Surfing the baby boomer wealth wave

By Nick Stride

Friday 2nd July 2004

The wave of baby boomer retirees now gathering momentum is expected to become a growing source of Rich List entrants.

Entrepreneurs who founded their businesses during the 1960s and 1970s began reaching 65 around the turn of the century and the bulk of them will be looking to ease back between now and 2020.

Anecdotally, it seems only a small proportion of business owners have sons or daughters interested in owning and operating the family firm, so the capital markets will provide the exit for most.

"One suspects that with the number of small and medium sized family-owned businesses operating in New Zealand, together with demographic changes, significant succession issues will appear across a number of industries," the New Zealand Venture Capital Association noted recently.

Owners of some larger businesses have been able to cash up through trade sales. Navman founder Peter Maire, for example, attracted some criticism for selling to the US' Brunswick last year and Murray Haszard sold his Ghost software to Symantec in 1998.

A slew of winemakers such as the Spence brothers' Matua Valley and the Marris family's Wither Hills have also changed hands in trade sales lately.

Sharemarket floats have provided partial exit routes for some business owners, such as John Mowbray of Mowbray Collectables and Peter Montgomery of Mooring Systems.

But public investors tend to be wary of businesses in which the owner is selling outright, asking themselves "if they're selling out, should I be buying in?" The answer for the owners is to sell to financial investors such as venture capital or private equity funds and let them worry about it.

Many of these take earlier stage businesses not yet ready for a public float and develop them through to the point where they're ready for an initial public offering or a trade sale. This approach generally means owners have to accept they will receive only a part of the businesses' eventual sale value.

But importing investment capital, discipline and expertise often means a smaller part of a bigger pie is more lucrative than slugging it out alone.

A good example is Sally Synott, who founded children's clothing maker Pumpkin Patch in 1990. She sold down most of her shareholding in private equity transactions, presumably for prices much lower than last month's float put on the company, in 1993, having only 8.6% just before the sharemarket listing. But her diluted 7.1% is worth nearly $16 million and she retains a seat on the board.

For smaller firms, a private equity-backed management buyout (existing managers buying shareholdings) or buy-in (outside managers buying shareholdings and taking operational control) can be the best solution to succession issues.

A "bimbo" (buyin management buyout) backed by ANZ Private Equity this year provided Paul Halford and Rod Sullivan with an exit from their Chequer packaging business at a price believed to be about $60 million. ANZPE provided $12.4 million of the $20 million required equity, with the remainder funded by debt from ANZ Bank and Bank of Scotland. ANZPE also contributed $10.2 million to the management buyout of United Carriers from its 11 retired or retiring founders, and $3 million to the buyout of electrical consumer products company Securimax.

Private equity deals don't have to provide a "clean exit." In some deals, owners who think the business still has good growth prospects have retained ownership stakes and have even stayed on in management.

David McFarlane built up Tauranga furnituremaker Design Mobel over a number of years and last year sold 40% of the business to Pencarrow Private Equity. Pencarrow brought in manager Quentin Quinn with a 10% stake, leaving McFarlane with a half share and a remaining involvement in the company.

In a similar deal Pencarrow brought John Cougar into Pacific Horizon Campervans but the retired previous owner still has a significant stake.

According to the New Zealand Venture Capital Association, industry funds had grown to $1.1 billion by December last year, with $568 million of that available for investment.

"Private equity is a safe way to sell a company. For smaller businesses, buyers are mostly competitors or suppliers," Pencarrow's Shawn Beck said. "If a management buyout doesn't succeed, everyone hasn't seen your data."

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