Henry Withers, General Manager Corporate for ASB Bank, describes two trends that are occurring in the marketplace:
● With the ageing population, baby boomers are thinking more actively about retirement and creating an equity event (MBOs). They are starting a conversation about how to transition out of the business, create value and leave a legacy for the management team and staff to buy into the business.
● Many executives have built successful corporate careers but have seen the wealth created for shareholders, not themselves. They are looking to move out of a large corporate and buy into a smaller business, with the backing of private capital (MBIs).
Over the past two years, more than $3 billion worth of private capital was raised in New Zealand and Australia, creating opportunities for MBO/MBI mid-market plays.
New Zealand's longest-established private equity manager, Pencarrow, announced last month it had closed its latest fund Pencarrow V at $250 million, well above the target of $200m.
Fundraising was completed in eight weeks and the fund was significantly oversubscribed by leading New Zealand institutions, iwi, foundations and community trusts, and private investors. Pencarrow said the fund's focus was on investing in MBOs, succession deals and expansion capital opportunities among privately-held companies in the mid-market segment.
Withers says that, in New Zealand, 25 per cent of owners with businesses more than $25m turnover were thinking of exiting within the next five years. For businesses between $2m and $25m turnover, 47 per cent of the owners were looking at selling within that period.
"You will see a huge structural ownership change in New Zealand, but many businesses aren't ready for the transition," says Withers.
"The owner (looking to exit) needs to create an alignment with management and staff to maximise the sale process. The owner has an emotional connection after building the business over 20 years or so. It can take three to five years to shape a conversation with management and develop a clear (exit) plan."
Typically, management would buy into the business with the backing of a private equity firm, which takes a 25 per cent shareholding. The existing owner retains 20 per cent while the transition is managed.
"The owner takes money out on day one but still retains an investment over a three to five- year horizon," says Withers.
"The private equity firm comes in and incentivises the management to create a more active and accelerated growth story."
Withers says a lack of succession planning is a concern for some companies.
"The founders started their businesses 20 to 30 years ago and have been very hands-on.
"As they have got older they may strike health issues or are looking for a lifestyle change, and they don't have the energy to take the opportunities to grow.
"The private equity firm can play an important role in growing the business and creating jobs by utilising the expertise and knowledge of the management team.
"Investors look for a strong track record and a clear strategy that is being executed.
"There are number of aggregation/consolidation opportunities for buying a similar business in a different region. If you can increase turnover from $5m to $20m over a five-year period, the valuation uplift creates value for management and bankers, and the business can be sold at larger earnings multiples," says Withers.
He says in the case of MBIs the level of due diligence is higher.
The investor needs to be sure there is a clear business plan and strategy in place and the work has been done. The owner needs to articulate the value proposition and the investor needs to be certain the new management has a good understanding of the industry and the relevant skill set.
"Private equity firms backing a management team to buy into a business is a viable proposition and anecdotally an easier way to do deals," says Withers.
Private equity investment grows
New Zealand Private Equity and Venture Capital Monitor 2017 (NZVCA and EY
Data) for year to December 31, 2017
Capital raised in New Zealand: 2017 Nil (2016: Just over $NZ1 billion)
Mid-market amount invested: $333.7m (2016 $100.8m)
Number of investments: 11 deals (17 in 2016)
Mid-market divestment total amount: $62.4m (2016 $134.9m)
Number of divestments: 2 deals (5 in 2016)
Active fund managers: Waterman Capital, Direct Capital, Pioneer Capital, Pencarrow Private Equity, Oriens Capital, Milford Asset Management.
Australia Private Equity for year to June 30, 2017 (Source Australian Private Equity and Venture Capital Association — 2017 Yearbook Activity report November 2017)
Capital raised: A$2.03 billion
New funds: 12 funds raised including Quadrant, Champ, Adamantem, and Odyssey Capital
Number of investments: 39 deals
Number of divestments: 26 deals
The lowdown
Withers' main tips for baby boomers looking to exit their business are:
• Get good independent advice
• Prepare a financial forecast and preliminary valuation
• Use an independent to start the conversation with management on transitioning the business
• Complete preliminary work on how to structure the transaction.
Withers says the more time spent on getting the business ready for sale, the more attractive it will be for the buyer.
