Venture capital optimism despite blows

By PAUL PANCKHURST

One thing has changed for venture capital in New Zealand, laughs Ross George, of Direct Capital: the industry no longer needs to bully newspapers to get a mention.

Venture capital is the money invested in the risky category of start-ups and small businesses with big growth prospects.

It is still in short supply in New Zealand: the Global Entrepreneurial Monitor report released last week described venture capital as being so rare in this country as to be "meaningless to 99.99 per cent of firms".

But the Government's effort to improve things by launching the Venture Investment Fund (VIF) has at least helped spark interest by supplying a focus and a narrative, the story of the rolling-out of an intended $300 million of investment.

That story is not always as pacy as the industry or the media - or the Minister of Research, Science and Technology, Pete Hodgson - would prefer.

Critics say the slow pace is stalling the industry. At least, though, it is movement.

Another encouraging sign for the venture capital industry: the emergence from the crypt, draped in dust, blinking into the light, of the Venture Capital Association, a creature sighted in the 1980s, long presumed dead, but reanimated last year.

Last month, the revived entity hosted its first annual conference, based on: "Developing the private equity industry in New Zealand".

The association's chairman, Phil Norman - also the chairman of the Kachingo! company, the listed Strathmore Group - said 150 people, including fund managers, bureaucrats, lawyers, accountants, investment bankers and investment advisers, attended at the Auckland offices of law firm Simpson Grierson.

Talking to the Business Herald, a long-time venture capital commentator, Victor Bivell, the editor of the Australian Venture Capital Journal, described the New Zealand industry as looking "poised for take-off".

He was loath to talk things up too far, though, pointing out that the context was a "pretty flat" past three years for the industry in New Zealand and a venture capital industry gone flat around the world.

"So, some good news would be welcome."

Bivell surveys the New Zealand venture capital industry to calculate an annual total of capital under management. Some of the big players do not take part, but the survey gives a rough guide to the industry's progress - or lack of it.

The first survey, in 1992-93, reported an unadventurous $25 million. The figure was $571 million for 2001-02, but that was a drop of 32 per cent on a record high of $842 million in 2000-01. One reason for the decline, said Bivell, was a major firm, Emerald Capital, pulling out of the survey, but another was a decline in the funds managed by firms such as AMP Henderson Private Capital,

Jump Capital and IT Capital.

For Bivell, the biggest issue for venture capital in New Zealand - and this is no revelation, people have talked about it for years - is the lack of institutional investment.

In Australia, with its compulsory savings regime, the superannuation industry was the biggest investor. Here, the industry relies on retail and private investors.

Hodgson said institutional investors around the world normally flicked a few per cent of funds into venture capital. "How big 'a few' is gets debated - but it's kind of bigger than nought, which is where we are in New Zealand."

Despite the advent of the VIF fund, there had not been nearly enough progress in enticing institutions into the field, he said.

Set up after the Government looked at state-backed initiatives in Israel and Australia, the VIF is putting up $100 million as early stage venture capital for things such as development and testing, start-ups, and expansion of new businesses.

The private sector is required to come up with a matching $2 for every $1 of taxpayers' cash - making for a pool of $300 million. The first investment - $4.4

million for software producer Compudigm - was announced this month, about a year and a half after the Government set aside money for

the programme in last year's Budget.

That investment was from the $60 million IO Fund, which bundles together $20 million each from infrastructure investor Infratil, electricity network operator Orion, and the Government. So far, this is the only fund up and running. Four are negotiating terms with the VIF after passing a due diligence check. A fifth bailed out, citing a difference in objectives.

Critics see the Government as slow to do deals with its prospectivepartners, leading to an industry hiatus.

"I would rather we had more than one of them out the door by now," conceded Hodgson, who said he hoped another one or two funds would be running before Christmas.

But, he added, the initial stages of the programme were, fingers crossed, running more smoothly than in Israel or Australia.

The intensive vetting of candidate fund managers by investment consultancy Wiltshire Australia was seen by some in the industry as an important learning experience and a boost for the industry's credibility.

Jenny Morel, of venture capital company No 8 Ventures, went along with that view. But she was wary of overstating the Government fund's impact, saying the companies lining up to become partners included some - her own included - that would have invested anyway.

She was also not buying the notion that Government investment would necessarily do good.

"The Government can do good and it can do harm.

"They've got to be careful, because if they fund bad managers, they'll do harm."

Like some of her peers, Morel hoped the exercise would help bring institutions to the party.

Ross George also noted venture capital was not a Government invention.

He was yet another person to focus on the investors missing from the sector, and noted the absence of community trusts.

"We need the advisory community - the asset allocators and the actuaries - to support the industry."

International bodies recommended - no, insisted upon - an exposure for investors to private equity, including venture capital, but not here.

Obvious question: "Why not?" George: "I don't know. It's very unusual."

* In Forum tomorrow, Craig Ansley, of investment consulting company Frank Russell, explains "why not" - the barriers to institutional investment.

Ian McInnes, the executive director of the IO Fund, enters the debate on angel investors versus venture capitalists.