Hey, Mr Listed VC!

Friday 1st June 2001

New Zealand is unusual - within a year it went from having no listed venture capital companies to having three: IT Capital (April 1999), Strathmore Group (November 1999) and E-ventures (June 2000). Out of fashion in most overseas markets, listed VCs are well represented here. Question is, should they be out of fashion here, too?

The problem all three face is that they have not been in operation long enough to experience the VC investment cycle, which usually lasts between three and five years. Investors have seen plenty of investment in a range of companies but have yet to see the returns, and some are starting to question whether the cash these three hold is better put back in investors' pockets.

There is no shortage of deals to be done. VC companies, either private or run by fund managers, have been investing steadily - a deal a week, according to Direct Capital's Ross George. By comparison, none of the three listed companies have done much in nearly six months. The news that chief executive Keith Phillips is leaving IT Capital to pursue related interests suggests the incentive to invest their cash is not really there. It seems that all three companies are long on talk but short on action.

The worst offender is E-ventures, which raised a total of $60 million 12 months ago - and still has $55 million in the bank. Of its two investments, Eloan has more or less failed. The company seems short of local VC experience and while its strategy sounds good, its execution hasn't led to any new investments for some time.

Strathmore Group's first exit, Commsoft Group, has gone pear-shaped, reporting an unexpectedly large loss for the December half, sending both its own share price and Strathmore's plummeting. The market value of Strathmore's shareholding in Commsoft is well below its book value. Other investments owned by Strathmore look hunky-dory, especially Global Online Promotions and Genie Systems.

IT Capital has had $20-odd million in the bank for months, while the company has been making plenty of noises about investing some of this. A $2 million dollop was just given to Aussie software developer, Streamlink, and the company has some good investments (notably Virtual Spectator and Deep Video Imaging), though it will be some time before exits are achieved. IT Capital's first exit, the sale of Exo-net to Solution 6, achieved a good outcome but IT Capital took a portion of the purchase price in Solution 6 shares, which have plummeted.

What should these companies do? First, IT Capital and E-ventures could either invest their cash or give it back to shareholders. Second, they could exit some of their investments - problem is, most are not mature enough, so getting rid of them now would be like cutting your nose off to spite your face. Third, they can look at privatising themselves or selling their investments to private funds, returning cash to shareholders. Or they can wait for their investments to mature, proving the listed VC model works. Given the value of the share price, it seems few punters want to wait that long.

Bruce McKay is head of research at DFMainland

Bruce McKay
bruce.mckay@dfmainland.co.nz

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