Petfood, honey, a real estate agent, menswear, tea & coffee — you might not know it, but thanks to the Super Fund, you’ve got a stake in them all, reports Lesley Springall.

K9 Natural's

chief executive, Calvin Smith, roars with laughter when asked if he knows all of New Zealand has a stake in his raw petfood company. Do I ever, he says. "I kind of use it as a little marketing thing when I'm talking to people. I say 'you own a piece of this so you may as well listen to what I have to say'."

The reason every Kiwi has a stake in K9 is because of the NZ Superannuation Fund. As well as its other investments, at home and overseas, the fund has a strategy of using some of its money to buy stakes in privately-owned NZ companies.

In the past nine years it has invested nearly $200 million in private companies. Though not all the money is allocated yet, most of the fund's latest private equity investment is earmarked for expansion capital - smaller, high-growth companies which have proven they've got something the rest of the world wants, but need a large dollop of capital to make their aspirations a reality. Like K9, for example.



Smith, a former managing director of investment bank Credit Suisse First Boston in Britain, says the Super Fund's expansion capital strategy is a no-brainer, as there is a serious funding gap in New Zealand for high growth companies.

"The Super Fund is all about growth and yield over the long term ... and if you look at our economy, it's the small- to medium-sized businesses that are growing the fastest so they should be offering the best investment return."

Though it's common for long-term investors such as superannuation funds to invest in private equity overseas, the scale of things in New Zealand makes the investments a little more unusual and, for some, a little more emotional, admits Randal Barrett of Pioneer Capital, one of the companies the Super Fund uses to manage its private equity investments.

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"New Zealand's listed market is a very small part of our GDP, so statistics show New Zealand is the most private economy in the OECD," he says. "Private companies in New Zealand make up about 90 per cent of our GDP."

New Zealand has about 145,000 private businesses and the top 1000 of those generate about 30 per cent of the country's revenue. "So if you want to invest in New Zealand equity, you have to invest in private companies here," says Gavin Lonergan, investment director at Direct Capital, another of the Fund's private equity managers.

"For me it's simple: the jobs that we want for our kids and the taxes we need to fund the standard of living we want in New Zealand can only come from growing our companies ... and the vast majority are privately owned companies, each with their own capital requirements for funding growth, acquisitions or facilitating a succession plan for owners."

Small slice

The Super Fund's private equity holdings are are only a small slice of the $3.7 billion or so it has invested in New Zealand, but they include a diverse range of businesses.


According to the Fund's own estimates, there are about 3500 private companies with annual revenue of $10 million to $150 million. About 2500 of those businesses have revenue between $10 million and $50 million, and thus fall into what the fund calls its "expansion capital" strategy.

There's nothing emotional about its decision to focus on this pool of economic potential, says Fiona Mackenzie, the Super Fund's head of investments. Nor does it have anything to do with the government's 2009 directive to boost the Fund's involvement in New Zealand's economic base.

"That's the least important part of it, to be honest. The reality is, back in 2009 we saw an opportunity in the New Zealand market where there are lots of great Kiwi companies that are high growth and have great expansion potential but needed equity capital to grow."

Expansion capital level

Thus there's a disconnect in New Zealand that's fairly unusual, says Mackenzie. "There's quite a lot of capital and expertise at the startup end and quite a lot at the larger end, but not every entrepreneur has the ability to take their company from a $10 million revenue company to a $200 million revenue company.

"That's what we call the expansion capital level. So it's a great opportunity for us, but not something we could do in-house because you've got to look at a lot of companies before you find one that makes sense, and then you've got to agree on price and all that, so it's quite a labour-intensive process."

Change of approach

New Zealand private equity has featured since the Fund's early days, but four years ago it changed its approach, from following the traditional asset allocation model employed by most pension funds, to an innovative strategy that focuses on the underlying opportunities within each asset class.

In New Zealand private equity, that opportunity was largest in the expansion capital end of the market, says Mackenzie. "We just think it's a better way to invest. It is slightly more challenging, but it's entirely logical ... you look through the investment structure, ignoring if it's a private equity manager or a hedge fund or a listed equity, and try to understand what the underlying driver of the expected returns are that you think you'll get."

Though understandably cagey about what those expected returns might be, Mackenzie acknowledges that on a global basis, private equity investors generally tend to expect returns of 20 per cent plus to compensate for the illiquid nature of the investments.

Given the size of New Zealand's listed market and lack of listed funds, there isn't a cheaper, more liquid or more straightforward way for the Super Fund to get access to New Zealand's expansion capital opportunity, says Mackenzie. "Our mission is very clear - to maximise return without undue risk. All of our investments have to stack up on a global basis. So the short answer is no, there's no emotion to this because emotion isn't a great way or a very disciplined way to invest."

Level of investment

As to whether the Super Fund should invest more in this area, Mackenzie says she believes it has the right level of exposure to the sector. Any more investment and it could have a negative impact, she says. "For the size of New Zealand, we have the right number of New Zealand managers to have a great perspective on the market, but not so many that it's too many to manage or we've created a risk that they will compete on price, which wouldn't be a good outcome."

The Super Fund's investment in the local private equity market is vital for the health of New Zealand's economy, says Pencarrow Private Equity's Rod Gethen. "These companies are the heart of the economy. Companies need capital to grow and finding that outside the private equity market is hard to do, so we need a buoyant, successful private equity market and if we didn't have the support of the Super Fund and other larger institutions it would be harder to attract other institutional or overseas investors."

The Super Fund's investment in the local private equity market is vital for the health of New Zealand's economy, says Pencarrow Private Equity's Rod Gethen. Photo / Marty Melville

The Super Fund's investment in this sector has definitely encouraged other institutions to get more involved in private equity and in expansion capital, says Colin McKinnon, executive director of the NZ Venture Capital and Private Equity Association.

"I think the Super Fund should be congratulated for its leadership role in New Zealand because as a result of what it's doing, there's certainly an increased inclination among the smaller institutional funds, trusts and foundations to look at illiquid assets, including private equity."

Mackenzie agrees the New Zealand investment market is maturing and if the Super Fund has been even a tiny part of that, that's great, she says. "I'm a New Zealander so of course I want the New Zealand market to do well. It's an exciting place to invest because you get to see some amazing and very cool New Zealand companies doing great stuff and, in particularly, expanding offshore. So it's great to be a part of helping those companies to grow."

K9 Natural: Raw food power

K9's Calvin Smith. Photo / Martin Hunter

Calvin Smith first came across the K9 company in 2006, after returning to New Zealand and buying a couple of border collie pups for the family. Back then it was more a good idea than a viable proposition, he says, but the fledgling firm's focus on dog and cat food made from unprocessed, raw meat still made sense.

"It makes sense for a dog to eat meat and even more sense for a cat to eat meat," argues Smith. "We've just been blindsided for years by the large petfood marketing companies that we should be feeding our dogs a grain-based diet rather than a meat-based diet."

K9's founders - former police dog handler Geoff Bowers and dog breeder Bruce Mayhew - formed the company after Bowers returned from studying wolves in Alaska, seeing how they thrived on a diet of raw meat, offal, bones and blood.

The problem was how to make the food palatable for squeamish pet owners and convenient to ship, store, sell and use. Once they cracked that - producing their meat products in frozen pellet and freeze dried form, rather than large blocks - Smith and his friend Chris Stewart jumped in to invest in the company.

Production was scaled up and distribution partners wooed. By the end of 2012, after just six years, K9's products were being sold in 19 countries and exports accounted for 70 per cent of sales. But Smith was concerned the company still wasn't growing fast enough. "We could've continued just chugging along, but I saw the risk of other people copying us and then our competitive advantage would disappear."

K9 was too small and it was too expensive to list on the NZ Stock Exchange, so Smith approached private equity firm Pioneer Capital. As luck would have it, Pioneer was in the process of establishing its second fund, a $150 million expansion capital fund, PCPII, that had just attracted the Super Fund as a $40 million cornerstone investor.

Persuaded by Smith's argument about the growing international "humanisation of pets" and K9's impressive evolution, Pioneer bought out the original founders and became the company's largest shareholder in October last year for something north of $10 million.

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As well as allowing him to sleep easier, the capital allows the company to move much faster, says Smith. "We've been able to put people in market in the US and Australia; we've employed a professional sales and marketing manager; rebranded our products; and we've doubled our product offering this year." The company is also eyeing up China and has been able to net a very large US-wide retail partner, whose first question to Smith was whether K9, coming from little old New Zealand, had enough capacity if the product took off.

The raw material supply in New Zealand is enormous, says Smith, but only by having a deep-pocketed investor on board could he could feel confident the company could handle whatever the world threw at it.

"The attractiveness of Pioneer's investment is not just the money. It gives us a lot of credibility and has opened a lot of doors for us. The retailer in the US was a classic example. They asked us how we knew we weren't going to be capital constrained if the product took off and we could just turn around and show them who's backing us."

Since Pioneer and the Super Fund's investment, K9 is targeting a minimum growth rate of 50 per cent, and preferably 75 per cent, over the next three to five years - more than double previous estimates. "We should be a $30 million company in three years," says Smith. "That's what Pioneer's investment has enabled us to do. And that's what the government needs us to do; take New Zealand's competitive advantages, one of which is the production of meat, and add value to it. And we're adding four to five times the value and then exporting it."

Bell Tea: Staying Kiwi

Another company that was attracted by the chance to be part of all our futures is a real Kiwi identity - the Bell Tea and Coffee Company. More than 50 suitors, many from overseas, sought more information when Bell's former owner, supermarket group Foodstuffs, put the company on the block last year. However the New Zealand factor was key for those in management who were keen to become investors in the company.

"It was a really big thing that [Pencarrow Private Equity] was a New Zealand-owned ... and was predominantly backed by the NZ Super Fund and ACC," says chief executive and shareholder Mark Hamilton. "It was a cultural fit because we've always been New Zealand-owned and we've been around for 100 years so we felt more comfortable with it and our staff felt more comfortable. So it differentiated them from other potential private equity investors in Australia."

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Bell Tea is the first investment for Pencarrow's IV fund, which has a cornerstone investment of $30 million from the Super Fund.

But not all the companies approached knew the Fund, and thus all New Zealanders, has a stake in their future. Menswear firm Rodd & Gunn's managing director Mike Beagley and online retailer Fishpond's general manager Ben Powles were both unaware of the Fund's involvement in their companies. Both have stakes owned by Direct Capital's III fund, which includes a $20 million investment from the Super Fund.

Manuka Health: Sweet investment

Manuka Health co-founder and chief executive Kerry Paul. Photo / Paul Estcourt

Honey and healthcare company Manuka Health is another business that had outgrown friends, family and other individual investors, and needed a big enough dollop of capital to allow it get on with growing the operation.

With a year-on-year compound growth rate of more than 50 per cent, and distribution in 40-plus countries, Manuka Health attracted a 20 per cent investment from private equity firm Waterman Capital's $75 million second fund, which includes a hefty $30 million investment from the Super Fund. That capital has allowed the company to build beehives, develop its plant in Te Awamutu, invest in R&D and launch new products.

Basically it has allowed the management team to focus on the business rather than on raising capital, says Kerry Paul, Manuka Health's co-founder and chief executive.

"Managing a fast growing business requires continual focus," he says. For Paul, the Super Fund's involvement with Waterman was important as in his eyes it gave the private equity a lot of credibility.

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It's also important from a New Zealand perspective, and an investment perspective, for the fund to be investing in the bedrock of New Zealand's economy, he says. "New Zealand relies on the continual development of a number of companies like ours that provide the stimulus for the economy long-term. We're adding value to a New Zealand raw material and we're doing that right across the North Island and the success of our business is flowing into all those communities. So the Super Fund is not just investing purely for a financial return, they are actually helping to contribute to the development of local economies across New Zealand."

Wherescape: Managing the world's data

Wherescape's co-founder and chief executive Michael Whitehead. Photo / Chris Gorman

Another PCPII fund investment, data warehousing company Wherescape, also needed capital to speed its progress overseas.

Formerly a consultancy, Wherescape's founders built a software tool to automate the process of planning and building data warehouses for various platforms, after realising much of their work was repetitive.

A data warehouse is a big database where an organisation collects information, which it can then use to analyse things such as sales trends.

"Market research showed there were a lot of potential customers for the software, but we didn't know what you had to do to build an international software company," says Michael Whitehead, Wherescape's co-founder and chief executive. Some early success, both locally and internationally, helped the team gain confidence, but by now data warehousing was becoming a seriously hot market and the company needed capital to stay ahead of the competition.

Pioneer again invested "north of $10 million", which Wherescape used on overseas offices and employing internationally experienced people to handle marketing, sales and product development. "World class people require world class packages," says Whitehead.

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But seeking Pioneer's help was about more than just the money, he agrees. It was about gaining expertise on governance, managing growth and sharing the risks. "Their involvement gives us the confidence to go for things. It's a big change from being a tightly held private company because then, even when you're profitable, the risk is still very personal: you have personal guarantees on overdrafts, personal guarantees on rent or leases. External capital gives you that ability to go, 'okay, right, I should take risks, I should push more,' so it's about a mindset as much as anything."

Today Wherescape has a turnover of about $21 million and employs 70 people, compared with 44 in 2012, and it's on the hunt for more. Its forecast growth is now twice what it was expecting before the PCPII investment.

But the company would have forgone that capital injection if it hadn't found the right investor. It was the fact that Pioneer was a Kiwi company, and backed by the biggest Kiwi investor of them all, that tipped the balance, says Whitehead. "We didn't want the culture we'd developed to be changed by big money guys coming in and making us do stuff differently."

Knowing that every New Zealander has a stake in your company's future is also "pretty cool," he says. "It's great New Zealanders are investing in New Zealand companies. It makes you stand up a bit straighter. But it brings with it a responsibility to deliver as well."

It's your portfolio

In 9 years, the NZ Super Fund's private equity investments have injected nearly $200 million into NZ companies.

Through Pencarrow Private Equity
Bell Tea and Coffee - Long established hot drinks company
NZ Crane Group - Cranes and specialised transport
Rishworth Aviation - Aviation recruitment, crew training and leasing
SolarCity - Designs, manufactures & installs solar-power systems, in NZ & overseas

Through Direct Capital
Bayleys - Property services & real estate agency
Cavalier Wool - NZ's largest wool scouring operator
Energyworks - Services to oil & gas, power generation and petrochemical industries
Fishpond - Online retailer
Hiway Group - Ground stabilisation and roading contractor
NZ King Salmon - King Salmon producer & exporter
NZ Pharmaceuticals - Biopharmaceutical manufacturer
PF Olsen - Forestry management services
Rodd & Gunn - Menswear retailer
Scales Corp - Horticulture and primary sector processing, export & logistics
Stratex Group - Specialty packaging materials manufacturer
Transaction Services - Payment processing

Through Waterman Capital
Academic Colleges Group - Private school operator
Healthcare Holdings - Healthcare group; includes Mercy Ascot hospitals
HealthLink Group - Communications systems & messaging for health industry
Manuka Health - Manuka honey-related functional foods & dietary supplements
Partners Life - Life insurance

Through Pioneer Capital
K9 Natural - Raw petfood manufacturer & exporter
Pet Doctors - Chain of veterinary clinics & catteries
Waikato Milking Systems - Milking technology developer & manufacturer
Wherescape - Software for data warehousing

Other notable NZ investments
Z Energy - Fuel retailer (now listed on NZ & Australian stock exchanges)
Datacom - IT services, including data centres, payroll management & software development

NZ Super Fund

The NZ Super Fund, or "Cullen Fund", was established in 2001 by the Labour Government, to help meet the growing cost of providing pensions for future retirees.

Between 2003 and 2009 the government contributed $14.88 billion to the Fund before contributions were halted by the National Government, which was more concerned about New Zealand's current debt problem, than more distant issues. Contributions are scheduled to re-start from 2020-21, and withdrawals from the fund are expected to begin in 2029.

Today the fund's size sits at about $26 billion. Its NZ investments include stakes in many listed companies, forestry, rural land, fixed income, property and private equity.

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