KEY POINTS:
In the past two years a host of local companies have been swallowed up by private equity: Yellow Pages, Griffins, Tegel, Independent Liquor, Kathmandu, Auckland Central Backpackers, Qualcare, Envirowaste and MediaWorks.
Kerry McIntosh can take some of the credit for the last four of those deals.
Since 2004 he has been the man on the ground in New Zealand for Australian private equity group Ironbridge Capital, helping it create a diverse portfolio of waste management, tourism, aged care and media companies.
McIntosh was born and bred in Timaru. As a keen fisherman he has plenty of personal reasons for loving the country.
But there are other reasons why - after building a career in London and Sydney - the investment banker turned private equity player is plying his trade back on home turf.
New Zealand is a happy hunting ground. Local industries tend to be structured around two or three major players and the market leaders are available and affordable, he says.
That's just not the case in bigger economies where market leaders in any given sector are likely to belong to a mega-corporation.
And because New Zealand is small it is often below the radar of the biggest buyers.
"There is less competition from trade buyers and big strategic players because they regard the market as too small," McIntosh says.
Ironbridge targets companies that range in value from $150 million to about $1 billion.
It could hunt bigger fish by putting together a consortium. But once you get over $1 billion - Yellow Pages size, for example - deals start attracting competition from the big trade buyers and other strategic players, McIntosh says.
Sydney firm Ironbridge was started in 2002 by four private equity veterans. Despite its recent arrival, its focus on New Zealand now has it rivalling more established outfits such as Pacific Equity Partners (PEP) in terms of its public profile.
McIntosh has been on board since 2004 but his interest in private equity goes back further. He was one of the first Australasian investment bankers to pick up on the emerging trend at the start of the decade.
As a director of investment banking for Credit Suisse in Sydney, he was initially covering mid-market companies but pretty quickly realised that private equity was a growing sector and picked up coverage of companies like PEP and Gresham Private Equity.
He is no stranger to putting together big deals. With CSFB he was involved in Ameritech's sell-down of its shareholding in Telecom, the merger of various dairy co-operatives in the period leading up to the formation of Fonterra, and a number of transactions involving private equity firms including the LBO of Repco and the IPO of Frucor.
McIntosh returned to New Zealand in 2003 with every intention of working for himself for a while.
But one of the first jobs he took on was a consulting role for Ironbridge. Before long he had generated enough work to join them fulltime.
Four deals with a combined value of more than $1 billion have followed in quick succession.
The latest - the takeover of TV3 owner MediaWorks - is still being completed but is all but a formality.
That purchase more than any other has put Ironbridge in the spotlight and raised questions of what a private equity company knows about running a media company.
McIntosh is not prepared to talk specifically about MediaWorks until the paperwork is done on the deal.
But he says questions about how private equity companies can manage businesses in such diverse sectors miss the point entirely.
The private equity team won't manage the companies, he says. What they do is manage the managers.
They do that by ensuring their companies get the best managers and the capital they need to expand and grow the businesses.
"One of the key things is to align management and shareholder incentives," he says.
"In New Zealand, management traditionally has a very low level of ownership, a very limited stake in the equity upside of the business. That just leads to issues of management acting in its own interests rather than shareholders."
Typically in a leveraged buyout led by private equity, management would have up to 10 per cent equity.
So the structure of the MediaWorks deal - with Brent Impey and the management team holding a significant stake - is far from unique, he says.
New Zealand has cultural issues to get over when it comes to rewarding management, McIntosh says.
"Part of that is the tall poppy syndrome. No one likes to see the management walking away from a transaction as multimillionaires. When, in fact, if they've created the value that is what should happen."
McIntosh has sympathy for the managers of public companies who face intense media scrutiny of their pay packets.
"When CEOs' salaries are flashed through the media there is a lot of debate about whether they are appropriately remunerated," he says. "In PE we remunerate people as we see fit and it's not a subject for media discussion. The returns are based upon the returns that we make."
The upside from private equity's point of view is that it creates a competitive advantage when it comes to attracting the best people.
The other thing private equity does to create value is to leverage companies more heavily.
That's ultimately about putting the best capital structure in place to grow the business faster than might otherwise have happened.
McIntosh points to the expansion and consolidation that Ironbridge ownership has already achieved in the backpacking sector. Auckland Central Backpackers has bought a new hotel, has another under way and has bought out its main competitor.
Qualcare has also set about acquiring six new retirement villages and developing its existing land bank.
Simply stripping costs out of a business is not the best path to good returns, he says.
Private equity companies such as Ironbridge typically look to divest their businesses after three to five years and to make money they need buyers who can see that value has been created.
But one benefit of the extra debt private equity businesses carry is that it imposes good discipline on management, he says. "You have to be very focused on cashflow."
And if a management team wants to make an acquisition it has to demonstrate it really will add value.
Private equity attracts critics because it is seen as a faceless form of ownership. People wonder who reaps the dividends. For example, who ultimately owns TV3 now?
The two cornerstone investors in the latest Ironbridge fund - in which MediaWorks sits - are GIC Special Investors, which manages the foreign cash reserves of the Singapore Government, and Caplers - the Californian state pension fund.
Ironbridge investors include a wide range of Australian and foreign pension funds, McIntosh says. At that level private equity ownership is hardly mysterious. Its leaders are simply investing the retirement savings of the baby boomers.
With demographics on its side McIntosh is confident the sector will continue to grow even if this decade's golden run comes to an end.
"PE has had all the ducks in a row for the last few years," he says. "There has been good liquidity, interest rates have been low, asset prices have risen and corporate profits have been strong.
"That's the ideal situation and people have generated good returns in that environment. And there is still no shortage of capital."
McIntosh cites a figure from the Economist - that US$240 billion was raised in the sector in the first half of this year.
"While you have access to equity and debt the industry will keep growing but it is a cyclical industry.
"We're seeing the start of what looks like a contraction in credit but this is not new. PE has experienced positive conditions and difficult conditions. You just need to ride it out."
Kerry McIntosh
Age: 41
Married with three children
Born: Timaru
Educated: Mt Pleasant High School, Canterbury University (double major economics and accounting), Harvard Business School
Career: Westpac merchant finance, Credit Suisse First Boston (director investment banking), Ironbridge Capital (NZ operating partner)
Hobbies: Fishing
