Private capital partners mid-market future growth

New Zealand’s economic opportunity is in the hands of unsung heroes: companies which have grown to become significant employers, yet few have heard of. It’s often lonely and hard to lead growth companies, but that’s where private capital can help, says Colin McKinnon.

New Zealand’s high-growth companies are growing revenues and employees at the rate of 20 per cent a year. Most employ 20-49 employees and are described as “mid-market”. In total there are around 10,000 of these companies representing 2 per cent of all Kiwi businesses. Ninety per cent are privately owned.*

New Zealand is at the mid to lower end of the OECD tables for high-growth firms. So growing more companies is important, but even more important is helping more companies grow, especially given the fact that although we have a similar proportion of smaller business to many other countries, we lack a decent number of larger firms. So how can we help more businesses grow to become high-growth performers?

Most of our mid-market growth companies are unsung heroes; operating below the radar and often struggling to maintain their growth while servicing the customers they already have.

Tap any mid-market chief executive or company founder on the shoulder and nearly all will tell you how lonely it is; how difficult it is to find time to work on the business rather than in the business and how hard it is to find the capital they need to maintain their growth and break into new markets.

It’s not easy to make the transition from running a stable, family-owned $10 million business to running a $200 million business; each requires different skills and different processes. That’s why these companies, their owners and their managers need support and should be celebrated by New Zealand’s wider community because they hold the key to our economic future.

A key financial supporter of these high-growth mid-market companies is New Zealand’s private equity sector. Professional private capital funds have invested around $150 million to $200 million each year in new deals for more than 20 years; even during the down years of the global financial crisis.

Privately-owned businesses and their investors are discreet about their ownership. Myths about private capital born out of Hollywood or international headlines are a long way from the reality of the New Zealand mid-market. Generally mid-market transactions in New Zealand exhibit conservative leverage. Value is created by growing the business rather than through financial engineering.

New Zealand’s professional private capital funds take a partnership approach. They support management teams to achieve the strategic goals of the business and create value for all stakeholders because to be successful investors they know the people who understand their markets best are the company’s founders and management who have grown the companies to this stage in the first place. Their part in the partnership is to help shoulder the risk, inject fresh capital, share the decision-making process and introduce efficiencies around governance and strategy to help the company take the next steps.

New Zealand is a small country with a limited number of players in the mid-market private company sector. We don’t have the mega deals of overseas – many of which have grabbed headlines here for the wrong reasons – because we simply aren’t big enough. But we can still generate significant returns for investors; returns that have consistently outperformed our public markets and are comparable to overseas private equity markets. Recent research of 92 realised private equity investments in New Zealand between 1994 and 2012 found the average returns to New Zealand private equity deals were 33.7 per cent a year.

These returns have attracted some of New Zealand’s biggest institutional investors, including the New Zealand Super Fund and ACC. The Super Fund has even gone so far as to state that expansion capital is a key plank of its investment strategy in New Zealand.

Companies such as EnergyWorks, Taranaki’s leading engineering company in the energy sector, data warehousing company Wherescape and raw petfood company K9 Natural have all sought help to realise their ambitions, as have a host of others, including many household names such as Rodd & Gunn, Bell Tea, NZ King Salmon and Z Energy.

In many cases company founders tell their private equity partners they didn’t realise this sort of help was available and thought their only option had been to sell the company.

Our private markets, both the companies within them and the investors who support them, are largely an untold story. And it’s true, none of us know what we don’t know. But one thing all sides can understand is that to grow more growth businesses requires more capital and more openness from both sides to counter the myths and to ask for and to offer help.

 *Statistics NZ Business Operations Survey and the MBIE Small Business Report

 Colin McKinnon is Executive Director of the New Zealand Venture Capital and Private Equity Association (NZVCA). To learn more about private equity in New Zealand, visit www.nzvca.co.nz