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Home / Business / Personal Finance

Behind privacy's veil - a money machine

Diana Clement
By Diana Clement
Your Money and careers writer for the NZ Herald·
5 Feb, 2007 04:00 PM5 mins to read

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KEY POINTS:

It is often said that there are no secret investments that only the rich know about.

Yet when it comes to private equity, ordinary investors can only watch through the window as rich investors tuck in to a meal said to provide 20 to 30 per cent returns
on their investments.

Private equity is medium to long-term finance provided in return for an equity stake in potentially high-growth unquoted companies. The investments are often boosted by chunks of debt.

Even so, smaller investors can get into private equity with as little as $20,000 - as long as they don't mind locking away their cash for a few years.

Venture capital and private equity are related beasts. Venture capital invests in early stage companies and private equity tends to invest working capital in established businesses that need money to grow. In many cases, private equity funds buy out existing businesses or are involved in mergers and acquisitions.

Private equity is often used to buy out companies - most recently Australia's Pacific Equity Partners took a stake in Veda Advantage (formerly Baycorp Advantage).

But private equity doesn't operate only at this mega-deal level, says Hamish Bell, chairman of the New Zealand Venture Capital Association.

As well as the huge Australian and other international funds that have been having a feeding frenzy in New Zealand, there are smaller houses including 21 local funds run by names such as ANZ Capital, Pencarrow Private Equity, and Goldman Sachs JBWere Private Equity.

Further down the food chain are syndicates and individual deals brokered by larger accountancy and legal firms - often broking deals between groups of clients. A list of such firms can be found on the Venture Capital Association's website (www.nzvca.co.nz).

Right at the bottom, but still technically private equity, says Bell, are small local businesses that raise money from friends and family.

There are other ways of investing money in private equity. Private investors often make direct approaches to venture capital funds, offering to invest alongside them. But such an investor needs serious money to get a foot in the door.

The advantage of private equity investing over other asset classes is the return, says Jordi Garcia, financial planner at New Zealand Financial Planning.

Investors get a slice of these businesses' returns, which are often higher than the returns from managed funds or other equities. A wisely chosen investment can grow very quickly indeed. Private equity also gives investors access to parts of the economy that aren't listed on the NZX.

On the downside, Garcia says, invested money is usually tied up for five to eight years.

Also, some of the profit from investment in a pooled fund or syndicate is eaten up in fees.

The entry level - often $20,000 or more per investment (although one, the Pohutukawa Fund, had what it describes as a "low" minimum investment of $10,000) - cuts out all but sophisticated investors with surplus money that they can afford to tie up.

Because of the downsides of private equity investing, investors should expect at least a 15 per cent return, says Garcia.

"You should expect the return a business owner would want and a slight margin on top of that to justify the risk."

Private equity providers like to stay private. Because of that, says Bell, it's not possible to buy $100 of units. Investors are mainly institutions and superannuation funds, meaning many ordinary investors who manage their own superannuation are exposed to this market.

Even the NZ Super Fund has committed money to the AMP Pencarrow Private Equity Fund.

After a review in 2005, the fund's managers decided to invest $100 million in local private equity funds by 2010.

Private equity was a hip investment last year, mostly for the seriously wealthy, but will the party continue this year? It's a relatively new asset class in New Zealand, compared with the UK, where it has been operating since the 1950s, says Bell.

Its growing popularity in Australia, where the lion's share of deals reported for the last half involved Australian funds, means it's likely to grow in New Zealand.

But that depends to a certain extent on the continuing buoyancy of the economy and small to medium sized business.

The bad news for potential investors is that no funds are open in New Zealand. The most recent were Goldman Sachs JBWere's two Hauraki funds, which are now closed.

Investors can contact the Venture Capital Association and register their interest in new funds. It's also possible to directly approach fund providers - most welcome calls from potential investors, says Bell.

"While there is talk of a fund-of-funds industry developing in New Zealand, we are not aware of any planned launches," he says.

The Venture Capital Association hopes New Zealand institutions such as KiwiSaver funds will invest in private equity funds, giving investors a back-door route into this potentially lucrative investment.

Private equity houses and funds differ in their investment styles. The Hauraki funds, for example, specialise in buy-outs and providing expansion and development capital, Direct Capital invests in mature profitable capital, and I-Cap partners favours certain sectors including healthcare, tourism and agri-technology.

It is possible to invest directly in an overseas private equity fund such as 3i Group, the British-listed international private equity firm, or the investment trusts listed on the London Stock Exchange.

More information is available on the website www.ipeit.com.


Pitfalls

* Money invested is usually tied up for five to eight years.

* The underlying investments are often illiquid, making it difficult to get funds' money out if the business fails.

* Investors need to trust that the funds they're investing in are choosing investments wisely.

* The New Zealand economy has performed well in recent years. If there is a downturn, private equity investments could suffer.

* In the early years, returns may be negative and at best relatively low.

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