COVER STORY : Private equity – Public interest

For all the rigour behind the figures, private equity is an emotive and divisive issue. Detractors liken it to plague of locusts and capitalism on steroids. It’s pump and dump mechanism, which extracts value before shovelling the shrivelled remains onto our stockmarket for less sophisticated investors.
Proponents argue the opposite. Private equity acts as cleansing system. It’s sanctuary for battered companies. healing ground where broken corporate wings can be mended before the bird is set free. chance to evict the grumpy old men from our boardrooms and replace them with far-sighted, keener-witted colleagues.
Is the recent rush of private equity buy-ups insidious Australianisation of our national wealth, as some would have us believe? Or simply New Zealand playing catch-up with international trends?
Certainly, we’re behind the eight ball compared with Australia, the United Kingdom and the United States. As percentage of total annual mergers and acquisitions, typical measure of private equity activity, New Zealand’s guestimated five to 10 percent is peanuts compared with the 50 percent notched up in the United Kingdom.
That private equity issues are now the talk of the town reflects the rapid rate of acquisition here in recent years. The latest annual New Zealand Venture Capital and Private Equity Monitor shows private equity investment rocketed up 250 percent in 2006 to $1.13 billion across 35 deals.
That would have included high profile transactions such as the sales of snack foods business Griffins, Blue Star Print Group and equipment rental company Hirepool.
Since then, Pacific Equity Partners and CCMP Capital Asia have soaked up Independent Liquor. Next Capital has bought controlling stake in Nutra-Life Health & Fitness. And, most spectacularly, Telecom’s Yellow Pages directories business has been bought by private equity partners CCMP Capital and the Teachers’ Private Capital pension fund from Canada. (See box story “Let’s go shopping”.)
It has been all too easy, as New Zealand Venture Capital Association chairman Hamish Bell points out, for our media to focus on the top end of the market: “big dollars, big headlines, lots of interest”. They are, he says, missing the bigger story which is unfolding in the corporate mid-market “where deals are generally smaller, the pool of prospects is large and where local investors dominate… It’s in the mid-market where the lion’s share of New Zealand’s future private equity transactions will occur.”
The vast majority of New Zealand’s mid-market companies are in private ownership. As their baby boomer owners scout round for exit strategies, private equity options will shift into the mainstream just as they have in Singapore, Australia and the United Kingdom. “This,” predicts Bell, “will bring many opportunities for those businesses and their managers and investors alike.” In other words, it ain’t so bad and we’d better get used to it.
Back at the big end of the market, businesses are cycling through faster as well. According to Direct Capital managing director Ross George, studies show that multinational subsidiary in Britain used to be sold every 11 years: that’s now closer to every seven years.
Here on the other side of the planet, private equity transactions have either already touched, or are about to touch, the careers of most senior managers in New Zealand, he asserts. “Even five to seven years ago, the regional managers of multinational companies would think, ‘we can sell that [part of the business] to that trade buyer. They now think ‘we can sell that to the management group’.”
NZX chief executive Mark Weldon is also keen to tease out the differences between private equity plays, on the grounds that different types of structures carry varying implications for the NZX and our nation’s wider capital market.
He divvies up private equity plays into three camps. New Zealand-focused players such as Direct Capital, No 8 Ventures, Morrison & Co or the Pohutukawa Fund, he says, can help local companies tap into outside capital and expertise. These Kiwi companies are fundamentally sound but in need of bit of spit and polish. “Maybe they don’t really have good long-run strategy or growth story on the market… New Zealand-focused private equity is unequivocally positive. It’s positive for the companies, the economy and for the capital markets because some of those companies at some point will come out of private equity ownership and be listed and available for broad public ownership. It’s very positive indeed.”
That’s the merry-go-round, wash-and-brush-up theory of private equity. less digestible scenario for New Zealand is Weldon’s second grouping which sees international private equity heavyweights picking over New Zealand’s economic carcass for the choicest bones. That, he says, raises structural issues for both the NZX and the broader national economy. “Structurally, that’s lot like our banking sector where each year around $2.6 billion worth of profits basically gets shipped overseas. You would prefer that profit get reinvested here.”
The prospect of these assets eventually reverting to Kiwi hands remains remote. Weldon reckons more likely scenario is global roll-up permanently super-gluing our relatively tiny assets into an international super-company.
His third category is combo deal of the first two with, perhaps, predominance of Australian funds. In this case, our assets may boomerang back to New Zealand but wise person wouldn’t hold their breath.
All of which raises, once again, the spectre of the permanent disappearance of local assets. In that fear we’re not, of course, alone. As private equity ownership bites into their economic pie, Australians, too, lie awake at night fretting over how much is still theirs. More specifically, earlier this year it had Australian treasurer Peter Costello publicly worrying over the high levels of debt stacked up in some of Australia’s private equity deals and the potentially dire consequences in an economic downturn.
Our finance minister Michael Cullen is on record waving aside such concerns over here citing our lower levels of leveraging. The conversation does, however, bring centre stage the relative merits of public versus private ownership and management.
Take, for starters, the issue of transparency. Unfettered by the constraints of six-monthly reporting and the continuous disclosure regime of the stock exchange, what motivates privately owned company to bare its corporate soul to the wider community? Certainly, anecdotal evidence suggests that private equity players in this country do not feel any great compunction to talk with the media.
Asia-Pacific Risk Management director Roger Kerr says one of the drivers behind the exponential growth of private equity is the simple fact that it presents an easier model for doing business. “Businesses and management in general see being listed as too tough – with [rules around] compliance and boards of directors and the guidance they have to give on forecast profit. And then, if you get it wrong you get caned.”
The jury is, of course, divided on the relative merits of six-monthly reporting. Opponents argue that it locks in short-
termism and suffocates long-range thinking. Others, such as business commentator and UNITEC adjunct professor Rod Oram, reckon that’s cop out. It is perfectly possible, he argues, for company to stay on the stock market through varying phases of its corporate life as long as it clearly articulates its thinking. The variable factor, he says, will be the type of shareholder and not the need to withdraw from the market to regroup.
“The most obvious example of all – although not in New Zealand – is Microsoft. Today it’s yield, not capital, stock so people are no longer buying it for big spectacular growth which is what they were doing up until five or six years ago.”
Many publicly listed New Zealand companies, it seems, may be trying to play their cards too close to their