Significant investments in these sectors include: Yellow Pages Group, A&R Whitcoulls Group Holdings, Vertex Pacific Limited, Guardian Healthcare, Tegel Foods, Griffins Foods, Independent Liquor, Qualcare and Envirowaste.
Small and Mid Cap Private Equity
Small and mid cap investments are transactions where the enterprise value of the company is less than $150 million. Typically these deals use less leverage than large cap deals and include transactions where existing owners can exit their business (replacement capital) or sell a stake in their business to enable it to grow (expansion capital).
Small and mid cap private equity investments in New Zealand have been concentrated in property/aged care facilities, manufacturing and media/communications. Significant investments include: Methven, Formway, Nobilo, Ezibuy, PC Direct, Ryman Healthcare, Masport, Phil and Teds, and Cadmus.
Venture Capital
Venture capital is the provision of equity funding for start up and early stage businesses with high growth potential to develop and market their products. Venture capital is regarded as more risky than investments in more established businesses but also offers potential for higher returns.
Consistent with international trends, top investment sectors for venture capital deals in New Zealand include information technology/software, technology and media/communications and life sciences. Examples of investments into these sectors include: Wellington Drive Technologies, Neuren Pharmaceuticals, Ectus, GFG Group, BioVittoria, Zephyr Technologies, Surveylab and Phitek Systems.
New Zealand Private Equity Fund Performance
As no published data for a private equity fund of funds exists in New Zealand, NZVIF has gathered performance data from a number of private equity fund managers in New Zealand. The data has been aggregated to provide an indication of the performance of the New Zealand private equity market over the past decade.
Based on this analysis the indicative performance of the New Zealand private equity market to 30 June 2007 is:
Figure 3: New Zealand Private Equity Performance
| Horizon IRR to 30 June 2007 | 3 Year | 5 Year |
| NZ PE | 24.8% | 22.1% |
| NZX 50 | 16.9% | 16.7% |
In themselves, these returns are attractive, but perhaps even more so when the stage of development of the New Zealand private equity market is taken into account. Developments in the Australian private equity market over the last eight years provide a useful insight as to how the New Zealand market is likely to develop over the next few years.
Australian and New Zealand Private Equity Comparators
In the past decade, the private equity and venture capital markets in Australia have been grown significantly with the amount of private equity invested now six times greater that 10 years ago. This is due in part to the growth in the amount of institutional capital in Australia, with the funds under management now over A$1 trillion. As their funds have grown institutional investors have increased their exposure to alternative assets such as private equity to capture the diversification and alpha returns that this asset class provide.
In Australia, private equity is becoming an accepted and structural feature of the M&A markets as a means of exiting businesses for founders, whilst venture capital, while still young in US terms, is gaining credibility as an investment class with institutional investors. While the returns data has yet to definitively support sustained outperformance, there are a number of managers onto their third funds.
Figure 4: Amount of Private Equity Invested in Australia
Source: The New Zealand Private Equity and Venture Capital Monitor, Australian Private Equity and Venture Capital Association Yearbook.
Note that the 2007 figure for New Zealand is first half only (to June). The Australian figure is full year (to June).
Further evidence that the New Zealand private equity market still has room to grow is its share of the overall mergers and acquisitions market. As Figure 5 shows, New Zealand is in the early growth phase compared with Australia’s more mature market.
Figure 5: Private Equity as a Percentage of Completed M&A
Source: The New Zealand Private Equity and Venture Capital Monitor, Australian Private Equity and Venture Capital Association Yearbook, Thomson Financial and Dealogic.
The trends displayed above suggest that the New Zealand private equity market is moving towards Australia in terms of activity level and maturity. The performance data in Figures 6 and 7 show that the pooled returns portfolio performance data for New Zealand as at June 2007 of 24.8% 3 Year Horizon IRR and 22.1% 5 Year Horizon IRR compare favourably with both Australian and US performance figures. These returns are largely being made by Australian private equity managers, who dominate the quantum of capital invested.
Figure 6: Australian All Private Equity Rolling Horizon Internal Rate of Return
Source: The Australian Private Equity and Venture Capital Association Yearbooks 2000-2007
Figure 7: US All Private Equity Rolling Horizon Internal Rate of Return
Source: Thomson Financial/National Venture Capital Association
New Zealand is following a similar path to other international markets where private equity and venture capital have become mainstream in recent years.
While the New Zealand market is at an early stage of development, domestic institutional investors are becoming increasingly aware of the benefits of an allocation to private equity in their portfolios, and investor composition of private equity funds should start to reflect a shift from the over reliance on high net worth individuals and government funds, to institutional investors such as banks, superannuation and retail funds.
Footnotes:
1 World Federation of Exchanges, www.world-exchanges.org. Includes non-free float portion of market capitalisation.
2 The Australian Private Equity and Venture Capital Association Yearbook 2006
3 New Zealand Venture Capital & Private Equity Monitor 2006
4 Private Equity in Australia, Submission to the Senate Standing Committee on Economics, May 2007, Australian Private Equity and Venture Capital Association, www.avcal.com.au. The Economic Impact of Private Equity in the UK 2006, British Private Equity and Venture Capital Association, www.bvca.co.uk
5 Global Entrepreneurship Monitor 2004
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