The gentler face of private equity in NZ

By Nick Smith

Rod Gethen says New Zealand's reputation has been unfairly tainted by the spectacular failures of Australian private equity. Photo / Marty Melville
Rod Gethen says New Zealand's reputation has been unfairly tainted by the spectacular failures of Australian private equity. Photo / Marty Melville

Rod Gethen looks an unlikely barbarian. The Pencarrow Private Equity executive director dresses in an off-the-rack business suit and shirt, like any other city slave, and the shoes are ever-so-slightly scuffed.

If this barbarian was at your gate, you'd expect him to be selling life insurance or religion, not buying the business. This is not meant as a put-down. As Gethen says early in the interview: "Barbarians at the gate - it's not really the New Zealand private equity story."

He's right, and not just because of the low-key attire. But there's no question the public perception of his profession is hard to shift and it clearly grates. Who, outside a Nordic death metal band, wants to be associated with Goths, Vandals and Attila the Hun? Not Gethen.

Of course, he is less worried about domestic opinion than about investor perceptions in Australia and Asia, people he hopes to persuade to part with more than $70 million for Pencarrow's fourth fund.

Last month, Pencarrow announced a first close of $77 million on the fund, money raised domestically and underpinned by a $30 million commitment by the New Zealand Superannuation Fund. ACC and high-net-worth individuals, many of them Goldman Sachs JBWere clients, provided the rest.

These Kiwi institutions and individuals understand that the New Zealand private equity story is different from Australian private equity, whose investments here in recent years crashed and burned in a display worthy of Guy Fawkes' night.

But if Pencarrow is to realise its ambition of raising $150 million, its biggest fund yet, it must convince the cash-rich Asians, in particular, that the Kiwis had nothing to do with Yellow Pages, Whitcoulls, Mediaworks, Independent Liquor and Blue Star, to name but a few casualties of private equity ownership.

The Aussies (Pacific Equity Partners, Ironbridge Capital, etc) may have done the damage but New Zealand has become tainted in international investor circles.

"There's a negative perception of New Zealand; they've seen a number of deals gone wrong," Gethen says. "But it's been the more high-profile deals bought by offshore owners that have struggled and that's partly due to the amount of debt they've put in those deals"

He's clearly chuffed to get a first close on the fund. To get $77 million in this environment is certainly a terrific achievement. As he notes, "In the boom times [fund-raising] used to be something you did when you wanted to raise a fund; now it's something you have to do permanently."

To that end, Pencarrow has been out pressing the flesh in Hong Kong, Singapore and elsewhere for three years now and it's fascinating to hear Gethen's insight into the long and winding process of Asian financial courtship.

"They say, 'We like to watch a manager for a one-fund cycle, seven to 10 years, before we invest.' Nigel [Bingham, executive director] is in Asia this week - 15 meetings in Hong Kong, 12 of them people we've seen four or five times over the last couple of years and that's what they expect."

There's no such thing as a quick Vegas wedding in Asia.

Today's difficulties in fund raising are borne out by a recent Thomson Reuters report showing a scant 1.48 per cent annual increase to A$3.3 billion in the value of private equity deals done in New Zealand and Australia in the year to June 2011.

Before the global financial crisis, the total value of deals here and over the Ditch was A$4.77 billion.

Plainly, investor sentiment in Australasia has taken a hammering: "A number of the large [Australian] compulsory super managers have decided to pull away from private equity," Gethen explains. "For some of them, that's the case [that they took a bath] but for others, the [fund] trustees decided that private equity [fees are] expensive."

Another factor is downsizing: the Australian institutions want fewer managers but when they are dealing with an average 10-year fund lifecycle, it takes a long time to reduce the numbers. They are certainly not taking on new managers from New Zealand.

Emblematic of present conditions is news that Australian behemoth Quadrant Private Equity, which has A$1.5 billion under management, has for the first time had to go abroad for its funding needs.

"[The Australians] could afford to pay six, seven times ebitda [earnings before interest, income tax, depreciation and amortisation] because they were borrowing A$5 million," says Gethen. "They can't do that now."

Quadrant sourced money from Canada and Asia and the latter market is particularly competitive because of ongoing global financial uncertainty. The Europe crisis has prompted large institutions to batten down the hatches, as in Australia, resulting in large funds roaming the earth for spare cash and an appetite for risk. The Europeans are in Asia, as are the Canadians, Americans and Australians.

"They need a home, money needs a home - and it makes it more difficult," Gethen says of the European fund competition. The ongoing euro crisis, he adds, will affect Asian financial institutions and therefore have an impact on New Zealand.

"We're insulated a little bit; people need to eat. Our pick is we're looking at a lost decade [of growth], as we had in Japan, as we limp from crisis to crisis.

"It's Band-Aids at the moment, when we need major surgery," he says of efforts to reform the eurozone.

The added complication to raising money in Asia is Pencarrow's size: it is small by world standards. Gethen says investing ratios imposed in the boom times could present a hurdle for a $150 million New Zealand fund.

"Their minimum commitment might be US$40 million but they don't want to be any more than 10 per cent to 15 per cent of a fund, which makes it difficult."

In its favour is that the rush to invest in the growth economies of China and India means many institutions are now overexposed in those territories, Gethen says.

"They're now looking at Australia and New Zealand, we're grouped together [in investors' minds, despite having different economic cycles]."

New Zealand could perhaps be seen "as the next hunting ground for private equity" and provide valuable portfolio diversification for Asian investors. He is confident Pencarrow will attract sufficient interest to reach its $150 million goal: "New Zealand has great companies, great people running them and has great ideas."

How private equity firms work here

Pencarrow Private Equity is New Zealand's oldest private equity firm and was formed out of the government-backed Greenstone Fund in 1993. Private equity involves an agreement between a management firm such as Pencarrow and limited partners (almost always large institutions such as pension funds but sometimes groups of wealthy individuals). The money is used to buy stakes in companies, which are usually not listed on the sharemarket and the investors and managers share the earnings. Pencarrow takes both minority and majority stakes in companies, which are mainly mid-sized with enterprise values of between $20 million and $100 million. It specialises in management buyouts, management buy-ins (where a new executive team is brought in)and expansion capital for businesses looking to expand domestically and offshore.

Private equity action

Blackstone Group buys Burger King in NZ

Late last year it was revealed that Blackstone Group, one of the world's largest private equity companies, had made its first foray into the New Zealand market, spending almost $108 million on buying the franchise to 75 Burger King restaurants and the rights to expand them. Blackstone has been described as one of the "barbarians" of private equity. It manages assets worth US$150 billion ($187 billion) and has a reputation for making record-breaking buyouts.

Blackrock takes stake in Telecom

In November giant US investment fund Blackrock emerged as the buyer of a 5 per cent stake in Telecom. New York-listed Blackrock has US$3.66 trillion under management.

TPG makes moves on Media Works

US private equity player TPG Capital is vying for control of troubled Media Works, which owns TV3, TV4 and several radio stations. It's understood it has already bought $70 million of debt in the media firm, which is owned by the much-smaller Ironbridge Capital. TPG has hinted it is interested in acquiring all of Media Works' nearly $400 million debt, which is held by a group of banks. If successful, the US firm - which has about US$48 billion of investment under management - could restructure the media firm, pay down its debt and end up owning it for less than half the price Ironbridge paid.

KKR circling Pacific Brands

This month NZX-listed clothing and homeware wholesaler Pacific Brands said it had received an approach from New York-listed private equity firm KKR regarding a possible acquisition of the entire issued capital in the company. Melbourne-based Pacific Brands, which is listed on both sides of the Tasman, markets labels including Jockey, Hush Puppies, Bonds, Dunlop, Berlei, Holeproof and Mooks. No price for the offer has been disclosed officially, although the Australian Financial Review has reported it to be worth about A$600 million ($778.6 million).

- NZ Herald

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