April 2004

Dear NZVCA colleague,

It has been another busy month for the industry with a number of deals by NZVCA members and other industry related initiatives hitting the headlines. Endeavour Capital announced its exit from Virtual Spectator and also a new investment in high temperature superconducting business HTS-110. Other major shareholders in HTS-110 include Industrial Research Ltd and American Superconductor Corporation (AMSC). More details on this investment can be found on the NZVCA website.

Angel member Sparkbox has also invested in terms of both dollars and skills in Wellington-based sound editing software development company Virtual Katy, whose technology was developed for and battle hardened on the Lord of the Rings trilogy. Sparkbox’s involvement so far, beyond the capital injection, has included redefining Vitual Katy's marketing strategy and business model, as well as hiring a new CEO to drive its international expansion.

Goldman Sachs JBWere Private Equity announced yesterday that its Hauraki Private Equity No. 2 Fund had received subscriptions of $74 million. Subscriptions exceeded the prospectus target of $40 million by 85%, and represent the largest private equity capital raising achieved in the New Zealand market.

News this week as well that Direct Capital is working with AgResearch-owned Celentis to raise money for a planned $100 million biotechnology investment fund. The new fund - called Life Science Ventures - will be designed to invest in projects at all phases of commercial development, from pre-seed projects still in the lab through to those almost ready for the market.

ANZ Development Capital has also launched its new fund in New Zealand and you can find out more about this in the feature article below.

It is great to see high levels of industry activity covering such a broad spectrum of investment stages and sectors. This highlights the growing importance of the industry to New Zealand’s economy and why developing the industry further so that it is as strong and vibrant as possible is so vital.

Mark your diaries! This year’s conference will be held in Auckland on Thursday 4 November. We will keep you updated on speaker and registration details as they come to hand. This year’s event will feature several speakers from overseas and will be a step-up again from the successful conference held in October last year. The NZVCA is also putting together plans for a number of other industry events to be held over the next few months and, again, we will keep you posted on these.

We welcome Simpson Grierson Partner Andrew Lewis to the NZVCA Council. Andrew was appointed in February and fills the spot left by his Simpson Grierson colleague Peter Hinton who stepped down from the Council earlier this year. On behalf of the Association, I would like to thank Peter for the huge amount of effort and time he has put into the organisation over the last 3 years. Peter has been one of the key people responsible for getting the NZVCA back up and running and we are grateful for his wisdom, humour and stamina.

Our survey of investment activity and industry funds for the whole of 2003 is now available on the NZVCA website (look under the “NZ Venture Capital Monitor” tab). Our next online survey covering the first two quarters of 2004 will be going out to venture capital and private equity fund members in early May and so look out for that. It is great to see that the survey is being received very well by a wide range of people and already has an international readership. This needs to be an ongoing initiative though and so keep those survey forms rolling in!

The Bill is a positive in that the Government is prepared to make tax and other regulatory changes to assist the development of the industry. Officials have also listened to the submissions made by the NZVCA and other parties on their initial proposals and made some positive changes to accommodate those. The provisions in the Bill are not nearly enough though. Our overall view is that they are too narrowly focused and are therefore unlikely to make a material difference to the flow of investment funds into the New Zealand venture capital and private equity industry.

The key regulatory priority for the industry remains the introduction of an internationally acceptable limited partnership regime. We also need to continue to look at ways in which we can resolve current uncertainties around capital or revenue account treatment of venture capital and private equity investments which affect a broad range of local and international investors.

The NZVCA will be reinforcing these messages in its submission to the IRD on the Bill which will be made in early May.

Thanks to Tim Russell, a Director of ANZ Development Capital, for providing this second feature article on areas of interest/relevance to the venture capital and private equity industry.

The Problem

Since the revival of the New Zealand private equity and venture capital industries in the 1990s it has been obvious to many that the sector so easily overlooked was the one most represented by numbers of businesses in NZ and the sector responsible for most employment and growth; that of privately-owned businesses, employing over say, 10 – 20 people and generating annual sales of $5m and beyond.

That particular slice of NZ business, probably consisting of about 14,000 – 15,000 firms, is the engine room of our economy, generating significant volumes of off-shore earnings and stable long-term employment.

Such businesses, scattered around the country, are in many cases manufacturers, distributors, wholesalers and retailers of quite prosaic products and services; a substantial proportion will also be exporters or will aspire to be so in order to capture the full benefit of the excellence and/or innovation that characterises their product or service. From the perspective of a private equity fund manager it has proven a different market niche to access because the likely smaller size of capital placement and often high fixed costs of transaction completion and then investment supervision could not be easily reconciled.

An independent fund manager also often anticipated the issue of a quality consistent deal flow with some horror. The best opportunities have often proved quite subterranean.

Accordingly growth and/or succession related risk capital for the smaller to mid-sized enterprise has been desperately difficult to find. As a consequence many good businesses have not achieved their potential to the ultimate cost of all New Zealanders.

The Solution

ANZ Development Capital, initiated in Australia last year, is now open for business in New Zealand. This year it will focus principally on servicing its existing ANZ\NBNZ customer base; those customers alone represent 40% of the targeted market in New Zealand. Thereafter the offering is likely to go wider.

In essence the bank looks to make either expansion capital placements for businesses that have traded for two years or more at EBITDA breakeven or better and are on a demonstrable growth trajectory. No less important will be the support given to managers wanting to buy established businesses that they know well but in all probability could not purchase without significant assistance. Capital placements of $0.5m - $3m are targeted.

Exits are expected to be more by way of redemption, within a 2 – 5 year period although clearly some will be by means of a trade sale. ANZ Development Capital will add value and support its investee companies through regular contact and the appointment of a suitably qualified independent director. That individual will be ideally suited to the particular company, be wholly approved of the investee and will function as more of a value-adding coach\mentor.

Two transactions have already been completed in Australia and the pipeline on both sides of the Tasman is expected to be of excellent quality.

FOR MORE INFORMATION

Contact Tim Russell, Director, ANZ Development Capital (+64 9 356 3462)

Chris Twiss
ex NZVCA