Private equity proves attractive for raising $10m-plus

By Brad Revell

Friday 3rd May 2002

2001 private equity deals ($10m+)

Company name	Deal type	Estimated value

Robinson Industries	Expansion capital	$13m
Methven	MBO	$11m
Restaurant Brands	Expansion capital	$25m
Motion Industries	MBO	$19m
Argent Metal Technology	MBO	$54m
Blue Star Print Group	MBO	$165m
Tru-Test Corporation	Expansion capital	$10m
Waikato Milking Systems	MBO	$20m

2001 public market fund raisings ($10m+)

Company name	Deal type	Funds raised

Metlifecare	Rights issue	$21m
Affco Holdings	Rights issue	$11m
Briscoe Group	IPO	$40m

Stagnant returns from public equity markets and the corresponding need for alternative investment opportunities for large amounts of capital are setting the platform for strong growth in New Zealand's venture capital and private equity markets.

In a parallel development, many medium-sized businesses are finding themselves cut-off from traditional sources of finance, such as flotation or rights issues, by the public market's increasing focus on large, international businesses.

The coincidence of these two trends provides a favourable environment for an increase in the importance of private equity in the financing market.

There is emerging evidence that the private equity market is robust and growing with the total number of deals up from 37 in 2000 to 42 in 2001.

But estimating the market's value is notoriously difficult given the number of deals where value is not disclosed. However, it appears reasonable to assume that the total value of private equity transactions in New Zealand is rapidly approaching $500 million, bearing in mind the average levels of debt involved.

The strength of the market is all the more impressive when one considers the generally poor global economic climate in 2001 and the ongoing fallout from the dotcom bubble in 1999-2000.

The perception of private equity as a growth area is reinforced by a comparison with recent capital raisings on the public market.

The table shows a comparison of activity in the private equity and IPO/rights issue markets in New Zealand during 2001. It demonstrates that private equity is proving more attractive than the public market for companies seeking to raise this level of capital.

There seems little doubt that significant amounts of capital now exist to fund management buyouts, management buyins and development capital opportunities.

The larger issue appears to be a lack of awareness among management teams and companies of the opportunities this presents them with. A lack of awareness leads to a shortage of high-quality investment opportunities and this, rather than any shortage of capital, could be the biggest factor in limiting the private equity market's growth.

Interestingly the large amounts of capital available have not made the process of raising private equity any easier.

Indeed some institutions are increasingly cautious following misguided technology investments and their scrutiny of business plans and due diligence requirements for new investments have increased accordingly.

This makes it more important than ever that management teams proposing to undertake a buy-out approach the process in a structured and professional manner. This means seeking advice at an early stage and ensuring their proposition is sufficiently well developed before they start the fundraising process.

Brad Revell is an associate director in PricewaterhouseCoopers' investment banking division. Email: brad.j.revell@nz.pwcglobal.com

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