For all the rigour behind the figures, private equity is an emotive and divisive issue. Detractors liken it to a plague of locusts and capitalism on steroids. It's a pump and dump mechanism, which extracts value before shovelling the shrivelled remains onto our stockmarket for less sophisticated investors.
Proponents argue the opposite. Private equity acts as a cleansing system. It's a sanctuary for battered companies. A healing ground where broken corporate wings can be mended before the bird is set free. A chance to evict the grumpy old men from our boardrooms and replace them with far-sighted, keener-witted colleagues.
Is the recent rush of private equity buy-ups insidious Australianisation of our national wealth, as some would have us believe? Or simply New Zealand playing catch-up with international trends?
Certainly, we're behind the eight ball compared with Australia, the United Kingdom and the United States. As a percentage of total annual mergers and acquisitions, a typical measure of private equity activity, New Zealand's guestimated five to 10 percent is peanuts compared with the 50 percent notched up in the United Kingdom.
That private equity issues are now the talk of the town reflects the rapid rate of acquisition here in recent years. The latest annual New Zealand Venture Capital and Private Equity Monitor shows private equity investment rocketed up 250 percent in 2006 to $1.13 billion across 35 deals.
That would have included high profile transactions such as the sales of snack foods business Griffins, Blue Star Print Group and equipment rental company Hirepool.
Since then, Pacific Equity Partners and CCMP Capital Asia have soaked up Independent Liquor. Next Capital has bought a controlling stake in Nutra-Life Health & Fitness. And, most spectacularly, Telecom's Yellow Pages directories business has been bought by private equity partners CCMP Capital and the Teachers' Private Capital pension fund from Canada. (See box story "Let's go shopping".)
It has been all too easy, as New Zealand Venture Capital Association chairman Hamish Bell points out, for our media to focus on the top end of the market: "big dollars, big headlines, lots of interest". They are, he says, missing the bigger story which is unfolding in the corporate mid-market "where deals are generally smaller, the pool of prospects is large and where local investors dominate ... It's in the mid-market where the lion's share of New Zealand's future private equity transactions will occur."
The vast majority of New Zealand's mid-market companies are in private ownership. As their baby boomer owners scout round for exit strategies, private equity options will shift into the mainstream just as they have in Singapore, Australia and the United Kingdom. "This," predicts Bell, "will bring many opportunities for those businesses and their managers and investors alike." In other words, it ain't so bad and we'd better get used to it.
Back at the big end of the market, businesses are cycling through faster as well. According to Direct Capital managing director Ross George, studies show that a multinational subsidiary in Britain used to be sold every 11 years: that's now closer to every seven years.
Here on the other side of the planet, private equity transactions have either already touched, or are about to touch, the careers of most senior managers in New Zealand, he asserts. "Even five to seven years ago, the regional managers of multinational companies would think, 'we can sell that [part of the business] to that trade buyer. They now think 'we can sell that to the management group'."
NZX chief executive Mark Weldon is also keen to tease out the differences between private equity plays, on the grounds that different types of structures carry varying implications for the NZX and our nation's wider capital market.
He divvies up private equity plays into three camps. New Zealand-focused players such as Direct Capital, No 8 Ventures, Morrison & Co or the Pohutukawa Fund, he says, can help local companies tap into outside capital and expertise. These Kiwi companies are fundamentally sound but in need of a bit of spit and polish. "Maybe they don't really have a good long-run strategy or a growth story on the market ...
New Zealand-focused private equity is unequivocally positive. It's positive for the companies, the economy and for the capital markets because some of those companies at some point will come out of private equity ownership and be listed and available for broad public ownership. It's very positive indeed."
That's the merry-go-round, wash-and-brush-up theory of private equity. A less digestible scenario for New Zealand is Weldon's second grouping which sees international private equity heavyweights picking over New Zealand's economic carcass for the choicest bones. That, he says, raises structural issues for both the NZX and the broader national economy. "Structurally, that's a lot like our banking sector where each year around $2.6 billion worth of profits basically gets shipped overseas. You would prefer that profit get reinvested here."
The prospect of these assets eventually reverting to Kiwi hands remains remote. Weldon reckons a more likely scenario is a global roll-up permanently super-gluing our relatively tiny assets into an international super-company.
His third category is a combo deal of the first two with, perhaps, a predominance of Australian funds. In this case, our assets may boomerang back to New Zealand but a wise person wouldn't hold their breath.
All of which raises, once again, the spectre of the permanent disappearance of local assets. In that fear we're not, of course, alone. As private equity ownership bites into their economic pie, Australians, too, lie awake at night fretting over how much is still theirs. More specifically, earlier this year it had Australian treasurer Peter Costello publicly worrying over the high levels of debt stacked up in some of Australia's private equity deals and the potentially dire consequences in an economic downturn.
Our finance minister Michael Cullen is on record waving aside such concerns over here citing our lower levels of leveraging. The conversation does, however, bring centre stage the relative merits of public versus private ownership and management.
Take, for starters, the issue of transparency. Unfettered by the constraints of six-monthly reporting and the continuous disclosure regime of the stock exchange, what motivates a privately owned company to bare its corporate soul to the wider community? Certainly, anecdotal evidence suggests that private equity players in this country do not feel any great compunction to talk with the media.
Asia-Pacific Risk Management director Roger Kerr says one of the drivers behind the exponential growth of private equity is the simple fact that it presents an easier model for doing business. "Businesses and management in general see being listed as too tough--with [rules around] compliance and boards of directors and the guidance they have to give on forecast profit. And then, if you get it wrong you get caned."
The jury is, of course, divided on the relative merits of six-monthly reporting. Opponents argue that it locks in short-termism and suffocates long-range thinking. Others, such as business commentator and UNITEC adjunct professor Rod Oram, reckon that's a cop out. It is perfectly possible, he argues, for a company to stay on the stock market through varying phases of its corporate life as long as it clearly articulates its thinking. The variable factor, he says, will be the type of shareholder and not the need to withdraw from the market to regroup.
"The most obvious example of all--although not in New Zealand--is Microsoft. Today it's a yield, not a capital, stock so people are no longer buying it for big spectacular growth which is what they were doing up until five or six years ago."
Many publicly listed New Zealand companies, it seems, maybe trying to play their cards too close to their chest. Add to that the relative lack of sophistication of the local investing public, an ingrained propensity for quick fixes and a slap-happy job by the media when it comes to keeping everyone informed.
"SkyCity," says Oram, "would be one of the few local examples of a company that has been articulate, has had to weather criticism from analysts [for doing that] and has actually delivered."
Others view the transparency issue through an altogether different lens, arguing that since private equity firms are packed to the gunnels with owner/managers, traditional problems associated with reporting are null and void.
Then there's the practical issue of a CEO's energy and resources, for which there are all sorts of rough calculations. "A typical figure that's been used for years in the UK," says Oram, "is that a CEO can spend 25 percent of their time on external relations--not customers but investors and presentations and being involved in their preparation and fronting. All stuff which is an overhead."
Logically, then, any CEO sweating the detail will want to be amply rewarded by the market for their time. Or look elsewhere for a less time-consuming alternative.
Take, next, a bunch of issues associated with succession: long an Achilles heel of corporate New Zealand and now achingly difficult to solve as the baby boomers rush for the exit door.
In the past, comments Direct Capital's Ross George, the steady flow of companies for sale had been matched by an equal number of trade buyers willing and able to pick them up. That's gone way out of kilter, he says, with companies for sale now "far exceeding" trade buyers. "Private equity is now stepping in to fill that gap."
On a very practical note, he points out that conflict is inevitably sewn into any sale process. "Selling to a trade buyer has the most conflict because the heart and soul of the business is disclosed to a competitor. Most business owners would rather have a much more minor conflict with their own managers. Selling internally is the easiest and least risky route."
Those managers who turn owners must make a mental shift: they're no longer paddling the canoe but steering it as well. No-one will bail them out if it tips up and anyone looks like drowning.
"Private equity companies," observes Roger Kerr, "have representation on the board and they drive companies pretty hard which is not a bad thing. Business has to be competitive."
In many cases, this rush of new blood to the boardroom may not be a bad thing. Brian Gaynor, an investment strategist and analyst at Milford Asset Management, knows only too well the need for refreshment at the top. "[For many company directors] the role is an important part of who they are and they don't want to be put out to pasture because that, for them, signals the end. For most of them their lives have been their work: their social life outside their work hasn't been great so they hang on in."
And that, he says, is exactly what private equity sees and wants to change. Sadly, perhaps, Gaynor has also seen first hand how time and tide have blunted the previously razor sharp mental edges of some of our nation's directors.
"It may not seem obvious if you meet them in the street or socially," he says, "but over three or four hours in a meeting you can tell that they're waning. They're not like they used to be."
Add to that the notion that in many countries overseas--but not here--there are rules around the perceived independence of a director. "After nine years in the boardroom of any one company, in most places in the world you are no longer considered an independent director," he says. "The rule is very good," he reckons, "because after all that time--especially if they have been with the same people all that time--the chances of you ever challenging each other become quite remote."
Whether the rise and rise of private equity will signal the ultimate death of public ownership is an emotive question. Most commentators prefer to talk in terms of the market having another healthy funding mechanism at its fingertips.
Healthy, that is, unless our economy wobbles off its current pedestal, in which case the lending banks would apply some pressure to protect their own interests. Even in that case, as Kerr points out, many savvy New Zealand companies--both public and private--have spread their base to enable them to weather such local wobbles.
Given the broad adoption of private equity options in other countries and private equity's waterlike ability to go with the flow, expect to see plenty more upside potential in New Zealand for years to come.
New Zealand managers, it seems, have a bigger pasture in which to play.
SEIZE THE PAY
Ross George, managing director of private equity fund Direct Capital sketches a six-point guide for senior managers on the brink of private equity changes.
1 If you work in a multinational company it's highly likely that at, some time or another, they will discuss options with a private equity group. So try to ensure that New Zealand managers get an equity share as well. If the Australasian business is being sold, for example, it's a logical time to stand up and ask for equity. Why would you watch your bosses in Sydney get equity positions while you and your management group in New Zealand don't?
2 Expect a private equity transaction to change your corporate landscape at some point in your career. Keep your eyes peeled. Chances are that your company, one of your business units, or a competitor will at some point be involved in a private equity transaction.
3 Understand that it's okay to talk with private equity players. The capital markets recognise that if there are strategic ownership changes such conversations will take place.
4 Seize the opportunity to ramp up your personal wealth. Don't let it slip by. The road to wealth is not through managing a company but owning it. Work hard to get involved in a possible private equity arrangement at your own company. The best opportunity to get an equity exposure to a business is not through buying a different one but through buying into the one you are already in.
5 If a private equity transaction is likely to occur at your business, and you are in a good company with good people, work out your personal finances to give you the best chance of maximising your investment. Some managers turn to family for additional money, sell other assets such as shares or raise bank debt for themselves. Bear in mind that if the company does well, you're talking capital, rather than revenue, assets so every dollar made is yours to keep and not swiped by the tax man at 40 percent.
6 When you work in a private company owned by a baby boomer be very open with the owner about wanting to buy into the business at some stage. You'll be helping them set up their succession and exit strategy. Get yourself involved in that process.
Tony Batterton is investment director at local private equity company Direct Capital. For the past two years he's also been a non executive director of Palmerston North-based company New Zealand Pharmaceuticals in which Direct Capital holds a 51 percent stake.
That has meant wrapping his mind round the complex world of pure biochemicals and natural extracts for the international health food, cosmetic, biotechnology and aquaculture industries.
For managers at New Zealand Pharmaceuticals (NZP) it has meant getting used to the idea that a private equity player is intimately involved in their business. A group of managers now control just over 40 percent of the company with the rest in the hands of a Japanese strategic partner Shin Nippon Yakugo (SNY).
This ownership structure has been in place since 2005. That's all about to change as NZP nears the third stage in a carefully scripted transition to take the company public. Batterton says NZP is eyeing up a listing on the NZX main board late this year or early in 2008.
Most of the building blocks are now in place, which means that NZP is in dress rehearsals before it hits centre stage, as much as possible acting out its new role as a public company.
Direct Capital has still to declare what part it wants to play in the post-float company. Batterton says options range from no change at all to selling a "meaningful portion" of its stake in NZP.
Direct Capital, says Batterton, would be "most unlikely" to sell out completely. "We've still to make a decision but we haven't fully sold out companies in the past. That's something that differentiates us from most overseas private equity companies."
In Batterton's view, as a private equity player his company's role is to support companies through change or growth or a combination of the two. That, he says, is not about to alter.
Changes had been afoot at NZP even before Direct Capital took an interest. A steady programme to nurture the next generation of management talent has the seen appointment of a new general manager, Andrew Lewis. He's since been joined by new finance, logistics and HR managers.
Next, investment dollars have been pumped into growth parts of the business including the construction of a new glycotherapeutics manufacturing plant--the building blocks for drugs designed to help fight cancer, heart disease and other nasties.
Stage three will be the float, say Batterton. "That's about providing an element of liquidity and access to further capital. It's all about orderly succession planning.
"It's a well trodden path."
LET'S GO SHOPPING RECENT BUYOUTS FOR SALE BOUGHT BY % BOUGHT WHEN Telecom's Yellow CCMP Capital & the 100 April 2007 Pages Group Teachers' Private directories business Capital pension fund NZ Nutra-Life Next Capital 70.7 February 2007 Health & Fitness Independent Liquor Pacific Equity 100 January 2007 Partners & CCMP Capital Asia Blue Star Print CHAMP Private Equity 84 December 2006 Group Enviro Waste Ironbridge Capital N/A December 2006 Healtheries Next Capital 88.2 December 2006 Metropolitan Glass & Catalyst Investment N/A August 2006 Glazing Group Managers Freshmax Group Wolseley Private 50 August 2006 Equity Hirepool Next Capital 75 July 2006 Kathmandu Group Goldman Sachs JBWere 51 April 2006 (Hauraki No 2 Fund) & Quadrant Private Equity Griffin's Foods Pacific Equity 100 March 2006 Partners (PEP)…