Diana Clement: Angel at my share table

Pssst. Wanna earn 20 per cent to 30 per cent per annum on an investment - without buying a dodgy investment property? Well the answer may come in investing in start-up companies.
But as with every investment it's not quite so simple as plunging a few thousand bucks into a start-up company and getting an instant return.

The returns on your investment may prove to be high, but de catch is that it could be many years before you actually see that money and there's probably no dividend along the way.

Investing in start-up businesses is not for the faint hearted. Nor is it for the millionaire-by-Christmas brigade, although thanks to the success of Trade Me founder Sam Morgan and his early investors, the world of business angel investing, venture capital and private equity investing, the three mainstream ways of investing in start-ups, have become a topic of cocktail party chatter in recent weeks.

As a rule of thumb, the R&D stage of a business may attract some Government funding, at the seed stage family, friends and angel investments comes into play. The next stage covering start-up and early growth is where venture capitalists get involved and private-equity investors, banks and other investors tend to come in at expansion.

All three markets are relatively young in New Zealand and there are few statistics to show exactly how well they are doing - although research by Ernst & Young released this week suggests it is a growing market.

Business angels in New Zealand are usually high net worth individuals with discretionary income they can divert to high-risk investment proposals, says Melissa Yiannoutsos, business incubation manager at Industrial Research, which set up MINE for Business Angels to provide a formal environment for investors willing to support young companies.

"The typical angel investment requires on average $250,000 a deal. Within angel networks, individuals come together and may put a minimum of 20k each into a deal. The active investors bring with them experience to nurture the new company, whether it be market networks, financial or business planning advice, to name a few."

While most investors come from the corporate or entrepreneurial world, there are possibilities for other high net worth individuals to invest. MINE says about one in every 10 deals will be "hugely successful".

Some networks adopt side-car funds (passive investor) to leverage investments made by the active investors, says Yiannoutsos. This gives passive investors the chance to get involved without committing time to mentor the company.

When it comes to venture capital and private equity, the norm is to invest in closed-end funds, such as Pencarrow Private Equity, that raise money for a period of time and then make a series of investments. Details of the latest offerings can be found via the New Zealand Venture Capital's website.

NZ Venture Capital chairman Mark Dossor says in the report that there is "ample research to support the thesis that companies with private equity of venture capital investment grow at a rate of two or three times that of organically funded entities, thus creating value for the owners of the companies".

Jon Hooper, Ernst & Young director and NZ Venture Capital council member, says: "While it is difficult to interpret much about potential returns from the limited divestment activity which has occurred in the New Zealand market to date, overseas statistics show that returns from this industry can be on average 10 per cent to 15 per cent above returns from a diversified portfolio of public market equities."

The question "Do you put your clients into venture capital and private equity?" to financial planners can elicit loud teeth sucking.

Robert Oddy, of International Financial Planners in Auckland, said he would only considering putting very wealthy clients with long time horizons into such funds.

Oddy estimates that some locally based funds will return 20 per cent to 30 per cent per annum. But he points out that clients will have to wait five or 10 years before they see that money.

Jeff Matthews, senior financial adviser at Spicers Wealth Management, asks why would he put clients into such esoteric investments when Platinum Asset Management, one of his favourite fund providers, has much more mainstream products that are returning nearly 20 per cent per annum without the need to tie up your money.

"I doubt I would recommend venture capital unless someone had about $5 million and could lose say $100,000 without shedding any tears," says Matthews.

Nonetheless, venture capital and private equity funds are a growing market, says Ernst & Young, with $1.56 billion committed capital at the end of 2004 compared with $2.02 billion a year later on December 31, 2005.

Gordon Price, tax director at accountancy firm Grant Thornton, says the tax implications of making a loss can vary according to the particular circumstances of the investor and the investment itself.

If you buy into a VC or private equity fund or investment on "revenue account" meaning that you trade in such investments or simply bought with the intention of selling, then gains are taxable and losses tax deductible.

However, generally if your investment is a buy and hold, then any losses cannot be claimed against your personal tax.

On the web:

nzvca.co.nz (see link below)
www.mine.org.nz (see link below)
nzvif.com (see link below)
www.iceangels.co.nz (see link below)
www.bizangels.co.nz (see link below)