$212 million invested in Kiwi businesses in 2005

24 March 2006

$212 million invested in Kiwi businesses in 2005: NZ Venture Capital & Private Equity Industry comes of age

Results from the 2005 New Zealand Venture Capital Monitor, a joint initiative involving Ernst & Young and the NZVCA, show an increasing number of funds looking to partner New Zealand businesses, and growing awareness by companies of venture capital and private equity as a truly viable and value-add alternative to debt and public listings.

The full year Venture Capital Monitor results show $496 million of new capital raised last year, bringing total committed capital to $2.022 billion, a 28% increase from 2004. Of this, $764 million (38%) is notionally available for investment in 2006.

Ernst & Young Director and New Zealand Venture Capital Association (NZVCA) council member Jon Hooper says the first half of 2005 was characterized by strong capital raising and modest levels of investment. He says the industry’s predictions for a strong second half were well and truly fulfilled, for a finish he describes as “sensational.”

“There was an unprecedented level of investment in the second half of 2005, providing a welcome boost to many private businesses in the New Zealand market and highlighting a growing acceptance by business owners of the value which Private Equity and Venture Capital can add,” says Mr Hooper.

A total of 72 deals were reported for the year with an investment value of $212 million, up 34% on 2004. Of this total, 87% ($185m) was invested during the second half of the year, reflecting an acceleration in investment which is expected to continue during 2006. Total investment during the period was split with 70% being invested by Private Equity funds and 30% being invested by Venture Capital funds.

NZVCA Chairman Mark Dossor says the industry’s maturity is evidenced by the consistent growth of industry participants in the local market, fundraising and deployment of these funds.

“This is providing owners of local businesses a credible alternative to funding their development plans and exit aspirations, other than the local or international public markets. The benefits that accrue to the economy and owners from private investment are numerous. We’ll see the fruits of this investment for many years to come,” says Mr Dossor.

Auckland has held steady once again as the main location for investment, accounting for two-thirds of both the value and deals completed. There was a considerable drop in the number and value of investments made overseas.

For the first time ever, fund managers were asked identify their committed capital balances as Private Equity or Venture Capital. The results show Private Equity makes up 60% of committed capital as at 31 December 2005, Venture Capital funds make up 13%, with the remaining 27% of funds stating they have elements of both Venture Capital and Private Equity.

71% of the investment activity in 2005 was considered Venture Capital, while Private Equity transactions made up 70% or $150 million of the investment value.

A total of six divestments were reported with a divestment value of $185 million, a figure which is largely skewed by the significant divestment of Guardian Healthcare. The average holding period was 2.3 years with trade sale being the most favoured exit mechanism.

Mr Hooper expects exits will increase as the Venture Capital and Private Equity industry continues to mature.

Summary of important findings from the 2005 full year survey are:

- $212 million invested across 72 deals – a 34% increase in dollars invested compared with 2004, $185 million occurring in the second half of 2005;

- $148 million, or 70% of dollars invested were by Private Equity funds, while $64 million, or 30% was invested by Venture Capitalists;

- Leading sectors measured by dollars invested were Health/Biosciences (30%), Technology (13%) and Business/Financial Services (11%). Health and Biosciences were assisted by the largest individual deal for 2005 being Ironbridge’s purchase of Qualcare Holdings Limited;

- Average and median deal sizes also increased in 2005 at $2.9 million and $1.5 million respectively. This increase is mainly attributable to four large deals completed in the second half of 2005;

- Six divestments totaling $185 million, a significant portion of which is attributable to Pacific Equity Partners divestment of Guardian Healthcare in July 2005;

- Committed capital reaches $2 billion for the first time, this represents a 28% increase from 2004; and

- $764 million notionally available for investment – with 22.75% or $174 million for Venture Capital deals and 77.25% or $590 million for Private Equity transactions.

The full New Zealand Venture Capital Monitor 2005 report is available for downloading from Ernst & Young’s website - 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 107,000 people in 140 countries pursue the highest levels of integrity, quality, and professionalism in providing a range of sophisticated services centered on our core competencies of auditing, accounting, tax, and transactions.

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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