The $100 million Ryman James Wattie retirement village under construction in Havelock North.
With local equity markets trading at all-time highs and continuing strong demand from institutional and retail investors for IPOs, expectations have been high that a greater number of private companies would make the transition onto the listed market.
There is no lack of high-quality private companies that are of a size and status where listing would be welcomed by investors. And yet the list of "companies that could" continues to highlight the potential rather than the reality.
New Zealand's private equity industry is well-established and today, company owners have more flexible options for raising growth capital or managing ownership succession.
But the decision to list is more complex than capital planning or providing liquidity for shareholders. The decision is highly strategic but for many private company owners the question has morphed from "Why not list?" to "Why?".
In remaining private and resolving capital requirements through partnership with a private company investor such as Direct Capital, shareholders retain control of key strategic decisions. The company's directors are typically also its shareholders or their direct appointees.
Private company shareholders can sell down a partial stake, releasing personal capital but retaining a significant shareholding free of the regulatory restrictions that apply to similarly held shareholdings in public companies.
Private companies retain the ability to act strategically, taking a long-term view without the constraint of meeting short-term market guidance and continuous disclosure obligations. Few companies advance on a straight line to success, but public markets have limited patience for missed targets, or strategies that require a step-change investment in capital or time.
Moreover, disclosing a company's strategic plan to competitors usually results in a strategic disadvantage. If the past 12 months have taught company owners anything, it is the importance of being flexible and adapting to change.
Perhaps the greatest advantage private companies have in remaining privately owned, is the ability to closely align the interests of both shareholders and management.
In the 27 years since Direct Capital began investing in private companies, there have been few instances in which key managers were not also shareholders in the business or invited to participate in company ownership through an employee share scheme.
Indeed, these schemes are often extended to include a large number of employees and in some cases all staff. The mana of being an employee shareholder together with the opportunity for creating personal wealth beyond a salary remain powerful incentives for aligning management and staff with the long-term objectives of shareholders.
The positive impact on company culture is significant. This is in contrast to public company executive life in which tenures are often brief, heavily influenced by career objectives and where incentive schemes are often poorly aligned with creating long-term shareholder value.
Taken together, these advantages of remaining private are compelling, and when combined with the introduction of new capital for growth, have driven the success of private company investment in New Zealand.
The role of private equity is to fund a step-change in growth but, of course, this can also be achieved through raising capital via a public offering. Enabling shareholder liquidity is an obvious benefit for a company to pursue a public listing along with gaining access to an even deeper pool of capital.
But size matters. Achieving market capitalisation and free-float thresholds that attract independent broker coverage and institutional investor support is critical. Being listed but illiquid is the worst of all outcomes.
Size factors aside, the issue is not as simple as choosing one over the other. Most private companies are owned by families or small groups of shareholders. Owners are typically private individuals who prefer to downplay their financial success and the desire for continued privacy is a common trait. For these owners, the thought of fronting a public company is usually low on their wish list.
Beyond capital, private equity offers a unique secondary role in assisting owners plan their succession, usually over a period of several years. It is through this transition that private equity can play an important role assisting a company to ready itself for a successful public listing if this meets the company's longer term strategic goals.
This can include introducing new management to help transition business founders to non-executive roles, building depth within the existing management team, ensuring appropriate governance structures are well-established, mitigating key business risks, and developing the financial reporting and forecasting capability required of a public company.
These are all examples of the transitions that private companies find much easier in partnership with an experienced private company investor — and these benefits accrue whether or not the company completes an IPO.
This is a role that Direct Capital has provided to its private companies over many years — the listings of Ryman Healthcare, Nobilo Wines, Scales Corporation and New Zealand King Salmon are all good examples of successful transition from private to public ownership.
Far from crowding out new listings for the NZX, private equity adds to the depth of New Zealand's capital markets. It creates additional opportunities for successful private companies in New Zealand to consider listing on the NZX if doing so is consistent with achieving the company's strategic objectives.
Remaining privately owned will continue to be the appropriate structure for most private companies.
For those companies that do have an IPO on their list of strategic goals, private equity offers a compelling pathway to achieving it.
In 1994, Direct Capital was established with the sole purpose of investing into New Zealand's most important asset class, the private company market.
Central to its investment approach has been the establishment of genuine and effective partnerships with the shareholders and employees of the more than 70 companies in which it has invested.
Key to its partnership philosophy is Direct Capital's employee share ownership model where staff are invited to subscribe for shares, often enhanced through interest free loans provided by the company.
Traditional option scheme arrangements tend to be asymmetrical between shareholders and management in the allocation of risk and reward. Executives do not invest personal capital in the business until exercising their vested options and only do so if the company's share price has appreciated beyond a required strike price.
Unsurprisingly, it can favour a greater degree of risk taking in the business.
The benefit of an employee share scheme is that staff participate in the same capital flows as other shareholders – capital investment but also imputed dividends. A well-designed scheme, and one in which employees commit personal capital, will see staff take on a broader shareholder perspective to the decisions they make, balancing both risk and reward potential.
The gain to the business is not only financial. The mana of being an employee shareholder is significant and empowering. It changes the culture of an organisation, enhancing the sense of partnership and common purpose between shareholders, the board and employees. "I'm a shareholder as well, you know" is a powerful statement of equity, in both its narrow and broader interpretations.
The benefit is greatest when employee ownership is extended beyond senior managers to include broader staff participation within the constraints of regulatory compliance. In one of Direct Capital's more recent investments, the July 2020 acquisition of a 40 per cent minority shareholding in Caci Group, the employee ownership scheme was welcomed by founders and majority shareholders David and Jackie Smith.
The opportunity to include their employees, each of whom is central to the continuing growth and success of the business, was compelling. Of course, employees will each consider their own circumstances.
Even with no minimum investment, not everyone has an interest in becoming an employee shareholder, and many will have financial obligations that limit their ability to participate.
That more than 60 per cent of Caci staff took up the opportunity to become shareholders in the business is a testimony to the company's culture of success, and an endorsement of its clear strategic goals and a shared purpose in achieving them.
Direct Capital:
Established in 1994, Direct Capital has raised more than $1.7 billion in capital for investment into over 70 of New Zealand's best-known and most successful businesses, including the now-NZX listed Ryman Healthcare, Scales Corporation, and New Zealand King Salmon. Direct Capital's current portfolio includes Mondiale VGL, Beca Group, AS Colour, TR Group, Perpetual Guardian, Qestral Corporation, Caci Group, Bayleys Real Estate, and PF Olsen who together have annual revenues of more than $2.8b and employ over 7,500 people.
- Gavin Lonergan is a director of Direct Capital.
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