KEY POINTS:
Far from being the asset strippers of old, many private equity firms are providing investment that is helping New Zealand's economy, says Finance Minister Michael Cullen.
Private equity transactions - where companies are bought using large amounts of debt - were among the major deals in New Zealand last year, when firms such as Griffins, Independent Liquor, Hirepool and Kathmandu were snapped up by private equity firms.
Cullen said he was mostly relaxed about the trend.
"I don't think one could argue that there's any serious evidence that we're seeing a whole wave of taking over a business, stripping the assets and moving on," he told the Business Herald.
"Most of the private equity investment we've seen in New Zealand, I think, has been much more about taking over companies which aren't performing as well as they might and seeking to improve that performance and looking like reasonably stable investors.
"So obviously that's the kind of investment that is helpful to the economy."
Overseas, concerns have been raised about the increasing debt of private equity firms, which commentators and officials say could put economies at risk in a downturn.
Cullen said he did not see such risks in New Zealand.
"I think it's important that the Reserve Bank continues to keep a general overview of what's going on in the economy, but there's absolutely no reason at this point to think about any countervailing action," he said.
"It's not for the Government to be concerned about individual losses by investors, as long as they don't drag down large numbers of companies and risk dragging down the economy at large."
Australian Treasurer Peter Costello has warned that private equity's increased level of debt would look "pretty irresponsible" if there were a sharp economic downturn.
"People ought to remind themselves they are living in a golden period with low commercial interest rates, small spreads and high profits," he said in an interview with the Australian newspaper last month.
"They ought to tuck away enough to weather a bit of a shock."
But Cullen said Australia was different, because some private equity deals there, such as the takeover of Qantas, had been much larger and involved much more debt than any New Zealand deals.
"The main concern is the one Peter Costello was highlighting in Australia recently, which is the extent to which some of the private equity activity is extremely highly-leveraged and does that increase the level of systemic risk in the economy?" Cullen said.
"While there is that little note of caution, I wouldn't want to over-emphasise it and distinguish private equity investment activity from activity of other sorts.
"It's just a reflection of the strength of international capital markets looking for opportunities."
Private equity transactions have boomed around the world, rising from US$314 billion ($454 billion) worth of purchases in 2005 to US$421 billion last year - about 20 per cent of all mergers and acquisitions activity - say figures from Thompson Financial.
The trend is the same in Australia and New Zealand, where private equity purchases rose from US$3 billion in 2005 to US$10 billion last year.
That increased private equity's share of Australasian M&A activity from 6 per cent to 20 per cent.
Cullen said what did concern him about private equity was overseas ownership of local assets.
"It tends to reinforce the weakness of capital markets in New Zealand and reduces the amount of publicly-listed scrip available," he said.
"In so far as it triggers again the concern over New Zealand's ownership of its economy, then the answer to that has got to be that it simply underpins the need for action on savings and investment capital markets."
