Pohutukawa fund set to bloom

By Rob Hosking

Friday 17th September 2004

New Zealand's private equity market has a new player, with the launch of a joint venture from ABN Amro Craigs and Direct Capital's Pohutukawa Fund.

The private equity sector has become increasingly popular worldwide over the past few years driven in part by the poor performance of the equity markets after the "tech wreck" of 2000 but also because of perceived advantages in the risk profile and the knowledge available about the firms invested in.

In New Zealand, the market is particularly attractive because our two main sectors agriculture and tourism have very few firms listed on the NZX, ABN Amro Craigs analyst Frank Jaspar said.

And overall, only 60 of the top 200 companies are listed.

The other attraction for investors is that they are able to learn more about the company, he said. That level of information is unavailable to investors in a company on the stock market he said unless they want to run foul of insider trading laws.

"There's a level of due diligence required and that's beyond the publicly available information about a company. You've got to do a lot more digging yourself."

Part of that process is also an ongoing involvement with the management of the firm invested in. Again, investors are able to be better informed than they necessarily would be on the sharemarket.

Typically private equity investors have tended to be more well off individuals. The aim of the Pohutukawa Fund is to get more smaller investors involved: the minimum investment is $10,000 and that is drawn on in three tranches the first is 40%, plus a management fee.

So for a smaller investor, Direct Capital director Ross George said, "you write out a cheque for $4200 on day one." The remaining two tranches are called on over the ensuing three years. The fund will also run a "grey market" for those who want to get out before the time of the investment is up.

Direct Capital, which has invested in firms such as Nobilos and Ezibuy since it was set up in the early 1990s, said the typical firm which seeks private equity investment is going through a transition usually an expansion.

Ezibuy, for example, was moving into Australia at the time Direct Capital bought into it.

"We've invested in 13 firms that have expanded into Australia," Mr George said.

"Typically, a New Zealand firm going into the Australian market makes a hash of it the first time, and we did too."

However that first time round experience meant the firm has done rather better since, he said.

The typical period for investment is five to 10 years, with the profit made when the investor sells out.

Pohutukawa is structured so as to remain a "capital account" for tax reasons, George said.

""We've done a lot of work in this area ," he said.

"However its not possible to guarantee that the individual investor won't be caught. We have though done the best we can to minimise the chance of that."

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