Capital Markets: New investor groups spice up private equity market

The emergence of new investor groups such as iwi and community trusts will introduce additional liquidity into the private equity sector, says the latest EY survey.

But there is some concern about limited interest in additional venture capital fund raising from both domestic and international investors.

Overall, the New Zealand Private Equity and Venture Capital Monitor 2016 says the market remains positive -- with some caution. "As for the invested companies, the current low interest rate environment will support companies seeking leverage to grow, while low dairy prices and shortage of skilled and experienced staff will continue to hinder some players."

The monitor says crowdfunding gained huge momentum in 2015, raising over NZ$12 million for 20 companies in the 12 months after the Financial Markets Authority's authorisation in 2014.

Venture capital funds, initially thought to be rivals to crowdfunding, raised capital on the funding platforms themselves (Punakaiki Fund and Powerhouse Ventures) and "it will be interesting to see how the trend develops in 2016".

Colin McKinnon, executive director of the New Zealand Venture Capital Association (which commissioned the 13th annual survey) says the mid-market investment activity increased 17 per cent to record the highest level since the monitor began.

"Concurrently, the continued strong return of cash to investors provides positive stimulus to future fund raising," he says.

Mid-market investment activity increased to $284.1 million in 2015 from $243.5 million in 2014. The rise was driven by higher average investment value -- $16.7 million in 2015 to $12.8 million the year before -- despite a lower number of transactions. There were 17 transactions last year compared with 19 in 2014.

The total investment value last year was $346.6 million, with the number of deals increasing from 81 to 86 -- the highest since 2006 -- and the average deal value rising from $3.7 million to $4 million.

The venture capital investment increased from $55.8 million to $62.5 million, driven by the increase in the number of deals -- 69 last year compared with 62 in 2014.

The total divestment value in 2015 fell sharply to $147.8m from $620.3 million in 2014.

The divestment activity last year was dominated by mid-market transactions, while 2014 featured a small number of of high value buy-out and mid-market divestments, primarily Pacific Equity Partner's sell-down of Griffins Food to URC (Philippines).

Notable deals last year included the purchase of Manuka Health by Pacific Equity Partners; Tembusu Partners' investment in CricHQ; Pencarrow's investment in Icebreaker; Allegro Private Equity's acquisition of Carpet Court; and Archer Capital's acquisition of the Aspire2 Group. In September Pacific Equity Partners agreed terms to acquire Academic College Group, but will settle in 2016.

Archer Capital completed its purchase of NZ Pharmaceuticals from Direct Capital and others in early 2016. The monitor says this reinforces the theme of strong activity level from overseas funds in 2015, but delayed completions through the Overseas Investment Office process into 2016.

On the short term outlook (next six months) for the private equity and venture capital market, respondents in the survey were relatively optimistic, reflecting the New Zealand economy's resilience despite the struggles in the dairy sector.