Early slips on the road to profit

The country has avoided some of private equity's worst excesses, says Paul Chrystall. Photo / Martin Sykes

Private equity may be in rude good health today, but its first 10 years were marked by disharmony and quite a few failures, recalls Martin Goldfinch, ACC private equity manager.

First on the scene was the government-backed Greenstone Fund (which eventually became Pencarrow Private Equity), closely followed by Direct Capital, established in 1994.

"Then there was a bit of a hiatus [until] the tech boom arrived," Goldfinch says. "And there was a lot of noise, and three firms started: No 8 Ventures, Caltech and TMT Ventures."

Caltech imploded in acrimony, he says, but he won't comment on No 8, save to note that it launched a second fund, which is inactive as it is fully invested.

TMT, which was a joint venture between Direct Capital and large US firm Advent International, is in wind-down mode.

"I've seen some successes and a whole lot of failures and I've seen creation right through to realisation," Goldfinch remembers. "The private [equity] industry really rests on a tight bunch of guys who are highly focused, only concerned with what they are doing and held together by camaraderie and remuneration."

When those two factors come under strain - Goldfinch points to the "failed model" of captive funds such as Goldman Sachs JBWere - then the brotherhood can fray.

A captive fund is one that is launched within a large organisation, which can impose an arbitrary change in strategic direction or remuneration. The average lifespan of a fund is 10 years, he notes. "It's a long-term relationship and it only works on trust and success. If you can't stand the guys or you've got a sense there will be aggravation, then it's easier to say no than get married."

And like a marriage, private equity divorce can be messy. The Goldman Sachs team fell apart, for undisclosed reasons, spawning Maui and Sydney-based Mercury Capital.

Meanwhile, Direct Capital got back on track, launching its third fund in 2005. "ACC participated and certainly made good money on the deals they brought us," Goldfinch continues.

Direct Capital has also made a foray into the corporate venturing fund TMT and BioPacific Ventures (a bioscience fund with Nestle and others), he says.

This year a TMT company, EMS-Cortex, was sold to US technology giant Citrix Corporation in what is claimed to be one of the larger sales of its type in New Zealand in the past 10 years.

Gavin Lonergan, Direct Capital investment director, says it took a good nine years and plenty of patience to finally realise that value. So much for private equity's reputation for the quick flick.

"I've been around since [private equity's] recent form," says Paul Chrystall, Maui managing director. "New Zealand was very late catching on to this particular [private equity] bandwagon."

As a consequence, this country avoided some of the overseas excesses - "the buyout culture, the first peak of madness, the barbarians at the gate," Chrystall says - that blighted private equity's reputation. Local private equity is essentially a copy of overseas models "but with some very New Zealand characteristics", he says.

The industry has matured, Lonergan adds, and there are a variety of management styles: "You do have managers only on buyouts. Some managers won't look at minority shareholdings; they're very driven by wanting to control the investment and dictate the outcome, and that model works.

"You've got groups like us that invest into minority shareholdings as well as majority," he continues. "It's very much based on partnership, getting alongside the business owner and understanding what they want.

"We're currently invested in 16 companies, generating around $1.1 billion [revenue] and employing 3600 staff."