More good investment propositions are needed

Friday 1st June 2001

By Nick Stride

The Budget announcement of a $100 million seed capital fund has drawn attention to our fledgling venture funding market but it's far from certain the government will be able to find private sector partners.

Science Minister Pete Hodgson has said the money would be aimed at high-risk seed capital and start-up companies.

As he expects the government to be a minority partner in investment projects, he is presumably relying on the venture capital/private capital industry to more than match that amount.

That's a tall order.

The giant of the industry, AMP Henderson, has $250 million committed to New Zealand private equity, of which $160 million has been invested so far.

But AMP focused on the lower-risk expansion/buyout end of the market, according to its head of private capital, Martin Turner.

New Zealand's private/venture capital market was still young and Mr Turner expected investors to keep favouring lower-risk, more developed companies until they got more comfortable with venture-type investing.

"That doesn't mean to say you can't raise some money at the earlier end of the market," he said.

AMP invested some of its funds on its own account but also supplied capital to specialists, such as Caltech Capital Partners, Pencarrow Funds Management and Direct Capital.

It has drawn $200 million from the $2.5 billion AMP Life fund which dedicated around 8% of its funds to private capital, Mr Turner said.

"They like to have some long-term stuff ... Private capital outperforms traditional asset classes over 10 years."

Pencarrow likewise specialised in leveraged (LBOs) and management buyouts (MBOs) rather than the racey start-up end of the market.

Pencarrow managed around $110 million, $25 million in the government/private sector Greenstone Fund and $85 million for AMP.

Its list of buyout funding included apple grower Eastern Equities, Donaghys and Methven Tapmakers.

It also had investments in unlisted public companies, such as Wellington Drive Technologies and, with AMP, 20 million Restaurant Brands shares.

Five years ago, MBOs were regarded with suspicion by companies' owners, executive chairman Mark McGuinness said.

At that time managers also tended not to have the sort of money required. These days, with the sharemarket "relatively moribund" and slow interest from overseas investors, selling a company to its management was a very real alternative.

"A management team focused on growing the entity is much more likely to succeed than if it's just part of a big group," Mr McGuinness said.

There's no shortage of venture and private capital around but there's always a shortage of very good investment propositions, he said.

A more likely partner for the government is Caltech, which specialised in technology-based companies with overseas business opportunities.

Caltech has around $40 million invested in 11 companies, aiming for an average of $5 million.

Director Douglas Paul said 80-90% of that was software-related, with the balance in biotech and electronics.

"The New Zealand market is too small for most of the companies we look at," Mr Paul said.

Caltech said US software makers were "pretty ineffectual" when it came to supplying functional products for the small to medium enterprise market, where New Zealand companies excelled.

Mission to put private equity in a nutshell

The New Zealand Venture Capital Association Incorporated (NZVCA) is on a mission to substitute standardised definitions of private and venture capital for the general perception.

Venture capital, it contended, was widely seen as early or seed-stage funding, mostly of information technology companies. The association used definitions that were interchangeable. Here's the official version:

"Private equity provides equity capital to enterprises not quoted on a stock market. Private equity can be used to develop new products and technologies, to expand working capital, to make acquisitions or to strengthen a company's balance sheet.

It can also resolve ownership and management issues - a succession in family-owned companies, or the buyout or buyin of a business by experienced managers may be achieved using private equity.

Venture capital is, strictly speaking, a subset of private equity and refers to equity investments made for the launch, early development or expansion of a business.

Among different countries, there are variations in what is meant by venture capital and private equity. In Australia, Britain and Europe, these terms are generally used interchangeably and venture capital thus includes management buyout and buyins (MBO/MBIs).

This is in contrast to the US, where MBO/MBIs are not classified as venture capital.

The New Zealand Venture Capital Association, the Australian Venture Capital Association Limited (AVCAL), the British Venture Capital Association (BVCA), and the European Venture Capital Association (EVCA) all adopt the definition of venture capital which includes MBO/MBIs and thus captures the full spectrum of the private equity market."

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