Lance Jenkins: Opportunities beyond the markets

Consistent returns of 22 per cent show investing in private companies worth looking at, says Lance Jenkins.

Deservedly the NZ equity market has been getting a lot of attention. Photo / NZ Herald
Deservedly the NZ equity market has been getting a lot of attention. Photo / NZ Herald

With recent research highlighting that there are approximately 5000 companies in New Zealand with revenues of $10 million, that suggests a very large pool of companies for funds like ours to partner and provide growth capital to.

The listed markets have been a great place to be invested and depending on who you listen to, the current market provides either a great opportunity to buy or sell, but I guess that's what makes a market.

The NZX returns of 24 per cent over 2012 have been fantastic for investors, especially in the context of a very tough prior five years.

Deservedly the New Zealand equity market has been getting a lot of attention.

From a capital markets perspective, these returns and initial public offerings such as the upcoming Mighty River Power float are some of the best things to have happened to the NZX in over a decade.

They help bring a new generation of investors to consider investment in different asset classes, other than property and bank deposits.

This is a great outcome for companies looking to raise capital as it broadens the investor base willing to consider investment alternatives to property and deposits. But it's not just listed equities that are back in good health.

One of the great performing asset classes has been private equity. These are the funds focused on investing and partnering with private companies.

New Zealand VIF - a fund and research entity that is part of the Crown - recently concluded a study highlighting that funds that invested in private New Zealand companies had returned more than 22 per cent a year consistently on their investments.

This wasn't just a snapshot of one or two companies - the researchers looked at 92 investments made into New Zealand companies by 13 funds over an 18 year period.

To give you a benchmark, that compares to approximately 7 per cent returns, including dividends, for the NZX over that same time period, according to JBWere/Datastream.

That's not bad for an asset class that has fallen under most investors' radars.

Importantly, the research showed, unlike most other investment asset classes, from property to shares, these returns were relatively consistent throughout the economic cycles over that time.

At Waterman Capital - a private company investor - we have a very simple investment thesis. New Zealand is a country where the bulk of our companies and wealth sit in the private markets space.

A common measure used to understand how representative listed markets are to their underlying economies is to compare listed market capitalisation to gross domestic product. For New Zealand that number is approximately 30 per cent versus Australia at 120 per cent.

Just like listed public companies, these private companies have a need for capital. Most can't access the public markets given their size or stage of growth, so firms like ours - made up of local investors - spend time working and partnering with these businesses to help them grow.

In some cases bringing them to the listed markets may happen, but put very simply, we work with these businesses to make what we consider great companies even better.

We provide the expansionary or growth capital, along with our hands-on involvement, to help and support these businesses over time.

Just as importantly we believe that we can achieve great returns for investors, and other stakeholders, by doing this.

Private company investing, or private equity, is an asset class that isn't for every investor, but it should be a consideration for those looking to hold assets over the longer term.

In general when you invest in funds such as Waterman, you make a longer-term commitment to the fund, but with industry returns of 22 per cent a year, it's a trade-off that appropriate investors should consider.

We take our role as guardians of other people's money very seriously and because of that we spend a great deal of time working with companies and understanding them before we partner with them.

With recent research highlighting that there are about 5000 companies in New Zealand with revenues of $10 million, that suggests a very large pool of companies for funds like ours to partner and provide growth capital to.

I would encourage investors, and companies looking for capital, to think of funds like Waterman when they review their options for investment.

Twenty-two per cent returns, as the advertisement used to say - it's gotta be good for you.

Lance Jenkins is an executive director of Waterman Capital.

- NZ Herald

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