Picking on the private sector
I have been mean to the private equity sector, apparently.
They did not take kindly to being called "ruthless" and "unsentimental" in this column last week, where I reflected on the disastrous ownership of New Zealand broadcaster MediaWorks by Australian private equity fund Ironbridge.
While the New Zealand Private Equity and Venture Capital Association (NZVCA) concedes the well-known roll call of highly leveraged Aussie private equity investments in Kiwi businesses gone sour - read Yellow Pages, Whitcoulls, Independent Liquor - it argues that the New Zealand branch of the sector has operated largely without significant incident, backing a wide range of stable, successful mid-market companies.
Before I get excommunicated by the Australian half of my extended family, let me clarify that this is not a racist distinction they make - it is only the Australian funds which have the scale to invest in deals the size of MediaWorks or Yellow Pages, meaning their falls from grace are also that much more spectacular.
I take NZVCA's point that the sector can boast plenty of success stories, but this is like informing the world that water is wet. It's the nature of the beast - private equity funds take out a portfolio of investments, knowing that some will ripen while others go bad. Their investors win in the end.
It's also a structure which allows for inattention by the Australian funds to their Kiwi investments - they put their money into a business as part of a wider Australasian play, not out of any particular interest in this country, and the details of managing the local business get overlooked.
Whether having a private equity owner is a good or bad thing is a circular argument, really. The funds are what they are - they invest in a portfolio of companies for a finite time, with the aim of creating the best possible return for their investors. Meanwhile medium-sized companies are crying out for investors.
Recently publicly listed Kiwi tech company SLI Systems has had a good experience of private equity ownership, its CEO Shaun Ryan says. Pioneer Capital has backed the firm since 2007, and provided invaluable advice and investment community introductions as the young firm worked its way up to a share market debut.
There is a wider issue here, and it has two sides. One is access to capital for growing businesses, and the other is access to investment in the considerable New Zealand privately-held mid-market sector.
NZVCA says raising money is not the problem for its member funds. Rather, finding investment-ready companies to put it into is the challenge. There is a lack of firms which are at a mature enough stage in their lifecycle to attract the attention of private equity investors.
Mid-market firms have also proved shy of the stock market, because of the costs associated with listing and the high transparency demands once they become a public entity.
And the KiwiSaver industry has so far steered pretty much clear of the private markets, because of the illiquidity of the funds and the high fees managers in this sector charge.
These structural blockages make it difficult for New Zealand Mum and Dad investors to bolster their retirement nest egg with exposure to the potentially lucrative private equity sector, which produces on average a 10 per cent better return annually than the public markets, NZVCA says. It also means badly needed growth capital isn't flowing into mid-level Kiwi firms.
A freer flow of capital in this sector of Kiwi business is the salient issue here, not the private equity funds' crocodile tears over a few unflattering adjectives.
Maria Slade is morning editor at the Fairfax Business Bureau. firstname.lastname@example.org