Flight of the bright benefits foreigners

Justin Vaughan wanted to tap into a bigger pool of capital. Picture / Richard Robinson

BrainZ Instruments is on the verge of cracking the big time. With technology developed by scientists at the University of Auckland's Liggins Institute, the Auckland-based medical technology company has developed bedside monitors to test for brain injuries in newborn babies and young children.

The company hasn't turned a profit but believes it will soon break into a global market it estimates at US$140 million ($227 million) in hardware and US$49 million a year in ongoing contracts.

When the company does make a return from the New Zealand research that has gone into the monitors, much of the profits will go to overseas investors because BrainZ is listed on the Australian Stock Exchange.

It is just one of a number of local companies that found when they needed investment to turn their research into a growing business they had to look overseas.

Neuren and Living Cell Technologies have also listed in Australia, Endace has listed in London and Virionyx looks set to list in the United States.

Opinion is divided, however, as to what is driving some of the best and brightest companies overseas and whether this country should be concerned.

The reason for BrainZ listing overseas was simple: Money.

Chief executive and former New Zealand test cricketer Justin Vaughan said the company wanted to tap into a bigger pool of capital "and a more, I suppose, accepting investor base in that they have had BrainZ-like businesses to invest in ... and had some good results out of those".

BrainZ raised A$13 million ($15 million) when it listed on the ASX in December, with New Zealand agri-tech company Tru-Test retaining a 57 per cent stake.

Vaughan said traditionally the New Zealand market had been more focused on yield stocks "and actually the costs associated with going to Australia are just really no greater".

Robin Clements, senior economist at UBS investment bank, said companies listing offshore could affect New Zealand's economic growth.

"For the successes, the capital gains and the income that flows from them goes offshore."

He said the fact that companies chose to list offshore was indicative of a lack of national savings and its knock-on effect into the availability of local venture capital.

Macquarie Equities investment director Arthur Lim said the local market did not provide the support needed by new technology companies.

"If they try to raise the money over here, they will struggle and they will probably not get what they would perceive to be fair value for their potential discoveries."

This is not due to a shortage of local finance.

"There's plenty of money out there," Lim said.

It was more because of a lack of confidence, which the market had brought upon itself. In the past, the market had paid too much for biotech listings, including oral health product manufacturer BLIS Technologies.

"Again the market foolishly priced in all the upside, all the blue sky on day one ... all on the back of some promises," Lim said.

Shares in BLIS were issued at 10c but rocketed to $2.20 before settling at $1.75 on the first day of trading in September 2000. The shares were trading at 13c yesterday.

"It's performances like this that give the biotech sector in New Zealand a bad name."

The market, however, was not alone in lacking confidence, with entrepreneurs keeping one eye out for a buyer.

"If you are a successful biotech or technology company over here and someone offered you a cheque ... the mindset I think is to take the money and run," Lim said.

Peter Maire, founder of navigation technology company Navman, agreed, but said the choice of whether to sell up or soldier on was not simple.

He sold Navman to US marine technology company Brunswick in 2004 for $108 million.

Maire said companies that sold up or floated offshore would lead to profits being sent abroad but could introduce new investment and skills, provided the operational base remained here. Since being sold, Navman has opened a $5 million research centre, employed another 150 people and more than tripled turnover to about $430 million.

Maire was more concerned about companies with less than $10 million turnover that sold up, ignoring the potential to create a $100 million business.

The root of this problem was not a lack of money.

"It's not money, it's never money. The excuse people make is, 'I can't grow my business because I can't get money'. What we lack here is the ability to commercialise."

Maire said the typical New Zealand company with between five and 25 staff rarely had a professional marketing person with offshore experience.

The Government's Venture Investment Fund, which invested $1 for every $2 of private money, would encourage more high-risk investment and help expose companies to the skills of venture capitalists.

Maire would like to see it taken further with a dollar-for-dollar policy for offshore venture capital funds but only if they committed significant numbers of experienced people to work here.

NZX chief executive Mark Weldon said although a number of companies had listed locally more needed to be done to publicise success stories.

"I think why having companies list in New Zealand, be owned in New Zealand and be successful in New Zealand is fundamentally important, rationally it's because that's where [the] wealth and standard of living go to."

Despite the fact there was plenty of money available, Lim said, foreign markets held more depth and investors embraced new ideas while pricing the stock more realistically.

Apart from looking to raise capital in wealthier foreign exchanges, companies could look to attract more private equity, although this was hampered by poor co-ordination between ideas and capital.

"There is an underlying mistrust of venture capital and private equity that when they come to invest that they are looking for too much," Lim said.

The sentiment was echoed this week by pharmaceutical sector innovator ICPbio, which is planning a back-door listing on to the NZX in April. ICPbio is looking to raise $2 million - a sum the company said the local market could provide - and preferred not to involve private equity or venture capitalists.

Managing director Earl Stevens said: "They are expensive and they basically want to take most of your company for not much money."

Howard Moore, executive director of BioPacificVentures - a $150 million biotechnology fund - said the question of whether listing overseas damaged the economy depended on the stance.

"I suppose you could say the ownership of the company has moved overseas but, on the other hand, net, it results in a capital inflow into the country," he said.

Moore would encourage companies to look for funding and stay private until they reached a stage of commercialisation investors could more easily assess.

A major problem here was getting access to the seed money needed to fund development before venture capital interest.

Moore said this funding gap was called the valley of death.

"It's pretty widely acknowledged now that that really is one of the impediments to allowing the biotech industry to go forward at a faster rate in this country."

Lim said despite market scepticism, however, there was one certainty that could be depended on.

"That's the thing about the market, there will always be another generation of fools who will come and embrace the next great thing."

BrainZ recently opened its US office and, after sales to three Swiss hospitals, is making inroads into mainland Europe.

Vaughan said had BrainZ, which is expected to turn a profit within two years, decided to list here the going would have been harder.

"You could try to be a pioneer and be the one to create the benchmark but it was just so much easier in the Australian setting." 
 

Fast-growing Rakon bucks trend to go to home market for $10m

Technology company Rakon has decided to buck the trend and stick with the New Zealand Stock Exchange.

The company said yesterday it planned to raise $10 million on the NZX to expand production capacity and develop new products.

The share offer will comprise a selldown by Ahuareka Trustee - as trustee of the Ahuareka Trust representing founder Warren Robinson and family interests - of 35 per cent of the company.

Rakon makes quartz crystals and oscillators used in telecommunications and global positioning systems.

The company, which was formed in 1967 by Robinson in his basement, employs about 500 people at its Auckland headquarters and exports 95 per cent of its production.

Forecast sales this year are $80 million with a trading profit of $14 million. The prediction for 2007 is $100 million and $20 million respectively.

Navman founder Peter Maire, who with his investment partners owns 20 per cent of Rakon, said representatives of the firm had spent a week in the United Kingdom investigating the possibility of joining London's AIM market. The US Nasdaq and Australian ASX markets had also been examined as listing options.

But Maire said the increasing cost of governance in the US after the Enron scandal had made a listing there a generally less attractive option. "It just got tougher and more expensive."