Size is an advantage for Kiwi venture capital industry

New Zealand's mid-market and venture capital investment scenes are showing robust health despite the global private equity industry suffering its worse hangover in its 50-year history.

While the rough ride continues for buyout barons in Europe and the United States, particularly at the two ends of the investment process - capital raising and exits - the first half of 2009 has proved more fruitful for domestic players.

Although the sector is undeniably quieter than its heyday a few years ago domestic private capital markets tracked near to long-term trends, with overall investment topping $82 million in the first six months of 2009.

The mid-market private equity sector once again led the way with both investments and divestments.

However, there was no return of the top-end leveraged buyout (LBO) private equity deals, which have been absent since early 2007.

Delivering a frank assessment of the global investment climate at the annual New Zealand Private Equity & Venture Capital conference in Auckland, chair Franceska Banga said the small size and limited nature of the domestic industry could represent a blessing in disguise.

"As the rest of the world readjusts towards smaller funds and unleveraged deals, the New Zealand market opportunities look very attractive," she told delegates.

Hungry for investment and capital-rich, Asia represented a great chance in the current economic environment for Kiwi companies eager to grow through private backing.

"With our proximity to Asia, with the development of free trade agreements between New Zealand and various Asian economies, and with the Government's stated desire to really focus on those markets, it is timely to reflect how attractive the New Zealand mid-market opportunities could be to Asian private equity," Banga said.

Parts of the domestic industry experienced significant investment activity in the past year. Angel investors invested a record $30m into young New Zealand companies over the first six months of 2009, taking the amount invested over the past 3 1/2 years to over $100m. Venture capital fund managers have also been active, with portfolio companies successfully raising follow-on capital both domestically and internationally.

Another industry bright spot, says Banga, was the $15 billion New Zealand Superannuation Fund's decision to invest more cash domestically.

The fund is also moving into venture capital and is searching for money managers focused on investing in high-growth companies with revenues from $10m to $50m.

Knowledge of a company's target markets, potential size and worth were key, especially in the US where "they won't even look at you if it's not got a 'B' [billions]," said Brian Russell, chief executive of technology start-up Zephyr Technology.

Given the US psyche of "we know best", New Zealand accountants and lawyers did not make the grade, while businesses had to shed their Kiwi idiosyncrasies to get their foot through the door. "You have to leave everything Kiwi behind you. If you don't, they're simply not going to do business with you," he said.

- © Fairfax NZ News