New Zealand's strong economy has Australian-based private capital investors treating us like another state of Australia, an Auckland corporate finance expert says.
Simon Peacocke, a corporate finance partner with BDO the business advisory and accountancy firm, says Australian interests last year pumped more than $730m into mid- market New Zealand businesses, a figure nearly half the total 2017 private equity (PE) investment in this country of $1.6b.
"This is no bad thing," he says. "New Zealand is a very attractive place to invest because of our strong economy and Australian funds help fulfill a need faced by many local companies for liquidity or replacement capital.
"The idea that these people are just a ruthless bunch of Australians coming here and taking over is not right and is really a myth."
Peacocke says although New Zealand has a good level of PE finance available from local firms (this accounted for 17 deals in 2017 at an average value of $18m), it is probably not enough for the number of companies here needing additional liquidity or capital.
"In Sydney," he says, "PE investors see New Zealand like another state of Australia. In fact some areas of Australia, like the west and south, receive less PE investment from within Australia than we do here; they are attracted by the strong economy and highly capable management teams."
On top of the Australian investment, Kiwi businesses were bolstered by $573m from PE investors in the United States and Asia and $310m from those within New Zealand, according to a BDO analysis into 2017 investment activity.
It shows the average investment from Australia was $66m (across 11 deals) while overall 39 deals were completed in New Zealand last year at an average of $41m each.
Peacocke says mid-market PE investors mainly target established businesses (generally those worth $30m - $80m) across multiple industry sectors including food and beverage, manufacturing, technology and tourism.
Tourism in particular has attracted interest, with Australian private capital investors behind the planned $200m development of the Even Hotel in Auckland and a $60m Holiday Inn Express in Queenstown.
PE differs from venture capital investment (VC) - which focuses primarily on start-up or new businesses - and in most cases mid-market PE investors are looking to buy in at between 50 and 80 per cent.
"Owners of mid-market businesses who sell to PE investors are attracted to being able to retain an ownership stake as well as a partial exit, something not typically available from a trade sale," says Peacocke.
Although he says it is important not to "sugar-coat" PE investments as always having good outcomes or endless growth, Peacocke says equally it is not correct to brand the practice as bad for the country.
"In many cases existing management and shareholders remain in place and ultimately benefit from the deal; in other cases the companies invested in are already owned by foreigners, so in this sense they are not buying out New Zealand companies or families.
"They will invest, accelerate the rate of growth and look to transform the business," he says. "So yes, this is a good thing, they will generally help strengthen performance through a commitment to a fast growth strategy and is a good proposition for many companies.
"Most privately-owned businesses don't look at buying out competitors, but often this is on the agenda for a PE investor, and can add a lot of strategic value.
Peacocke says there are many flow-on benefits for the wider New Zealand economy: "All of these companies invest to accelerate their growth, they all have suppliers and employees here, so if the business grows, their suppliers and employees benefit."
His analysis comes as New Zealand's capital markets continue to struggle to maintain healthy levels of IPOs (initial public offerings) through the New Zealand stock exchange (NZX). These are usually offered by smaller, younger companies but last year was one of the worst ever, with just one IPO (for Oceania Healthcare) and eight delistings.
By contrast PE investment is growing and Peacocke expects this trend to continue in 2018. Last year's $1.6b was up from 2016 when the rate of PE investment stood at $1.1b according to figures produced by the New Zealand Private Equity and Venture Capital monitor.
PE funds worldwide have been described by some commentators as "full to the gunwhales with dry powder" (cash reserves) and New Zealand's booming economy is considered a prime target.
In Australia alone a combined $7.69b of PE and venture capital cash reserves is available to be used in high-growth business according to the Australian Private Equity and Venture Capital Association.
Chief executive Yasser El-Ansary says a total of $3.26b of PE funds were invested into Australian businesses in 2017, three-quarters of which came from domestic Australian sources.
He says Australian investors are also likely to up their participation in domestic PE, especially in growth and mid-market parts of the economy: "This helps to expand the ever increasing footprint of PE sponsored businesses in regional and metropolitan locations across the nation."
Peacocke says the amount of funds available from New Zealand mid-market PE firms may be smaller than in Australia, but there is still more than $600m available to invest.
For more information on BDO's corporate finance services, please go to www.bdo.nz/corporatefinance
