News Release 

2008 results shows consistent activity at reduced levels

Results from the 2008 New Zealand Private Equity & Venture Capital Monitor show consistency of deal activity at reduced investment levels in the New Zealand private capital market 

• The total FY08 investment of $178.1m was lower than FY07. This decrease was primarily driven by the absence of top-end / LBO private equity deals since FY07 first half and is reflective of debt market conditions post the global financial crisis.

• Both mid-market private equity and venture capital deal values were lower than FY07 yet have held up well relative to historic averages.

• Total venture capital investment was down 19% to NZ$ 66.1m in FY08, as a result of a similar reduction in completed deals (52 in FY08).

• The number of mid-market private equity deals increased year-on-year from 23 in FY07 to 30 in FY08. However, these deals were on average smaller in FY08, hence total deal investment value fell 45% to $112m in FY08.

• The approximately 50% reduction in 2008 mid-market investment activity has been a result of a fall off in the Australian domiciled fund activity, with New Zealand fund activity holding relatively stable over the 2006 through 2008 period.

Divestments

• In total 11 mid-market private equity and venture capital divestment events occurred in FY08 compared to seven in FY07. The total level of divestment recorded in FY08 amounted to NZ$46.5m.

• In each of FY05 to FY07 divestments included one top-end / LBO private equity divestment in the order of NZ$150m to NZ$200m. No similar divestment occurred in FY08.

The structural challenges facing global financial markets is impacting deal flow and impacted the resultant decline in private equity activity in 2008. 

“No top-end / LBO deals took place,” says Andrew Taylor. Partner, Ernst & Young. “The effects of the crisis and impact on funding are more acute in top-end deals due to their reliance on debt markets. Private equity deals and exits may take a backseat for a period of time as fund managers focus on their existing portfolios.” 

Elsewhere there were pleasing signs of continued life. Mid market activity fell, but to a lesser degree with $112m of activity across 30 deals last year, down from $205m over 23 deals the year before. 

Venture capital also held up reasonably well, reporting $66m invested in 52 deals compared to $82m invested in 60 deals in 2007.
 
Franceska Banga, NZVCA Chair explains, “What we are seeing now, particularly in the top-end of the market, is not a judgment on private equity as an investment class, but a reflection of the effects of an international economic crisis that is unprecedented in our lifetimes.” 

Banga comments further, “the top-end of the market will be subdued for some time yet. However, close analysis of the overall investment performance shows areas of consistent activity, albeit at reduced levels, in the mid-market and venture capital segments.” 

“The level of activity in 2008 was only a little below the long-term average,” Says Banga. “The number of deals in mid-market private equity actually increased by nearly 30%. “In the venture capital segment we will see new funds being raised, to take advantage of new growth opportunities, as well as more series B funding to highly promising companies, to carry them through the 12-18 months. The lack of exits is no surprise, and it is difficult to envisage that changing until the economic environment improves.” 

“There is a positive aspect to the current environment,” says Banga. “Private equity, like other asset classes, follows cyclical patterns in terms of investment and returns. Historical analysis suggests that some of the private equity deals that yield the strongest returns are transacted during economic downturns,” says Banga. 

Banga believes that the fundamentals of the New Zealand private equity industry are sound and there are considerable opportunities due to the preponderance of New Zealand companies which remain in private ownership.
“Our fund managers have good performance records over the past 15 years and will be looking to make investments in what is a good market for buyers,” says Banga. “Opportunities exist where some very good New Zealand companies need capital and look to private equity funds perhaps more readily now than they have done in the past.”
Infrastructure (including roads, ports, energy and utilities) may present opportunities for private equity across the development lifecycle, particularly given the potential impact of government stimulus packages, including ‘PPP’ models. 

Distressed asset opportunities are also seen as a key opportunity for participants. 

And the outlook for New Zealand’s private capital market? 

“In these turbulent economic times, looking ahead and predicting future trends is difficult,” says Andrew Taylor. “There is considerable discussion taking place here and in overseas markets not only about the future of the market and the time the market will take to correct, but also about the opportunities the current environment will breed.”
“Even as markets recover,” says Taylor. “The new lending environment will see the private equity model operate with lower leverage than that seen in the recent past with a return of traditional covenants, wider spreads and reduced lending.” 

Both Banga and Taylor agree that 2009 will all be about timing. The liquidity crunch and international economic situation will clearly have impact on the top end of the LBO private equity market. We expect to see minimal activity from the LBO private equity market in the first half of 2009 with possible improvement in the second half.
Mid-market private equity interest remains consistent. Whilst overall economic sentiment might constrain some transactions in this segment in 2009, we have little doubt that it is the mid-market which will show the strongest growth over the next few years. 

The venture capital market faces some hurdles in 2009, but vital signs are good. Bottom line, the New Zealand private capital industry continues to have a real and exciting future, and has a major role to play in driving future economic growth. 

BACKGROUND — WHAT IS VENTURE CAPITAL AND PRIVATE EQUITY? 

Forms of Venture Capital and Private Equity can be categorised according to the stage in the life cycle of a venture, and these are outlined below:

Seed stage
The Venture is at the idea stage or may be in the process of being organised and needs finance for research and development. This is usually funded by the entrepreneur's own resources.

Start-up/early stage
The company is in the process of being set up or may have been in business for a short time. Such firms have not yet sold their product commercially and have no track record. Companies seeking investment have completed the product development stage and require funds to initiate commercial manufacturing and sales. 

Expansion/development stage
The company is now established and requires capital for further growth and expansion. The company may or may not have made a profit at this stage. This is a period of rapid growth and the company will usually require several rounds of capital injection as it achieves the milestones set in the business plan. 

Management buy-out (MBO)
These are funds provided to enable the current management team and investors to acquire an existing product or business from a public or private company. This area is usually when Private Equity investment is applicable. 

Management buy-in (MBI)
These are funds provided to enable a manager or group of managers from outside the company to buy in to the company. As with a MBO, Private Equity investment is usually applied. On the whole, early stage investments require less capital than an expansion or MBO stage. Venture Capitalists spend the same amount of time and effort assessing and assisting an early stage company as they do a later stage company. In fact, the earlier stage companies usually require greater assistance than later stage companies. Therefore, many Venture Capital firms prefer to invest in later stage deals that fit their investment criteria.

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About the New Zealand Private Equity & Venture Capital Association
The NZVCA is a not-for-profit industry body committed to developing the Venture Capital and Private Equity industry in New Zealand. Its core objectives include the promotion of the industry and the asset class on both a domestic and international basis and working to create a world-class Venture Capital and Private Equity environment. Members include Venture Capital and Private Equity investors, financial organisations, professional advisors, academic organisations and government and quasi-government agencies.

(Source: NZVCA)