17/07/2009

AUSTRALIAN PRIVATE EQUITY & VENTURE CAPITAL JOURNAL JULY 2009

Auckland-based Direct Capital has passed the NZ$201

million mark in fundraising for its latest private equity

fund.

The manager said it had commitments of NZ$201.5 million

and was “well on the way to achieving an expected

NZ$250 million” for its Direct Capital IV fund.

New Zealand Private Equity & Venture Capital Association

executive director Colin McKinnon said Direct Capital’s

progress “indicates that investors are prepared to support

growth capital to be invested into the good opportunities

which exist in privately owned New Zealand companies”.

Mr McKinnon added: “It is especially pleasing to see that

major institutional investors – such as the New Zealand

Superannuation Fund, ACC (Accident Compensation

Commission) and some of the pension funds and

community trusts – are investing into this area.

“New Zealand private companies need to be able to

access growth capital to finance further expansion, which

is the focus for funds like Direct Capital. This is good news

for the New Zealand economy and the business sector in

general.”

In May (APE&VCJ, Jun 09) the New Zealand

Superannuation Fund said it had committed NZ$50 million

to the fund as a cornerstone investment.

Announcing passing the NZ$200 million mark on June 26,

Direct Capital said commitments had come mainly from

investors in the 2005-vintage Direct Capital III fund. These

investors had, on average, increased their commitments

by a factor of 2.3 times for the new fund. Several new

investors had also been attracted including community

trusts and pension scheme trustees and the manager was

now working with potential further new investors to

complete the fundraising.

Direct Capital managing director Ross George said the

success of the capital raising was “a huge endorsement of

the private company market in New Zealand and also a

reflection of our 15-year track record”.

Mr George said the new fund would be invested in the

same market segment as the earlier Direct Capital funds,

established New Zealand mid-market private companies.

On current values, this would include companies valued

between NZ$25 million and NZ$150 million. This accounts

for about 850 of the 1500 New Zealand companies with

annual revenues in excess of NZ$20 million.

“The private company market is New Zealand’s largest

equity market, being five to seven times larger than the

NZSX for example, and represents more that a third of the

economy,” said Mr George. “Private companies are the

backbone of the New Zealand economy and investing in

their growth does more for improving New Zealand’s

economic performance than any other single initiative.”

Direct Capital has achieved average net annual returns to

investors in excess of 20 per cent over its 15-year history

and has attracted strong support from institutional

investors, including superannuation funds and community

trusts.

“Consistency in performance is critical for our investors

and we’ve invested through multiple economic cycles

now,” said Mr George. “We’ve had great support from large

public funds like the New Zealand Superannuation Fund

and Accident Compensation Commission. Investors with

long term liabilities to fund understand the benefit that

comes from investing in private companies where returns

are higher but less volatile and risk is more highly

diversified.

“We’ve also had very good support from other pension

funds and community trusts whose trustees and manages

have seen very large swings in the value of their

investment portfolios but are still required to fund

members’ pension benefits or continue making

community grants. Trustees want to reduce risk and return

to normal, common sense investment. It makes sense for

them to invest part of their New Zealand equities portfolio

in private companies as this market represents about 80

per cent of the equities market.

The current market environment is very positive for

investing in private companies. While all companies, listed

or private, operate in the same macro environment,

private company owners don’t get distracted by share

market volatility in the way that public company

management and boards have to deal with.

“With additional capital from us, company owners can

simply get on with growing their businesses in what is

actually an outstanding environment for growing market

share.

“We’ve been delighted with the response to Direct Capital

IV. There’s been a fundamental shift in understanding the

size of the private company market and the opportunities

that exist for investors to make consistent returns from

well managed mid-sized New Zealand companies.”

Direct Capital has so far raised total funds of about NZ$600

million. The firm is owned by its senior management team

most of whom have been with the manager for most of its

history.

Direct Capital investments over the past few years have

included New Zealand King Salmon, Rodd & Gunn, Go Bus,

Sears & Mac4, Innovair, Paper Coaters, New Zealand

Pharmaceuticals and Express Logistics.

As at the end of March, Direct Capital III fund had achieved

a net return to investors of 28.9 per cent per year.