INVESTMENT: Capital Injections for Business – Six of One, Half a Dozen of Another

The good news about the business investment outlook for New Zealand during the next four to five years is that plenty of opportunities are likely to present themselves in the small to mid-market company sector, irrespective of what happens in global markets.
The bad news is that lack of appreciation of the importance of succession planning could hamper the matching of those opportunities with suitable investors.
It’s contradiction in terms that Franceska Banga, chief executive of the NZ Venture Investment Fund (VIF), is only too aware of.
Banga has led the fund since 2001, presiding over the investment of venture capital into 45 local companies. On her watch, the fund’s venture capital programme has been completed by the $40 million seed co-investment programme, launched in 2005 and aimed at small- to medium-sized businesses with strong growth potential at the seed and start-up stages of development.
Banga says New Zealand is nation of predominantly small businesses, including some sound and typically well-run businesses which would hold their own in bigger market than here.
Most investment opportunities in New Zealand, she says, are in the unlisted companies market.
“In demographic sense there are many people who are at stage in their life where they want to step back from the day-to-day routine of their businesses and look for either an exit strategy or partial exit strategy.”
That, says Banga, means some “very good” investment opportunities are likely to present themselves, even at time when institutional investors might be inclined to revert to default position of putting their money into instruments like cash and bonds.
“There is rump of very small businesses, like the corner dairy, which are never going to be necessarily attractive because they are very dependent on one person.”
However, Banga maintains that well-run businesses, which are part of wider industry, are candidates for being “rolled up” into larger businesses.
“We’ve seen that with Australian private equity firms investing here.”
Banga counsels those with an eye for an attractive exit opportunity to prepare thoroughly and not rush in. Getting expert professional advice is essential.
“It won’t work for all businesses,
so spending the time to assess whether yours might fit that category is certainly important.”
She says the VIF is not an “active investor” but partners with private-sector angel investors in investment in privately managed, commercially focused venture capital funds.
“‘We look for the full spectrum of angel seed start-ups through to expansion and growth companies in the New Zealand market.
‘There appears to be no lack of opportunities, and that will continue.
“Angel investors, who have the appetites and are themselves people who have been successful in business, have the capital. They want to play an active role in bringing through the next generation of young New Zealand companies,” says Banga.
Several of the companies the VIF has invested in have “significant global promise”.
But, if they don’t get the necessary capital to take them to their next stage of development, life will get tough for them, she says.
That requires investment from institutional investors and engagement from the wider venture capital and private equity market, which can sustain next stage investments of $10 million or $20 million.
“It is important that companies get that follow-on capital, which may previously have come from offshore.”
Banga’s hesitancy is due to her contention that when building their portfolios, institutional investors and fund managers have invested in bonds and listed equities, both onshore and offshore.
“They have typically been very shy of investing into private equity and venture capital. If they don’t – given that great deal of the productive economy and investment opportunities are in the unlisted market – if they are not investing in opportunities in the unlisted market, then that of itself will have negative impact on the New Zealand story.
“At the moment the pensioners of Wollongong do very well out of New Zealand companies, and the pension funds and fund managers have not taken the time as yet to understand the sort of investment opportunities that exist in New Zealand, and systematically include that as part of portfolio diversification strategy.
“That’s real issue for New Zealand.”
Dunedin-based investment banker Mike O’Connor, of Parker O’Connor Trust, says Australia has got “huge jump” on New Zealand over the years by having superior savings record.
“They have developed fund management industry which has passed the trillion-dollar stage, and New Zealand hasn’t. Now that we have KiwiSaver, some of that money will find its way into alternative investments, ie, private equity and venture capital funds.
“But it’s long-term process and it’s not going to happen overnight,” says O’Connor.
While venture capital funds seek out early-stage companies with global prospects, private equity funds are looking for mature businesses that also have some prospects but which are not necessarily global.
“Venture capital is going little bit slowly in New Zealand because we’ve got to four- or five-year stage in the development of our industry and the current fund managers haven’t been able to prove success,” says O’Connor.
“They are finding it difficult to start new funds, so the funds that are in place are pretty much fully invested. Fund managers looking to start new funds are struggling to get investors because the industry in New Zealand doesn’t have track record yet of successful exits.”
New Zealand Venture Capital Association executive director Colin McKinnon agrees that angel investment – movement he says is growing internationally – is doing so because it is prepared to pick up opportunities that are really at the “bottom end” of the venture capital market.
“Angels are making investment decisions on their own, unlike fund, where fund manager makes the investment,” McKinnon says
“As model, angel groups have grown worldwide at quite pace. They are becoming an interesting source for young businesses wanting to test an idea locally, and they are quite happy to take on local prospect that looks like good and interesting investment.”
Dunedin-based Deloitte partner Mike Horne says that despite the contracting economy, there is still “reasonable amount” of cash circulating in the investment community.
“The property market and the public equity market and that sort of thing have all had very good run over the past five years, but then it’s just fallen away bit.”
However, while times have been good, people have generated quite bit of income and were contemplating where they should actually put it.
“Given that those equity and property markets have reached their full value, there is quite an appetite among those people to look for businesses to invest in,” Horne said.
“Opportunities will come up in the private business sector and are being seen as potentially worthwhile commitment.”
Horne however cautions that he is talking about opportunities related to mature, established businesses rather than “speculative” early stage businesses for which the investment appetite has waned during the past six to 12 months.
ANZ Bank general manager of corporate banking Ross Verry is appreciably aware of the “enormous” growth during the past two to three years in local private equity investment, driven by Australian-based private equity firms, and traceable in part to the advent of compulsory super­annuation.
“That has created vast amount of capital that fund managers have had to find home for. You could see that slowing down towards the second half of last year and even little bit more in the first half of this year. People are still looking but there’s not that second or third-tier finance that might have been available 12 months ago.”
However, says Verry, there are still companies requiring investment and companies for sale. “So how will that play out?”