Clare FarrantSenior Communications ManagerErnst & Young+64 274 899 700
Results from the 2008 half year New Zealand Private Equity & Venture Capital Monitor show activity momentum has been maintained despite tough market conditions
Mid-market private equity and venture capital activity maintains momentum despite tough market conditions, with investments totalling $64.6m and $22.9m respectively in 1H08.
While there has been no top-end private equity activity in the 1H08, this is in line with 2H07, reflecting the fact that funding for large leveraged transactions is difficult to attain in the current market.
“Overall, the first half of 2008 is consistent with the outlook we commented on in the 2007 full year monitor, being a return to private equity investment levels more inline with longer-term historical averages,” says Andrew Taylor, Director, Transaction Advisory Services Ernst & Young.
There appears to be an increasing trend for larger private equity funds to focus on ‘follow on’ acquisitions, typically through acquisitions of smaller competitors.
Mr Taylor said that the mid-market segment appears less affected by credit availability, though some participants believe that vendor price expectations have yet to fully adjust to the new credit environment with higher debt costs and lower available debt multiples reducing leverage ratios and hence deal pricing.
“Mid-market deals have long been the strength of the New Zealand private equity market and there is still strong underlying demand from private equity buyers for quality assets,” says Mr Taylor.
Franceska Banga, Chair NZVCA says that the venture capital market is reaching a significant point where a number of managers seeded by the New Zealand Venture Investment Fund in 2002-03 are close to fully-invested and are now moving into the divestment phase. Some will also be looking to raise new funds over the next 12 months.
Market conditions make this a challenging time to execute on these activities, with no venture capital divestments achieved in 1H08, continuing the trend seen in 2H07, and no material new funds raised, though some fund-raising is in progress.
“On the other hand, current market conditions make for ‘great vintage years’ for those that recognise the stage of the investment cycle we are in,” says Franceska Banga.
At the portfolio company level follow-on investment activity has remained steady.
While investment in the venture capital and the mid-market private equity segments was slightly below historical average levels, both deal volumes and average deal size ratios indicate that, while market conditions are tough, the sector remains fundamentally sound.
Franceska Banga comments on the outlook for the venture capital market, “There are challenges ahead, but the venture capital industry is in a good position to cope, and as business owners adjust their valuation expectations, the opportunities to invest will become apparent.”
The outlook for New Zealand’s private equity market? Andrew Taylor says, “Whilst the top-end private equity LBO market will be awaiting an improvement in credit conditions, mid-market activity will continue to unde rpin this market.”
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BACKGROUND — WHAT IS VENTURE CAPITAL AND PRIVATE EQUITY?
Forms of Venture Capital and Private Equity can be categorised according to the stage in the life cycle of a venture, and these are outlined below:
The Venture is at the idea stage or may be in the process of being organised and needs finance for research and development. This is usually funded by the entrepreneur's own resources.
The company is in the process of being set up or may have been in business for a short time. Such firms have not yet sold their product commercially and have no track record. Companies seeking investment have completed the product development stage and require funds to initiate commercial manufacturing and sales.
The company is now established and requires capital for further growth and expansion. The company may or may not have made a profit at this stage. This is a period of rapid growth and the company will usually require several rounds of capital injection as it achieves the milestones set in the business plan.
Management buy-out (MBO)
These are funds provided to enable the current management team and investors to acquire an existing product or business from a public or private company. This area is usually when Private Equity investment is applicable.
Management buy-in (MBI)
These are funds provided to enable a manager or group of managers from outside the company to buy in to the company. As with a MBO, Private Equity investment is usually applied. On the whole, early stage investments require less capital than an expansion or MBO stage. Venture Capitalists spend the same amount of time and effort assessing and assisting an early stage company as they do a later stage company. In fact, the earlier stage companies usually require greater assistance than later stage companies. Therefore, many Venture Capital firms prefer to invest in later stage deals that fit their investment criteria.
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About the New Zealand Private Equity & Venture Capital Association
The NZVCA is a not-for-profit industry body committed to developing the Venture Capital and Private Equity industry in New Zealand. Its core objectives include the promotion of the industry and the asset class on both a domestic and international basis and working to create a world-class Venture Capital and Private Equity environment. Members include Venture Capital and Private Equity investors, financial organisations, professional advisors, academic organisations and government and quasi-government agencies.