An increase in total buy-out investments proved a big factor in the growth through 2016 of the private equity and venture capital market in New Zealand.
A new report looks at this growth and concludes that fund-raising activity there has reached a milestone, hitting again a levels not seen since 2007. Total investment was above NZ$1 billion. Specifically, it was NZ$1.1987 billion.
Mid-market deal activity was down, but the report, a collaboration of EY and the New Zealand Private Equity and Venture Capital Association (NZVCA), says that focusing on that decrease out of context would be a mistake. Mid-market activity is down because “the successful growth of historical mid-market investments” in recent years has allowed some entities to exit from that category into the higher value buy-out category. Mid-market deals exclude transactions in which the target entity has a value of greater than NZ$150 million.
This graduating-out effect hasn’t hampered the fund-raising activity of mid-market funds, which are the beneficiaries of most of the capital raised in 2016.
An Activity Summary
| In NZ$Millions | FY 2010 | FY 2011 | FY 2012 | FY 2013 | FY 2014 | FY 2015 | FY 2016 |
| Investment in VC | 94.4 | 36.6 | 26.8 | 54.8 | 55.8 | 62.5 | 92.3 |
| Investment in mid-market PE | 130 | 223 | 84.6 | 191.5 | 243.5 | 284.1 | 100.8 |
| Investment in buy-out PE | 70 | 294.5 | 0 | 210 | 0 | 0 | 1,005.6 |
| Number of deals VC | 67 | 70 | 50 | 66 | 62 | 69 | 50 |
| Number of deals mid-market PE | 14 | 12 | 12 | 15 | 19 | 17 | 11 |
| Number of deals buy-out PE | 1 | 2 | 0 | 1 | 0 | 0 | 5 |
| Total number of deals | 82 | 84 | 62 | 82 | 81 | 86 | 66 |
Source: New Zealand Private Equity and Venture Capital Monitor 2017 Full Year Review adapted from p. 17.
I’ve bolded the sixth boxfrom the top on the right edge of this table because those five big deals, the 2016 buy-out PE deals accounts for the big above-a-billion number for the total buy-out PE investment, and that in turn accounts for the nearly $1.20 billion figure in total industry investment mentioned above.
Optimism and Factors
Survey participants were generally optimistic about the continued growth of this market in the short term. But their mood became “somewhat subdued” when the discussion went “further out.” They expected that economic growth in general will slow over time and this will constitute a challenge for PE/VC in particular.
Seed and start-up investment grew substantially last year, as did expansion investment.
The dominant sector for VC activity in New Zealand is technology. Information technology, including software, “remains a strong presence.” Other important sectors include health/bioscience and manufacturing.
Survey respondents each year speak to their plans for the investee companies. Within the 2016 survey in particular those plans included acquisitions, a growth in exports, increase in research and development expenditures, increased marketing efforts, and new product launches.
Respondents also speak each year to “key factors expected to affect their investee companies over the next two to three years.” In 2016 this included global headline events, market volatility, fluctuating currency valuations, demand from other PE players, and the depth of the pool of skilled employees with relevant experience within New Zealand.
Overall, most managers say that they are optimistic about New Zealand’s PE/VC industry. The report attributes this to an appreciation of New Zealand’s resilience in the fact of global downturns. There were no outright pessimists in this survey, although there seem to have been hold-out non-optimists who described their outlook as “neutral.”
A Success Story
The EY/NZVCA report includes some brief case studies. One of these tells the success story of Pencarrow Private Equity’s involvement in the coffee and tea markets in 2013 – 2017. The success includes all three chronologically germane elements: the entry, the through passage, and the exit.
In 2013 Pencarrow acquired BrewGroup, formerly Bell Tea & Coffee. The Pencarrow era has been very good to BrewGroup, which increased revenue and sales, expanded its export business, and acquired Hummingbird Coffee. All this success drew the attention of the world’s second largest coffee company, the Netherlands’ JDE.
Earlier this year, JDE bought BrewGroup for more than $100 million. EY/NZVCA says that Pencarrow is quite pleased with the outcome this has delivered for its investors.