First ‘Snap Shot’ Of New Zealand’s Venture Capital

Monitor Provides First ‘Snap Shot’ Of New Zealand’s Venture Capital & Private Equity Industry

A joint venture between Ernst & Young and the New Zealand Venture Capital Association has produced the first New Zealand-based ‘snap shot’ of this important area of endeavour—The New Zealand Venture Capital Monitor.

The survey, says Ernst & Young Director Jon Hooper is important given New Zealand’s desire to become a more active participant in the world economy.

The survey shows the industry is significant with committed capital of NZ$ 973 million with an additional NZ$ 461 million available. During the initial survey period of 2002 over 39 major deals were concluded. Up to the end of the first quarter of this year a further 9 deals, with a value of NZ$23 million have been concluded.

This information, and additional, findings show the relevance and importance of the industry says Jon Hooper.

“Venture capital and private equity are key ingredients in helping to improve a country’s global competitiveness and economic strength. In the context of helping convert intellectual capital—namely ideas—into viable business endeavours venture capital and private equity are usually the ‘life force’ that creates these opportunities.

”Equally, the industry creates ways by which we can keep talented and smart Kiwis at home.”

Jon Hooper points to recently concluded international research to support his contention.

“A recent study by the British Venture Capital Association (The Economic Impact of Private Equity in the UK) reinforces this perspective. Over the last five years, private equity backed companies have had a considerable impact in these areas, achieving both sales and employee growth substantially in excess of national performance.

“Our aim is to gather similar information about the New Zealand scene but first of all we needed to get a perspective on some basic measures regarding the industry in this country.
The New Zealand Monitor—for 2002 and the first quarter of 2003—is the first step in beginning to monitor, and measure, the impact venture capital and private equity play in this country’s economy, he said.

“Our aim for this and future surveys is to achieve four objectives. First we want to create accurate information on the size and structure of the venture capital and private equity industry in New Zealand.

“This will, in turn, help us facilitate analysis of industry trends and portfolio returns over time. We will then be in a better position to quantify the impact of the industry on the New Zealand economy.

“Finally, this survey and the accompanying discussion and analysis will assist in generally in developing the venture capital and private equity industry in New Zealand.”

The survey was sent to 35 venture capital and private equity firms. Data was collected from 18 of these representing, we believe, a significant proportion of both the investment funds and activity in the industry.

Executive Director of the New Zealand Venture Capital Association, Christopher Twiss, believes the Survey marks an important milestone in both the industry and in the activities of his organisation.

“Our commitment and mandate is to help develop the venture capital and private equity industry in New Zealand. Having timely, accurate and detailed information from a comprehensive survey such as this can only help us in our undertakings,” he said.

IMPORTANT FINDINGS FROM THE INAUGURAL SURVEY
- Significant Pool of Capital—committed capital for the industry as at 31 December 2002 was approximately NZ$ 973 million, and of that NZ $461 million was available for investment;
- Active Deal Making—39 deals were reported for the year with an investment value of approximately NZ$ 87 million—an average of NZ$2.2 million per deal;
- Certain Sectors Preferred—the most active sectors in terms of number of investments were IT/software (12) and communications (6) with the industrial manufacturing sector accounting for the highest value of capital invested during the year;
- Up and Going—later stage investments accounted for 63% of investment made, while earlier stage investments accounted for a further 20%
- Promising start—so far this year (first quarter) 9 deals and a total invested of NZ$23 million have been reported.

NOTE: The full survey can be downloaded from Ernst & Young’s website at www.ey.com/nz

BACKGROUND—WHAT IS VENTURE CAPITAL AND PRIVATE EQUITY?

Forms of venture capital and private equity can be categorised according to the stage in the life cycle of a venture, and these are outlined below:
Seed stage

The Venture is at the idea stage or may be in the process of being organised and needs finance for research and development. This is usually funded by the entrepreneur's own resources.

Start-up/early stage

The company is in the process of being set up or may have been in business for a short time. Such firms have not yet sold their product commercially and have no track record. Companies seeking investment have completed the product development stage and require funds to initiate commercial manufacturing and sales.

Expansion/development stage

The company is now established and requires capital for further growth and expansion. The company may or may not have made a profit at this stage. This is a period of rapid growth and the company will usually require several rounds of capital injection as it achieves the milestones set in the business plan.
Management buy-out (MBO)

These are funds provided to enable the current management team and investors to acquire an existing product or business from a public or private company. This area is usually when private equity investment is applicable.
Management buy-in (MBI)

These are funds provided to enable a manager or group of managers from outside the company to buy in to the company. As with a MBO, private equity investment is usually applied.

On the whole, early stage investments require less capital than an expansion or MBO stage. Venture capitalists spend the same amount of time and effort assessing and assisting an early stage company as they do a later stage company. In fact, the earlier stage companies usually require greater assistance than later stage companies. Therefore, many venture capital firms prefer to invest in later stage deals that fit their investment criteria.

About Ernst & Young

Ernst & Young, a global leader in professional services, is committed to restoring the public's trust in professional services firms and in the quality of financial reporting. Its 106,000 people in more than 140 countries around the globe pursue the highest levels of integrity, quality, and professionalism to provide clients with solutions based on financial, transactional, and risk-management knowledge in Ernst &Young's core services of audit, tax, and corporate finance.

Ernst & Young practices also provide legal services in those parts of the world where permitted. Further information about Ernst & Young and its approach to a variety of business issues can be found at www.ey.com/perspectives.

Ernst & Young refers to all the members of the global Ernst & Young organization.

About the New Zealand Venture Capital Association

The NZVCA is a not-for-profit industry body committed to developing the venture capital and private equity industry in New Zealand. Its core objectives include the promotion of the industry and the asset class on both a domestic and international basis and working to create a world-class venture capital and private equity environment.

Members include venture capital and private equity investors, financial organisations, professional advisors, academic organisations and government and quasi-government agencies.

ENDS

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