We rushed to her defence. There was shouting. We didn't get to eat all the Danishes, damn it. Thus ended the last serious attempt at rapprochement between private equity and the business press: shouting and wasted pastries.
A meeting hijacked by high tempers may be an amusing anecdote but there were unintended consequences for the sector. New Zealand private equity doesn't get written about much, and one of the reasons they believe their story never gets told is their distrust of the media.
Instead, the media write about Australian private equity, a narrative that sometimes fits the public perception of cowboys, debt and mismanagement. Perhaps it's just another example of transtasman cultural differences, but the Aussies seem to hog all the headlines, and for all the wrong reasons.
Consider this recent partial list of casualties of private equity ownership: Whitcoulls, Yellow Pages, MediaWorks, Independent Liquor and Blue Star. Each is, or was, owned by offshore private equity (mainly Australian but some Canadian and Asian funds, too).
Among them you can find examples of colossal recklessness that nearly destroyed businesses, wiped out investors' stakes, cost banks hundreds of millions of dollars, and resulted in the loss of many jobs.
New Zealand private equity believe they get tarred with the same brush, even though they are a fundamentally different beast.
Australians tend to target large companies and buy them outright, or seek a dominant holding. Ownership is often short. Local private equity often takes minority stakes in much smaller companies, is less active and tends to hold on to assets for longer periods.
The Kiwi guys will not specifically criticise their overseas private equity cousins, not even off the record.
But Maui Capital managing director Paul Chrystall does say that, when considering corporate train wrecks such as Whitcoulls and Yellow Pages, it's important to bear in mind the impact of Australia's compulsory superannuation regime.
While the enormous pool of superannuation savings is an asset to the Australian economy, it also created a proliferation of private funds desperately searching for a home, Chrystall says.
"There isn't a shortage of capital; there's a shortage of good opportunities and it's a different problem," he says.
During the boom last decade, a plethora of funds were created in a small Australasian market, with managers paying ever increasing prices for a diminishing number of investment opportunities.
"[We] invested during that period," recalls Direct Capital investment director Gavin Lonergan, "and the average leverage across our portfolio was two times ebitda [earnings before interest, tax, depreciation and amortisation]. Yellow Pages was above 10; lots of deals were getting done with five or six times ebitda."
Chrystall: "Most of the Aussie boys got on to a treadmill where they were going for bigger and bigger funds, competing against one another. There were too many funds chasing too few opportunities in a boom that scaled up the prices until there was one disaster after another."
Middle corporate New Zealand is the beating heart of the economy and performs better than the bigger companies, asserts Direct Capital's Lonergan.
The average revenue per employee for the top 230 companies, according to Ministry of Economic Development figures, is about $180,000.
Direct Capital invests in companies earning between $30 million and $200 million, a sub-sector where the ratio is $250,000 per employee.
"The companies we invest in now have average revenue per employee of just over $300,000," says Lonergan.
He admits his sample is self-selecting (Direct Capital is expected to cherry-pick the 850 companies in this category). But his point is that performance can be lifted with the right management and support.
The task of elevating New Zealand into the top half of the OECD seems an insurmountable task, Lonergan says, citing Sir Paul Callaghan's commentary on the issue. But if middle corporate New Zealand matched what private equity has achieved with its companies "it would add another $21 billion to our economy, roughly 10 per cent to 12 per cent to GDP," he says.
That vision for long-term sustainable growth, Lonergan argues, is what private equity brings to the New Zealand economy. And something as simple as lifting per-employee revenue makes that OECD goal seem achievable.
And while private equity in New Zealand isn't exactly whale-sized, it's more than a minnow. Direct Capital, for example, raised $325 million in 2009 for its fourth fund, and the year before that Maui attracted $250 million for its third. Direct Capital plans to raise the money for a fifth fund in 2013.
Lonergan points to investments such as Go Bus as exemplars of how private equity can work. Go Bus started out in 2003 as an amalgamation of family bus businesses in the Waikato. But since Direct Capital came on board in 2007, it has put on startling growth and is now among the top three providers of bus services in New Zealand.
"We haven't gone out and bought a whole heap of businesses and tagged them on," says Go Bus chief executive Calum Haslop. "Our growth has been very manageable, methodical and strategic.
"We haven't gone out and been stupid about it and neither have [Direct Capital] paid over-the-top multiples for the business," Haslop says. "They put fuel in the tank but those opportunities were always there for a business like Go Bus.
"They've brought a lot to the table, as opposed to other examples where private equity has been a licence to go stupid," he says, when asked about Yellow Pages and Whitcoulls. "I guess it's a question of style and Direct Capital isn't an aggressive private equity company.
"They were criticised [before the crisis] for not being aggressive enough."
Perhaps a more wide-angle view of private equity comes from the New Zealand Superannuation Fund, which started investing in the sector in 2005.
"Fees are a lot higher in the world of private equity and you're a lot more illiquid," says Matt Whineray, super fund general manager of investments. According to the fund's calculations, private equity fees (including performance) comprise about 4 per cent of the average return.
"If you want to invest in the New Zealand economy, you can buy the NZX50; it's cheap - you might pay 40 basis points [of the fund investment]," Whineray says.
Delivering ten times the average return from the NZX50, as private equity fees suggest, requires either special skills, an inefficient market or an incredible eye for bargains, argues Whineray. "The thesis is that probably the median manager adds value but not necessarily after fees," he says.
The super fund is now investing in what Whineray calls "the expansion capital space": small companies valued at between $20 million and $50 million.
"They're too small to go in the public markets but too big to be funded by angel investors or venture capital," he explains. "There's a scarcity of capital that can be provided to those companies - we like that; we think that's an investment opportunity."
It's a space that used to be occupied by Direct Capital "but now they've grown larger and they're doing more control transactions [where private equity takes a hands-on role]," notes Whineray.
Last year the super fund committed $30 million to a Waterman Capital fund; in 2009 it was $50 million to the Direct Capital IV fund. More has been invested in offshore private equity. But its only other New Zealand investments were in 2005: $20 million to the Direct Capital III fund and $23.75 million to the AMP Pencarrow Private Equity Fund.
Whineray still has reservations about the value international and local private equity adds "and that's a challenge to the industry to present the investment case a bit better".
"As long as we can find a manager who's good at what they do, who's in the upper quartile of managers, then we can justify the fees and the illiquidity that we put into the fund," he says.
Maui Capital acquired a stake last week in an Australian company, Diversified Mining Services (DMS), in a deal which will see the firm inject A$25 million ($31.6 million) to A$35 million of capital into the business.
"That will be partly for debt repayment but mostly cash for acquisition," comments Chrystall. "It will increase the scale of the business and they have targets that they want to achieve.
"We will build their business and broaden its capabilities."
The stake in DMS means Maui has invested about 70 per cent of its third fund, which raised $250 million in difficult conditions in 2008.
Chrystall had expected the global financial crisis to create ideal conditions for a cashed-up fund. Surely companies would come with a price-tag commensurate with economic reality, not the hyper reality of the boom years?
But "we couldn't find an investment to do for a year," reports Chrystall. "The past two funds were invested over a two-year period; this one's taken us three and it will probably be the best part of four years before this one's fully invested."
Just like the housing market after the crash, everything was taken off the table in the hope the good times would return. The owners refused to believe the crash represented a paradigm shift in global markets.
New Zealand private equity, and Maui, in particular, is not in the business of paying "stupid prices" for assets, Chrystall insists. It is a long-term investor with no fixed end to its funds, he adds.
That may be so but Maui has exited its first fund completely and all but one investment in its second fund, raised in 2004 (see pg 13).
Chrystall created the first fund as part of Goldman Sachs JB Were's team and when he left to create Maui they had to exit the fund first. "There was an artificial closure aspect to it," he explains. Asset prices were so high with the second fund "you couldn't buy anything but we could sell."
"You can't make a lot of money by rushing in and out of businesses unless there's a ridiculous boom on - and that's just the same as property," he contends. "You have to be patient and build businesses and when you've got a good business, you'd be a mug to sell it. They're hard enough to find in the first place."
There are three common misapprehensions about private equity, says Direct Capital's Lonergan: "One, they take on too much debt, they over-leverage the company; two, they come in and cut costs; three, they do a quick flip."
But anyone can put on debt - just look at the housing, farming and government sectors, he urges. Some private equity did that too "and, I have to say, particularly the Australian managers".
"They came in 2005 and for a lot of them it was their first time, they hadn't invested in a recession before and they thought [New Zealand] was cheap," comments Lonergan.
But he says excessive leveraging is not a big feature of New Zealand private equity practice. "In that timeframe of 2005-2009, when we were investing our Direct Capital III fund, our average debt to ebitda was lower than the NZX average," he says.
As for cost-cutting, it is a practice based on the assumption of inefficient management. "That may be true of a subsidiary of a multinational ... but it's hard to cut 20 per cent out of costs without doing some damage to the revenue base and the long-term sustainability of the company," says Lonergan. "In the 17 years we've been running, we have never ever had an investment paper put in on a company based solely on cost-cutting."
A common exit strategy for New Zealand private equity is a public listing. But often those shares are distributed among investors. "Ownership can be enduring and should be if they're good investments," he says.
Private equity's public reputation rests on a string of high-profile disasters. But it also has its supporters, people like Martin Goldfinch, ACC private equity manager.
"The private equity space isn't too bad," he insists. "One of the beauties of the private equity model, at least for the management team, is you can concentrate on investment selection, the valuation and the management; you don't have to plead for money every time you do deals."
The super fund's Whineray agrees: "Direct Capital has done well, they're on their fourth fund and that's a success."
Directors for Maui and Direct Capital answer private equity critics by pointing to their roster of successful business.
For Chrystall, that's an Australian electrical business called Norfolk, local insulation company Insulpro, fence maker Euro Corporation and paper merchant, BJ Ball and its Australian sister companies. Lonergan name-checks Go Bus, King Salmon, fashion chain Max and Stratex, a manufacturer of specialty packaging.
Not many of those companies are household names, which is the point. Local private equity funds unsexy but profitable middle New Zealand companies. Virtually all are below-the-radar success stories, some of them stellar. Today's a chance for the public to read about it.
Private equity
* Private equity is essentially pools of capital that are invested in the private market and has always existed, but in an informal structure.
* The modern form of private equity involves an agreement between a management firm and limited partners (almost always large institutions such as pension funds, but sometimes groups of wealthy individuals).
* The money raised is used to buy stakes in companies which are not listed on the sharemarket, with investors and managers sharing the earnings.
* A fund is created with a set timeframe, usually 10 years, though some are open-ended. At the end of that time the fund's investments may be sold or listed on the market.
* Nick Smith is a freelance business writer who has previously worked for the NZ Venture Capital Association.
