Private equity market enters its troubled teens

By Nick Stride

Friday 3rd May 2002

The private equity market grew again last year but it faces a hard race catching up with first-world norms.

Corporate financiers cite institutional and attitudinal issues, rather than a lack of ready money or opportunities, as the market's main stumbling block.

A clear sign of this came last month when Jump Capital announced it would return $35 million of private equity capital to its investors, blaming a lack of interest from institutions and problems with deal size.

Chief executive Leigh Davis said there were plenty of investment opportunities but local institutions were unwilling to commit money to private equity fund managers.

Part of the problem, advisers say, are restrictions on what managed funds may invest in.

Some Australian institutions invest private capital in their own market but are apparently unwilling, or unable, to invest in New Zealand companies that are unlisted.

And many New Zealand-based funds won't, or can't, invest in unlisted companies.

The $1 billion-plus ASB Bank Charitable and Community trusts, for example, are advised by Frank Russell, a "gatekeeper" asset allocator, which doesn't recommend investing in private equity in New Zealand even though it favours the asset class on a worldwide basis.

Even so, most agree there is money out there looking for opportunities.

Grant Samuel New Zealand managing director Michael Lorrimer reports interest from Australian institutions using the private equity fund managed by GS' Australian parent.

The often-quoted Frucor success story was funded principally by Australia's Bain Capital and Pacific Equity Partners.

The $A250 million Quadrant Capital fund has invested in insurer Sovereign and children's clothing maker Pumpkin Patch. Both AMP and ANZ Bank have active local private capital arms.

Many investment bankers feel private equity is coming of age as the quality end of our small to medium-sized enterprises (SMEs) gains recognition.

Wealthy private individuals are investing alongside, or instead of, those institutions that are active in the market.

Sharebroker JB Were recently launched a private equity fund which aimed to raise up to $40 million from private clients for investment in later-stage businesses.

"New Zealand has thousands of SMEs and some of them are absolute gems," JB Were chief executive Clark Perkins said.

"But raising private capital isn't easy. The institutional structure is functionally inept to support private equity. It has no ability to invest in long-term assets."

With little competition locally, he said, Australian institutions had been able to "cherry-pick" the market.

Deloitte Corporate Finance director Tim Russell agrees. "In an institutional sense our MBO [management buyout] industry is five to 10 years behind other first-world markets."

In the UK, he said, all the major banks had private equity arms supporting their senior debt activities.

Clavell Capital managing director David Belcher said there was plenty of private capital available in Australia and New Zealand for investment in high-quality, later-stage New Zealand businesses. But raising money was much tougher at the seed- or venture-capital end of the market.

Clavell is winding down its $40 million New Zealand Fund.

"There's pressure once you've raised the money to spend it. You can't leave it on short-term deposit," Belcher said. "Now we'll find the opportunities, then raise the money."

One of the market's more obvious shortcomings is the lack of a reliable measure of capital flows. A ballpark estimate is that up to $500 million a year may be available for investment into New Zealand SMEs.

Advisers and managers hope the growing deal flow will eventually deliver greater depth and breadth to the listed sector. But they expect many of the more successful companies will be bought by corporates, as Frucor was, once they grow big enough to attract international attention.

Some, of course, won't make the cut. The high return private equity has historically delivered compensates investors for a higher level of risk than investment in listed blue chips.

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