Late last year, Direct Capital raised its fifth private equity fund in New Zealand. Since it began in 1994, the firm has raised $1.2 billion, with its latest $375 million fund coming almost exclusively from existing investors in just two months.
Herald: Direct Capital’s first fund was raised in 1994. 23 years on, what has changed most in the New Zealand private equity industry?
Ross George: When Direct Capital began, private equity was a very established industry offshore, but it didn’t exist in New Zealand in a formal sense at the time. We had to go out and explain who we were and what we wanted to do with investors, advisors, and private companies. Now Ryman Healthcare, Scales and NZ King Salmon are on the stock market – people know they came from private equity, and the private company market is well regarded by investors.
One of the most positive changes has been the New Zealand stock exchange. When we started 23 years ago, you couldn’t necessarily invest in companies and then list them – the stock exchange said they were too small. Around the world, all successful markets mirror their economies and their company stock base. The stock exchange here has now grown substantially by appealing to a broader set of companies reflecting New Zealand’s companies, and it means you can keep them here in New Zealand.
Herald: You’ve just finished raising your fifth fund in the last quarter of last year. How did it go?
Ross George: We had a two-month window, and we were easily able to raise it. We wanted to cap it at $375 million, but could have raised significantly more.
Over 23 years we have performed very well for investors. The feedback we receive is that we don’t take inappropriate risk, and that our performance has been consistent and very good relative to other categories. We are in the fortunate position of being able to go back to our existing investors and raise capital. That’s real recognition of our performance and just how big the private company opportunity is.
Herald: What is unique about the private equity industry in New Zealand?
Ross George: In New Zealand, you can find yourself investing in the top five companies within a sector. We have managed to invest in Ryman Healthcare – the biggest in its industry, Scales – the second biggest apple producer in the country, King Salmon – the largest salmon producer. In Australia, you’re more likely to invest in the top 15.
Economically, New Zealand is doing very well, and there are a lot of good opportunities. But it’s a double-edged sword. We’re not the only ones that have noticed New Zealand is going well – the global corporates have noticed too. There is now a real desire to be here.
Also, private company owners in New Zealand tend to be older than offshore. In our size bracket, that’s a real feature. As owners near retirement age, they might want to sell down but remain a 20 per cent shareholder, or change their role but stay on the board. We can work with them to understand how they want to change their life – because more often than not they don’t want to stop working abruptly.
Herald: Direct Capital’s investments have been across many different sectors – from technology and e-commerce to forestry and pharmaceuticals. Are there any particular areas you’re targeting for this fund?
Ross George: You can’t just choose an industry in New Zealand and invest in it. There are some areas such as food and primary industries that dominate in New Zealand and that we get a lot of recognition for. These will always be a cornerstone of our funds, but we try to follow big long term trends. Food for Asia is a big trend that we think will suit us into the future.
In the short term, New Zealand has done well economically over the last decade, and there has been a lot of money spent on infrastructure. Although we’re not an infrastructure investor ourselves, we do invest in companies that provide services into the industry.
Herald: NZ King Salmon was one of your most recent exits, listing on the NZX and ASX last year. What was it that appealed to you about the company?
Ross George: NZ King Salmon is a company with good insights into how to run a primary industry. When we did due diligence on the company, we liked that it had its own hatchery, farms, processing plant, brand, and export operation. If you put that in the context of other primary industries, it has every step covered.
It is a real pleasure to turn up in London and see Ora King salmon on the menu, and you think that started from the production of an egg by the one company. When we came to listing it, that was a really appealing thing. The main comment from the institutions is that this is how a lot of other primary industries should be organised.
NZ King Salmon has been a stellar performer for a long time. It produces a premium product that doesn’t have a commodity price attached to it, and can sell every kilogram of salmon it produces. The issue now is how it continues to grow. It’s a very large employer in Marlborough, and because it is a year-round employer it’s a sought-after place to work. The only problem is that it can’t grow its production enough. The government and regional councils talk about growing regional businesses that can create employment, but there has got to be enabling tools and legislation to allow them to do it.