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Growing up

By Rebecca Macfie

Thursday 9th June 2005

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A brand new $150 million biotech-focused venture capital fund with heavy-hitting international backing; an 80% lift in venture capital investments in the 2004 year; a near-doubling of the amount of new venture capital raised. Has the venture capital industry in New Zealand finally come of age?

The announcement in mid-March of the BioPacificVentures fund, which has already raised $100 million and will seek a further $50 million, created justifiable excitement in the sector. Venture Capital Association executive director Chris Twiss called it an "extremely exciting and important development", both for the VC industry and the life sciences sector. In particular, the involvement of leading international life sciences VC fund, inventages - whose major investor is food giant Nestlé- is seen as a powerful endorsement of the pharmaceutical, agricultural and food-related investment opportunities in this part of the world.

At the same time, latest figures from the annual Venture Capital Monitor, produced by Ernst & Young, show a big lift in the amount of venture capital activity in the 2004 year. New capital of $156 million was raised, up from $81.6 million in 2003. Investment for the year totalled $158 million, compared with $87.7 million the year before. And, particularly encouraging, the number of investments in early-stage companies (which are either still researching their product or just beginning to commercialise it) has doubled from $7.2 million in 2003 (seven deals) to $15.5 million in 2004 (16 deals).

Adding to this flurry of good news for the sector, another substantial-sized VC fund, targeting local IT, life sciences and niche manufacturing, is expected to be announced in the next few weeks.

Suddenly it seems we've gone from a venture capital famine just a few years ago to a veritable feast.

Well, not quite. Don't break out the bubbly just yet. Even Franceska Banga, chief executive of the government's Venture Investment Fund - charged with stimulating growth in the VC industry through the formation of 'seed' funds in partnership with private fund managers - is quick to point out we're still off the pace internationally. The most recently published figures show private equity investment (an umbrella term that covers investment in non-listed companies, including venture capital for early-stage companies) was about 0.07% of GDP in 2003, compared with 0.9% in the US, 0.6% in the UK and 0.2% in Australia.

And, given that VC is a key vehicle by which novel science and technology is commercialised - thereby stimulating economic growth and exports - it matters that these figures are improved.

Mark Edwards, director of VC fund manager Number 8 Ventures (which runs one of the VIF seed funds) believes the industry continues to be held back by a major bottleneck: the reluctance of institutional investors to back it. While he acknowledges the BioPacificVentures fund is a positive development for New Zealand, "in order to say there is any degree of maturity in New Zealand we have to get local investors and pension funds in play ... Only one institution, the ACC, has made any kind of commitment to the sector."

Edwards says mainstream institutions are deterred from entering the VC market here because the advisers they rely on - primarily Mercers and Frank Russell - don't cover the sector in New Zealand. As a result, he says, there's still a marked shortage of early-stage capital, and opportunities to back promising young companies are therefore going begging.

Banga agrees the reluctance of the institutions remains a problem for the VC sector. "Many will be wary until they see a track record from existing funds. But while that's logical, in terms of our role in developing a VC industry, it's frustrating."

However there are some signs the bottleneck may start to ease. The March announcement that the New Zealand Superannuation Fund aims to allocate up to $100 million to New Zealand-based private equity over the next three to five years is a potential fillip to the VC sector. Chief executive Paul Costello can't say how much of that allocation will wind up in early-stage VC, but doesn't rule out investments in that segment of the market.

And at sharebroker Forsyth Barr interest in early-stage VC investments is rising. Head of funds management Stephen Loomans says because the sector offers diversification and potentially attractive returns, the firm is now doing its own research on the VC fund managers in the market - including those focusing on early-stage investments, such as Number 8 and iGlobe Treasury - and is suggesting to institutional clients they invest in the sector. "I think you will see the appetite for it growing because investors feel they should be there."

That said, Loomans says the fact fees have to be paid upfront but the returns from the investment don't flow until much further down the track means it suits investors with long time horizons, such as charitable organisations and community trusts, rather than pension funds whose investors are not locked in.

In the case of the newly formed Bio­PacificVentures, the first $100 million in funding commitments has come primarily from corporate, government and private investors. The ACC has committed $6 million (as part of an overall allocation of $34.5 million to early-stage VC investment) but pension funds and other traditional institutions are notable by their absence. Major backers are Nestlé (the largest investor in the fund, although it won't disclose the scale of its commitment), Wrightson ($14 million), and crown research institute AgResearch (up to $5 million). In addition there are several undisclosed high net worth individuals, one community trust, and the government's VIF fund, which has committed up to $15 million.

BioPacificVentures executive director Howard Moore says the VIF fund has been helpful in pushing the early-stage VC sector along. Ernst & Young director Jon Hooper, who oversees the Venture Capital Monitor, agrees, saying the increased level of investment in early-stage companies last year "appears to vindicate the government's VIF fund, which was created to correct a marked failure at the seed and early stage."

Set up in 2001 with $100 million to kick-start investment in early-stage New Zealand science and technology companies, the VIF invests on a 1:2 ratio with private investors, via selected fund managers. Including the new BioPacificVentures fund, it now has five funds in operation, through which 17 investments have been made in early-stage companies. It has a further $35 million still to be allocated.

But, as Mark Edwards argues, the VIF can't be judged a success until it has drawn institutional investors in. "A major part of the VIF charter is to develop the industry, and the bit they haven't developed is the institutions."

Bill Kermode, executive chairman of the BioPacificVenturesFund and director of VC and private equity investor Direct Capital, believes institutional investors will eventually back the sector once good returns have been demonstrated.

But he agrees early-stage VC in New Zealand still has a way to go before it reaches maturity. "This fund [BioPacificVentures] is a significant step in the right direction and it indicates a growing maturity, but the early-stage sector in New Zealand is still, if you want to put it in human terms, in its early teens."

The BioPacificVentures story
The impetus for BioPacificVentures came from AgResearch's commercialisation arm, Celentis. Frustrated at the reluctance of the local venture capital market to back projects spun out of the organisation's agri-biotech research, it decided to find a fund manager willing to break the mould. Simultaneously, Direct Capital's Bill Kermode was increasingly conscious his organisation wasn't exposed to the sector, despite New Zealand's core strength in the field of agricultural science.

When the government's Venture Investment Fund called in 2003 for expressions of interest in a dedicated biotech fund, the two organisations teamed up with a proposal and were selected to manage the fund.

Meanwhile inventages, which already has $900 million under management worldwide via three other life sciences funds, had been introduced to New Zealand by NZ Trade & Enterprise. It was attracted by the opportunities both here and in Australia to invest in first class science in an environment offering unique biodiversity and biosecurity. In mid-2004 inventages decided to throw its weight behind the AgResearch/Direct Capital
fund to form BioPacificVentures.

The fund will target investments across the life sciences sector, including nutrition, pharmaceuticals, agri-biotech, plant health, and food. Executive director Howard Moore says the team is already reviewing potential investment proposals, and will look to make around 20 deals over the fund's ten- to 12-year life. It is mandated to make investments in Australasia, although the VIF contribution can be directed only at New Zealand investments. Moore says likely investee companies will have market-ready products and offer the fund the prospect of a 'liquidity event' such as an IPO or trade sale after three to five years.

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