By YOKE HAR LEE
The United States is seeing an explosive growth of venture capital funds but New Zealand firms have little chance of tapping them for direct investment.
This is why: New Zealand is too small a market and too far away. The best way for New Zealand to attract US venture funds is through co-investments, said Dayton Carr, a US venture capitalist who is in here on a special investment programme organised by the New Zealand Trade Development Board.
Mr Carr, who has been in the industry for three decades, is the president of Venture Capital Fund of America, which has some $US100 million ($196 million) in funds under its portfolio.
According to Mr Carr, there is a tremendous amount of available capital in the US at the moment. "But I don't think a major US venture capitalist would make an independent investment in New Zealand."
He said smart venture capital typically invested in markets where they resided.
"They don't want to be sitting in a company in New York or San Franciso, investing in a company here, and having difficulties," he said.
What they were more likely to be interested in would be to have a really good partner in New Zealand, co-investing in companies with them.
"If they know of local Kiwi venture funds that have ideas, they may co-invest with them. There also may be other US funds that have international investments looking for affiliations or co-investments," he said.
From what he had seen, his assessment was that despite New Zealand companies having good technology, they had limited growth opportunities locally due to the small market here. To grow, these companies needed to look offshore quickly, he said.
"You don't have so much time to make hay, so to speak, before competition seeps in," he added.
Co-investments would benefit New Zealand venture companies as that meant having global partners with not only the capital but technical expertise.
Venture Capital Fund of America adopts the strategy of buying out existing shareholders in venture companies or existing shareholdings of venture funds.
In New Zealand, Mr Carr said he might look at one or two opportunities to buy into existing investors of venture funds.
According to statistics cited by Mr Carr, the US private equity market raised $US88 billion in 1998. Of this $US26 billion was in venture funds.
In 1991, the size of the US venture capital industry was around $US1.5 billion.
The size of the total US private equity (venture capital and leverage buy-out funds) market amounted to $US332 billion as at the end of 1998.
Around the globe, the US venture capital industry was still by far the largest, Mr Carr said.
Britain and Europe combined had venture funds totalling $US79 billion; Asia $US29.1 billion, Canada $US5.4 billion, Israel $US5 billion and Latin America $US4.9 billion.
As at the end of 1998, the top quartile compounded rate of returns for US venture funds formed in 1997 was 37 per cent.
Top quartile returns for funds formed between 1993 and 1996 were between 32 and 36 per cent.
Out of over 100 US venture funds surveyed, the majority invested in medical and health services companies (27.8 per cent); computer hardware and software companies (27.1 per cent) and telecommunications companies (19.3 per cent).
'Partnership' key to tapping venture capital
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