NBR: How Direct Capital Came Out On Top

Duncan Bridgeman, NBR:

Buying into Scales Corporation [NZX:SCL] paid off handsomely for Direct Capital, which last night won the Private Equity and Venture Capital Association deal of the year award.

The Auckland-based company headed by Ross George more than tripled its investment in Scales in three years, crystalising some of those gains by selling into an IPO in July this year while still keeping a stake in the company.

Mr George was awarded the NZVCA Leadership Tribute for outstanding leadership commitment to the private equity industry.

Entries were judged on return to investors and the company’s financial performance. The company’s contribution to the economy, employment, innovation, consistency and industry competitiveness was also taken into account.

Direct Capital, the NZ Superfund and ACC acquired a 79% stake in Scales for $44 million in June 2011 from receivers of the late Allan Hubbard’s failed finance company South Canterbury Finance.

This July, Scales listed on the NZX with an initial market value of $222 million. Direct Capital sold down to a post-IPO shareholding of 20% while Scales also raised $30 million of new capital. All up $150 million was raised in the IPO with Direct Capital netting its share of $119 million.

While it can be argued the asset was sold in 2011 at a heavily marked down price given the situation at the time, it is also apparent that those new shareholders added value to the business.

Under their ownership Scales vastly improved its business including by installing new technology in logistics and storage, higher value apple varieties for its main Mr Apple business, and by widening its market access, particularly into Asia.

In the first three years of Direct Capital’s majority ownership, the company invested around $50 million of capital in re-developing orchards to Asian preferred apple varieties, enhancing and expanding various storage and manufacturing plants and other growth initiatives.

Direct Capital director Tony Batternon says Scales more than doubled profit before tax during this period and achieved a significant reduction in the level of debt enabling the company to recommence dividend distributions from 2013.

Scales,which was founded in 1897 as a shipping business by George Herbert Scales, today employs more than 450 staff.

It operates across its three operating divisions: Horticulture, Storage & Logistics and Food Ingredients.

“The Direct Capital investment in Scales Corporation is an example of innovation, growth, and excellent returns on investment that benefit investors, who are generally local and international superannuation and pension fund members,”says NZVCA executive director Colin McKinnon.

Meanwhile, Mr George received his individual award at the annual NZVCA conference in Queenstown.

Mr George has been in the private equity industry since 1985. He founded Direct Capital in 1994 following his return from Hong Kong, where he had been a director and shareholder of local Hong Kong based private equity firm.

His “humility and unqualified conviction have helped shape the New Zealand industry over two decades,” Mr McKinnon says.

Since its establishment Direct Capital has raised more than $800 million and invested in 68 private companies. Its current active funds, Direct Capital III and Direct Capital IV have invested in 19 portfolio companies that have aggregate annual revenues of $1.5 billion and employ more than 5,000 staff.