NZ Venture Capital, Private Equity at New Heights

New Zealand’s Venture Capital and Private Equity Industry Reaches New Heights

Results from the 2004 New Zealand Venture Capital Monitor show the industry has hit new heights with $158 million invested across 59 deals; an 80% increase in dollars invested from 2003.

Ernst & Young Director and New Zealand Venture Capital Association (NZVCA) council member Jon Hooper says the results indicate an increased quality of deal flow combined with increased investor confidence.

“The 2004 results herald a coming of age for the industry and highlight that New Zealand’s venture capital and private equity industry is an asset class which should be considered as part of any diversified investment portfolio,” says Mr Hooper.

The New Zealand Venture Capital Monitor is a joint initiative involving Ernst & Young and the NZVCA, surveying New Zealand’s leading venture capital and private equity firms to chart the industry’s growth and development.

The 2004 results show significant growth in both committed capital and new capital raised. Committed capital grew to approximately $1.56 billion as at 31 December 2004, up 39% on 2003; meanwhile $156 million of new capital was raised, around 1.9 times the amount raised in 2003.

Investment into ‘early-stage’ opportunities for the year was more than double the levels experienced in 2003. In addition, companies in an expansion mode attracted the greatest interest accounting for 61% of the total dollars invested and 53% of the deal activity.

NZVCA Executive Director Christopher Twiss says the strong growth in early-stage investment bodes well for Kiwi entrepreneurs.

“Accessing capital for early-stage investment remains one of the key challenges for New Zealand entrepreneurs and the NZVCA is committed to developing a business and regulatory environment where this type of investment can thrive. It is great therefore to see the growing confidence in the venture capital industry. Against this backdrop, we are pleased to report that seed investment for the year represented 10% by value and 27% of the deal activity – a significant uplift from 2003,” says Mr Twiss.

Other important findings from the NZ Venture Capital Monitor 2004:

· Average and median deal sizes during 2004 were $2.7 million and $1.2 million respectively, both significantly up on 2003 levels.
· Leading sectors by amount invested were Communications (27%) and Construction/Housing (16%), both of which included this year’s largest individual deals. In addition, five sectors received investment in excess of $10 million demonstrating there are good investment opportunities across all industry sectors.
· The most active sectors continued to be IT/Software (10 deals), Technology (9 deals) and Communications (6 deals).
· Five divestments were reported for the year with reported Internal Rate of Returns ranging between 58% and 81% and the average holding period being just over two years. The four divestments completed in the second half of the year together with a buoyant Initial Public Offering market in 2004 suggests the liquidity window has reopened and there is light at the end of tunnel for both venture capitalists and private equity funds seeking exits and entrepreneurs implementing a succession or exit strategy.

The full New Zealand Venture Capital Monitor 2004 report will be available for downloading from Ernst & Young’s website and the NZVCA website from Wednesday, 4 May 2005 (at www.ey.com/nz and www.nzvca.co.nz).

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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 employs 106,000 people in more than 140 countries. Ernst & Young staff 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.

Further information about Ernst & Young and its approach to a variety of business issues can be found at www.ey.com/nz.

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

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.

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