Key Points:

Mergers and acquisitions of medium-sized businesses are expected to be the key drivers behind private equity investment this year as the big deals are put on the backburner following the credit crunch and rising debt costs.

New Zealand Venture Capital Association chairman Hamish Bell said high numbers of mid-market business owners wanting to sell up and retire over the next five to seven years meant fundamentals in the sub-$150 million investment market remained strong.

"There are 3500 businesses in the market and surveys have found around 50 per cent have aspirations to retire in the next five years."

Bell said one-third of the economy's revenue came from businesses in the mid-market or those valued at between $10 million and $150 million.

But at the top end of the market where many buyers also needed to borrow high levels of debt to fund their investment it was likely that many of the major deals would be put on hold.

"There are plenty of investors with equity, but the uncertainty means there are some constraints on the market and a lot of the deals are on hold," Bell said.

This year's expected slowdown at the top end carries on from a slow second half in 2007. An annual monitor of private equity and venture capital jointly produced by the association and Ernst and Young found that while the total private equity investment matched 2006's record level of $1.2 billion, almost all of it - $1.1 billion - was invested in the first half of the year.

Bell said it would be tough to maintain the same level of investment this year as the top-end deals had a big impact on the overall figure but taking those out of the equation he expected continued strong growth from the mid-market.

Last year private equity mid-market investment grew by 141 per cent to $205 million across 23 deals. Venture capital investment also grew by 8 per cent to $82 million invested across 60 deals.

Bell said the New Zealand market was young but was in a strong position because of its demographics and fundamentals.

Compared with other markets, New Zealand's private equity investment remains small.

Last year only 7.2 per cent of the money involved in mergers and acquisitions came from private equity.

In the United Kingdom, around 55 per cent of M&A (merger and acquisition) activity was funded through private equity.