It's been a quiet year for initial public offers (IPOs) on the local sharemarket, and part of the blame has been laid at the feet of private equity.
Last year was a big one internationally for IPOs, but the local scene has been slow, despite a record-breaking performance from the New Zealand sharemarket.
"You are not seeing the same number of potential capital raisings here," says Shane Solly, portfolio manager and analyst at Harbour Asset Management.
"People thinking about possible capital raisings here are also thinking about other sources of capital such as private equity," he says. "I think that's contributed to the relative lack of capital raisings."
There were eight de-listings on the NZX main board last year and just one IPO: Oceania Healthcare. There have been no new listings so far this year, though My Food Bag has been tipped as a possible listing over the next year or two.
By comparison, in 1986 and 1987, the NZX had 115 IPOs; in 1993 and 1994 it had 33 and in 2003 and 2004 there were 46. There were only seven IPOs over 2015 and 2016.
Private equity specialists agree that the local IPO market has fallen quiet, but are optimistic about what may lie ahead.
They say the current lack of IPOs is more to do with the private equity cycle, rather than one segment of the market taking precedence over another. Private equity sources say the lull in IPOs just means the small to medium-sized New Zealand companies now owned by private equity investors are simply not ready to go public.
Roger Wallis, a senior partner at law firm Chapman Tripp, agrees it has been slim pickings on the IPO front, but he sees the relative dearth of new opportunities as simply reflecting the current state of play.
"It's not a matter of an either/or," Wallis says. "I think there's a necessary co-relationship between the two categories."
"At the moment we've got half a dozen New Zealand private equity funds that are well-funded, that have some good assets, and that in two or three years' time - perhaps in one year's time in the case of businesses like My Food Bag - will be attractive opportunities for the public markets."
Wallis expects this year to be light one for IPOs, but is optimistic about next year.
"Private equity needs an effective IPO exit route as well, because if you look at some of the domestic private equity firms - Direct Capital springs to mind - they've had some very successful outcomes through holding onto assets for two or three years and then selling them through IPOs," he says. "They, and everyone else, had a great outcome from that and they've had a great outcome from Scales (listed in 2014) and from New Zealand King Salmon (2016)."
While fund managers may get grumpy when they see businesses taken into private equity ownership, Chapman Tripp's Wallis is optimistic that new IPO opportunities will arise as private equity funds take their companies to the next level. "It will change."
Wallis sees private equity involvement in small to medium-sized companies as an effective way for companies to go to the next level.
Private equity firms tend to be run by very experienced investment managers but their business is not free from risk, and they do tend to take on debt.
Some private equity deals haven't gone well. In recent times, Australian managers came in and paid big prices for Yellow Pages, MediaWorks and Metropolitan Glass in its early stages.
Across the ditch, there was the hair-raising private equity-sponsored Dick Smith float, which cost creditors an estimated A$260 million and shareholders A$344.5m when the retailer collapsed in 2016.
"The Dick Smith debacle demonstrates once again that shareholders and unsecured creditors should be extremely careful when dealing with companies that have had private equity shareholders," Weekend Herald columnist Brian Gaynor wrote at the time.
Private equity specialists are quick to point out that the handful of local private equity players are not typically involved in high-risk industries.
Pencarrow Private Equity, for example, has investments in the retirement sector, while Direct Capital has a whole raft of industries from manufacturing thorough to real estate (Bayleys).
Wallis says the media tend to play up the private equity failures, such as the Dick Smith disaster in Australia, but he says those "misses" tend to be in the minority.
Direct Capital managing director Ross George says private equity works differently here than in Australia, where transactions tend to involve a lot of debt. "We are all 'growth' people," he says. "There are exceptions, but the bulk of the Australian funds are leveraged buyout funds."
"We have four companies that have no debt at all and that's because we are trying to grow them - that's the main difference between New Zealand and Australia."
George prefers to call Direct Captial a private company investor rather than a private equity firm, because of the debt connotations associated with the latter name. He believes it doesn't matter whether a company is listed or not, provided it can get funding to grow.
On the NZX, there are 70 or so companies with annual revenue of more than $30m, compared with 933 in the private company sector. "There are an enormous number of companies that have been funded either from private equity or through the NZ Stock Exchange," says George. "To the New Zealand economy, it does not actually matter whether they are listed or not. It matters that they get funded and can grow."
One senior private equity executive says the quiet IPO market just means some companies in the private equity stable aren't yet ready for a public listing. Like Wallis, he says it is not a matter of "either/or" for IPOs and private equity.
"To some extent, we can be a bridge from private to public," he says.
"When we look at the possible next stages for a company, a listing is one of them."
Part of the problem with private equity, he says, is that it functions outside of the general public view. "A slight negative about our industry is that it is called 'private' equity - because we are not in the public markets - so we are not out there showing people what we are doing."
"When you are operating in the dark, people jump to conclusions that you are up to no good."
"There is a view that private equity deals are bad. Clearly, some of them have not worked, but a lot have."
"Things like Dick Smith are not good for private equity as an industry - and that's not good for anyone," but he says Australian research shows that IPOs with a private equity background hit the mark more often than not.
"For IPOs, I'm not a pessimist about the market because we are clearly benefiting from KiwiSaver inflows, and fundamentally that underlies a healthier investment market than it was 10 years ago."
"It doesn't look like there is much coming to the market at the minute, but I'd like to think that the outlook will get better over time."
Colin McKinnon, executive director of the New Zealand Private Equity & Venture Capital Association (NZVCA), in an interview on the Herald's Economy Hub, said private equity was "sympathetic" with the NZ Stock Exchange.
"Generally, the companies that mid-market managers are investing in are the companies that are not ready for listing, so you will find many examples where NZ [private equity] fund managers have gone and invested in a company, growing a company and then it's gone to a listing," he says. "So it's a very sympathetic relationship. We want a strong NZX because often that is the place that will be the next stage for the companies that private equity fund managers invest in."
Still, private equity's image problem persists.
"If you look at the totality of the data, private equity sponsored companies tend to do better than the non-private equity sponsored companies, so it is a bit of a myth," says McKinnon.
"The challenge is in dispelling that myth."
It's not a boom - at least not like the crazy days before the global financial crisis in 2007 - but private equity investment appears to be on a roll again, in New Zealand and around the world.
That's got some people in the local financial markets worried that it will crowd out activity on the NZX.
For many investors, the distinction between private equity and public markets has blurred as private equity has become increasingly mainstream.
Yes, there are still high net worth investors involved, but if you're in an aggressive KiwiSaver fund, then you too are probably into private equity.
Local players like Direct Capital - which has more than $1.2 billion invested privately - raise much of their money from investors such as ACC, the NZ Superannuation Fund, pension funds, community trusts, utility trusts, iwi and even religious groups.
Private equity essentially just refers to capital that is not listed on a public exchange.
But as distinct from, say, a family business, private equity typically refers to funds and investors that directly invest in private companies, or engage in buyouts of public companies.
Private equity has different classes based on the scale of investment and maturity of the companies involved.
The NZ Private Equity and Venture Capital Association (NZVCA) describes three classes on the local scene: large-cap, with deals bigger than $150 million; mid-cap, with deals below $150m but bigger than the third category; venture capital (early stage or start-up), deals with a value below $15m.
Private equity still suffers from the infamy of some ruthless corporate raider activity in the 1980s and 1990s, as well as the attention that big deals get when they go wrong.
There have been stock market failures like beloved electronics retailer Dick Smith in Australia and, closer to home, the disappointing performance of Tegel, which was floated on the NZX by Asian private equity group Affinity.
But despite big headline grabbing deals like Tegel or US firm Oaktree's buyout of MediaWorks, you need to look at the mid-cap and early-stage categories to get a realistic picture of what's happening in New Zealand.
The NZVCA lists seven companies operating in the mid-cap space and another half a dozen early-stage investors.
On top of that there are similar numbers of Australian and international funds active in local mid-cap and early-stage investment. We don't have any local large-cap players.
New Zealand's market is relatively small and one big deal can distort the overall total of activity, says NZVCA's executive director Colin McKinnon.
The NZVCA's Monitor 2018, released this week, showed disclosed venture capital activity hit a record $217.3m across 48 deals last year. That compared to just $92.3m across 50 deals in 2016.
Chris Nave, whose Australian VC fund Brandon Capital is an active investor in New Zealand's biotech sector, says there is more capital available in that segment of the market than there has been in the past two decades.
Brandon Capital – which manages four funds with investments worth more than $500m – last year invested $8m in Kea Therapeutics through its Medical Research Commercialisation Fund.
KEA is a spin-off from the Auckland Cancer Society Research Centre and Faculty of Medical and Health Sciences Waikato Clinical Campus, University of Auckland.
It has developed a powerful painkiller which offers an alternative to opioid based medicines and which it is seeking to take to clinical trials.
Disclosed mid-market deals last year were worth a record $333.7m, from $100.8m in 2016 – driven by both an increase in the number and the scale of deals.
Mid-market buyout activity in 2017 included: Navis Capital Partners' 75 per cent stake in Mainland Poultry; Mercury Capital acquiring half of Nirvana Health; and Strait Shipping being acquired by Australia-based CHAMP Private Equity.
"We had a good year in 2016 with fund raising and in 2017 the managers were putting that capital to work," says McKinnon.
So, are we at risk of a bubble? After all, the last one is still fresh in the memory of many people.
In 2006 and 2007 – while Wall Street was going mad for debt derivatives – private equity players went on a massive and ultimately ill-fated spending spree.
Research by industry consultants Bain & Company shows that the global figure went from fewer than 2000 deals in 2005, with a total value of US$352b, to a 2007 peak of about 4000 deals with a value of US$762b.
In New Zealand, the high tide mark was Telecom's sale of Yellow Pages for $2.24b to a private equity consortium consisting of CCMP Capital and Teachers' Private Capital, the private investment arm of the Ontario Teachers' Pension Plan.
Any plans to publicly float Yellow Pages were effectively killed off by the global financial crisis, which stopped the whole industry in its tracks.
In 2009, fewer than 1000 deals were done worldwide and the total value slumped to US$101b.
But as with the equity market bull run, there has been a slow, steady recovery. Global activity surpassed 2005 levels last year with more than 2000 deals done and a total value of around US$440b.
But while valuations are creeping higher, McKinnon doesn't see a return to the red-hot conditions of last decade.
"The banks have had a healthy attitude to the sector, both in Australia and New Zealand, so we're not seeing some of the excesses that we saw in 2006 and 2007," he says.
"The other thing is that the growth that we've seen in 2017 wasn't from big international funds taking big bets on companies in New Zealand; it was solid New Zealand and Australian funds investing in good, solid businesses."
It is also a very different economic environment in terms of lower growth and lower inflation, he notes.
Bubbles aside, McKinnon argues that private equity has done well as an asset class regardless of "whether you are in an up or down cycle."
"Because they've got capital to invest in companies, when valuations come down that's a good opportunity, so it's a very resilient asset class."
Despite a few high profile failures, there's a reason why the sector is increasingly attracting the attention of KiwiSaver and super funds.
Bain & Co's research show private equity returns are still quietly outperforming local equity markets across the US, Europe and, particularly, through the Asia-Pacific region.