Venture investing makes comeback

By RICHARD BRADDELL

Wiped out by the sharemarket crash, New Zealand's venture capital industry has taken 13 years to get back to where it was in 1987.

The executive chairman of Pencarrow Private Equity, Mark McGuinness, says the difference between then and now is that although the industry has recovered to the same size as in 1987, it has much more experienced management.

"The venture capital industry has made a lot of investments, but the challenge is to show they work, so that pension funds use venture capital as a place to put their funds, as they do in Australia and the US," Mr McGuinness said.

He rejected the doom and gloom currently affecting many businesspeople, suggesting that the prospects now were as good as they had ever been.

And with the industry enjoying steady, rather than rapid, growth he was optimistic that it would avoid the silly investments typical of the 1980s.

Pencarrow manages the Greenstone Fund, established in 1993 with Bolger Government encouragement and initial capital of just $25 million.

AMP put up 40 per cent and Axa, National Provident and the Government, 20 per cent each.

Pencarrow has since moved on to manage an additional $55 million of venture capital, under a joint venture with AMP, which takes the total it now manages to $90 million.

Greenstone was set up to fill a gap in a moribund industry, and has since been joined by names such as Direct Capital, Caltech, AMP and Wellington's Jenny Morel's No 8 fund.

The leader of New Zealand's venture capital renaissance, Greenstone has invested in 11 companies and retains its stakes in seven of those. Since Greenstone invested, the remaining companies have doubled their turnover to $140 million, their exports have grown from $8 million to $55 million, or 35 per cent compound annually, and jobs from 400 to 900.

One investment, 29 per cent-owned Formway Furniture, of Lower Hutt, has boosted turnover from $11.6 million to $40 million, with $27 million of that exported.

Pencarrow's investment philosophy makes quality and innovation of management paramount, since it likes to let managers get on with running the business.

Mr McGuinness said Formway was the kind of New Zealand company he liked because of its strong management. It was successfully tackling the US market, and in an annual commercial furniture fair in Chicago it won two of the top prizes.

But the real test of a venture capitalist is not just doing the deal, but making a successful exit when the investment matures, typically within five to seven years.

Although Greenstone has exited four of its investments, only one was because the time had come; the rest were abandoned because they were not meeting Pencarrow's investment criteria.

The success story, Fieldair, an airfreight aviation support and engineering services company, was sold for a 37 per cent compound return on the $3 million invested.

Another investment involves the 1997 management buyout of Hurricane Wire Products from Australian parent Adelaide Brighton, which gives Greenstone a 50 per cent shareholding at a cost of $38 million.

One of Greenstone's rare technology investments involves a 14 per cent stake in the brushless DC electric motor company Wellington Drive Technologies, expected to list at the end of the year.

Mr McGuinness said it was a company with great potential andan excellent managing director.