US investors eye Kiwi firms

18:27, Oct 14 2014
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Dr Hartley Atkinson, CEO of AFT Pharmaceuticals in Takapuna, Auckland.

When in November 2012 Peter Thiel ploughed the lion’s share of $49 million into Xero, the Paypal founder’s enthusiasm for the Kiwi online accounting software company was reported in the New York Times and a host of other major US and global media.

Money talks, and in the world of business, American money talks louder than most. 

Thiel’s punt on Xero has proved a bellwether, with several other top tier US venture capitalists subsequently investing in promising New Zealand firms.

In June Intel Capital, the world’s largest venture capital company, took a stake in Auckland-based sports fitness technology firm Performance Lab.

The previous month, Houston-based growth capital fund CRG (previously known as Capital Royalty) and New Zealand’s Milford Asset Management invested $US14 million in equity in AFT Pharmaceuticals, with the American firm providing additional capital of up to US$30m from a structure loan facility. 

Last year US-founded global private equity firm The Riverside Company bought a controlling interest in Waikato agritech company Simcro for an undisclosed sum. 

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These deals also follow the backing of Auckland-based clean tech company LanzaTech by Silicon Valley legend Vinod Khosla, co-founder of Sun Microsystems and founder of Khosla Ventures. 

Greg Shanahan, publisher of the annual TIN 100 report on the performance of New Zealand’s top technology exporters, says the sequence is strong enough to constitute a trend.

“It’s not a tidal wave, but it’s something that didn’t exist before. In 2000 we had an event where we invited some of the leading captains of industry from Silicon Valley to Auckland. I don’t think any of them went on to make a significant investment in New Zealand.”

Why are high profile American investors interested in New Zealand now when they weren’t during the dotcom boom? Shanahan offers a couple of reasons.

“The world has become a smaller place, and increasingly US venture capital companies have a global perspective. We’d always been told that typically VC firms like to invest in companies within an hour’s drive of the office. But the feedback I’m getting now is that there is too much money chasing too few quality deals in the US.

“The other reason, I think, is that New Zealand companies themselves are more focused on going global. Post [the] global financial crisis and with the New Zealand dollar being so high, that requires staking out some unique value offering. Globally that attracts customers, but also potential investors.”

Importantly, these US investors aren’t bottom feeders who can’t make the grade stateside, but highly successful and high profile venture capitalists.

“It certainly gives credibility to the country. People feel ‘if it’s good enough for Peter Thiel, then it must be good enough for me, too’,” Shanahan says.

It is true that many of these recent deals can be considered examples of enthusiasm for a particular investment opportunity, rather than some broader interest in the New Zealand scene. But not all. Simon Feiglin, a Melbourne-based partner with the Riverside Company, says his firm spent three years investigating opportunities in New Zealand before sitting down with Simcro.

“We like companies that are small, between $US5 million and $US15 million EBITDA, that are high growth and that think internationally. We knew they existed in New Zealand, we just had to find them.”

New Zealand is appealing, too, for the quality of the business environment, he adds. “We like the regulatory framework, the transparency and the culture is one of partnership and openness and candidness. That’s important. As an investor we need to know that we can rely on local management to develop a strategy and execute it. The other thing we really like is that as a small and remote country, New Zealand companies almost from conception think globally, and are structured to achieve that objective. Ninety per cent of Simcro’s sales, for example, are outside of New Zealand. We like that about Simcro, and about New Zealand in general.”

Deepak Natarajan, who directs Intel Capital’s investments in Southeast Asia and Australasia, expresses similar sentiments. Intel clearly sees Performance Lab as a potential world leader in its niche. But the wider environment also appeals. “New Zealand is gaining a reputation for tech innovation and as an investor-friendly environment,” he says. “Its regulatory environment, IP protection regime and quality research universities are a big plus for tech investors.” 

Most of the Kiwi firms who have caught the attention of stateside investors have an eye on cracking the US market. The American imprimatur is particularly helpful there, remarks Shanahan. “The [US venture capitalists] have access to deep pools of funding and an understanding of the market. They also have huge contact lists of powerful people, and can enable those Kiwi companies going to the US to be seen more as American companies.”  

Blossoming trans- Pacific relations

The deal struck between CRG,  which specialises in healthcare investment, and AFT Pharmaceuticals is a case-in-point of the reach the American venture capital industry has.

Dr Hartley Atkinson, AFT founder and managing director, says the investment will help the firm to accelerate its R&D programme and build up infrastructure and sales capacity in the Australian market, among other things. 

“It made eminent sense to go to the US for capital,” says Atkinson, who notes that AFT’s numerous global outlicensing deals are all driven out of the States. “We get very little recognition in the New Zealand market for the work we’ve done, whereas when we go to the US we get a very good hearing. People in the States really get pharmaceuticals; they understand where we are at, and our potential.”

The relationship has benefits beyond the financial, he adds. “CRG has an advisory board that features the past head of the US FDA. We’ve been able to talk to him about a particular project we’re working on, and get his advice. That’s something money just can’t buy. That said, we still want our local contacts, so it’s been important having Milford (Asset Management) involved.”

For CRG, the partnership is its first foray in Australasia. Managing director Michael Weinmann says Auckland-based AFT Pharmaceuticals appealed because of its strong brand, talented management team and international growth potential. 

“It’s an exceptional company, and the investment gives the fund and our investors exposure to a new geography while enhancing the diversity of our portfolio. It also enables us to build relationships with local healthcare industry leaders. Our focus as healthcare investors is primarily on the biopharmaceutical and medical device industry. In our experience this is a very tight-knit community in New Zealand and presents a number of compelling opportunities.”

Weinmann says geography and cultural differences haven’t been an issue. “And the legal and due diligence framework was quite representative of our typical approach.”

In fact, American investors generally seem to value the Kiwi attitude, according to Greg Shanahan. “New Zealanders have a reputation for being direct and honest, and I think that particularly in the Northern Hemisphere they find that refreshing – you’re able to build trust quickly.” On the other side of the table, Dr Atkinson says he enjoys the “action-orientated” spirit of the Americans. “We don’t subscribe to the laidback, No.8 wire mentality. They want to get things done, and we’re the same. It’s been a pretty good fit.”

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