Business cash pool set to expand

By SIMON COLLINS

The timing could hardly be worse. But with the world in a synchronised recession for the first time in decades, the New Zealand venture capital industry is poised to expand.

The manager of the Government's new $100 million Venture Investment Fund, Franceska Banga, says the fund is still on schedule to choose its first fund partner or partners in the first quarter of the new year.

Strathmore Group chief executive Phil Norman, who was elected last week to chair the new NZ Venture Capital Association, believes the fund will succeed.

"They have advertised it widely, they have promoted it widely. My hunch is that they will have had a high level of interest, and I don't have any doubt that they will be successful," he says.

Venture capital is money invested at the early stages of a business, before it is big enough to offer shares to the wider public. Generally, venture capitalists (VCs) take a hands-on role in the companies in which they invest, using their contacts to help with marketing and often technology.

New Zealand has the fourth-lowest level of venture capital of the 24 countries cited in the Gem entrepreneurship survey - only 0.7 per cent of its annual economic output, compared with 1.2 per cent in Australia, just over 10 per cent in the United States and a high of 12 per cent in Israel.

But the New Zealand figures in the report are based on the 14 New Zealand venture capital companies that belong to the Australian Venture Capital Association, with $794 million among them at the end of 2000.

Ross George, of Auckland's Direct Capital Private Equity, says there are 40 companies active in the New Zealand venture capital industry, with investments totalling $1.3 billion and with a further $1.7 billion available to invest. The amount invested represents 1.2 per cent of our national income - equivalent to Australia.

Moreover, venture capital has been growing dramatically in all these countries. Last year's Gem survey listed Australia's venture capital at the same 0.7 per cent this year's survey give to New Zealand. In the US, the figure was then just at 5.3 per cent and in Israel only 4.3 per cent.

"The venture capital industry is a mature industry in the US, more than 25 years old," says Mr Norman.

"Here it is much more immature. There is growing interest in investing in young companies, but just of recent times we have seen the macroeconomic environment become more volatile."

He says New Zealand venture capitalists have made few new investments in the past year and will be "pretty selective" for the next six months.

"When a firm strikes difficult times, you find the amount of time you have to spend with it goes up exponentially," he says.

"So VCs have been looking to consolidate their portfolios and put more capital into companies they think are going to make the grade.

"Those they think are not going to make the grade they have been shooting."

Most NZ venture capitalists are looking for businesses with the capacity to grow globally. And right now, the markets around the globe look sick.

Nevertheless, the new Venture Investment Fund was expecting up to 40 expressions of interest from VCs interested in managing the fund's capital when the first round of applications closed last Friday.

Phil Norman was expecting "a strong response" from local VCs, and the fund says it has also had interest from Australia, Singapore and the United States. It advertised in both Australia and Singapore.

The fund plans to divide its $100 million among several separate funds during the next three years. Although the Government has set the maximum state investment in any one fund at $12 million, the Australian investor who chairs the fund's advisory board, John Grant, has asked cabinet to raise this limit to $25 million.

He has also asked for approval to invest initially in "early stage" expansion of companies as well as "start-up" and "seed" stages. Ministers are due to consider these proposed changes on November 21.

Mr Grant told the Venture Capital Association's inaugural annual meeting last month that the private sector partners in the new fund will have to be able to raise substantial capital. "Quite how much capital your investors put in, and how much we put in, is open for negotiation," he said.

"However, taking our investments in aggregate - i.e., once the full $100 million is placed - we expect to be a minority investor.

"Our goal is 1:2, Government to private. However, the exact level of co-investment will be negotiable based on competitive bids under the prevailing market conditions."

The funds will be limited to investing in businesses with a majority of their employees and assets in New Zealand at the time the investment is made.

But Mr Grant said this would not prevent businesses from growing quickly into global players. The venture funds will be able to keep investing in them even if they eventually become bigger overseas than at home, as long as they were New Zealand companies when the first investments were made.

The Government has also ruled that each fund cannot put more than 15 per cent of its total capital into any single business. Mr Grant said larger ventures could still be funded through syndicates of several funds.

The board will meet on November 19-20 to whittle down the initial expressions of interest from potential partners to a shortlist, who will be asked to submit more detailed proposals by early February.

The first partnership deals are expected to be signed by March or April.

"We are keen to move as fast as a fair and transparent process allows," Ms Banga says.

Already an enormous amount has happened in less than a year, since Science Minister Pete Hodgson visited Israel last November to meet Dr Yigal Erlich, who created a similar set of state/private investment funds for the Israeli Government a decade ago.

Mr Hodgson brought Dr Erlich to New Zealand in March to advise on details of the scheme here. Singaporean and US venture capitalists were also consulted.

The minister won approval from his cabinet colleagues by offering to provide half of the Government's $100 million contribution from the profits of crown research institutes.

So far, HortResearch has agreed to contribute $4.2 million, Landcare $3.5 million, and the Forest Research Institute and Crop and Food Research, $3 million each.

A spokesman for the Association of Crown Research Institutes, Bruce Kohn, says Industrial Research and the Institute of Environmental Science and Research (ESR) have been exempted from contributing to the fund.

The Government is still negotiating contributions from the two biggest institutes, AgResearch and the National Institute of Water and Atmospheric Research (NIWA), and from one of the smallest, the Institute of Geological and Nuclear Sciences.

The $100 million has been provided for in this year's budget as a Government capital expenditure.

GEM Special Report