Blog:

Why is New Zealand's private equity market so attractive?

23 February 2018

Simon Peacocke , Advisory Partner, Corporate Finance Partner |

New Zealand's private equity (PE) market is expanding. In 2017, the rate of PE investment reached $1.6 billion, up from $1.1 billion in 2016, BDO reports. According to Simon Peacocke, Corporate Finance Partner at BDO New Zealand, the favourable conditions that have allowed the country's PE market to thrive are only set to continue throughout 2018.

Economic growth and a renewed appetite for funding

"New Zealand businesses have a lot of growth potential because it's such a strong economy currently," says Simon. "There are favourable conditions for exiting businesses, including an active buyer market, strong interest from global acquirers and the private market, as well as a healthy appetite for funding from banks."

The country's Gross Domestic Product (GDP) grew 2.7 per cent between September 2016 and 2017, Stats New Zealand reports, while the unemployment rate decreased to 4.5 per cent in the fourth quarter of 2017, the lowest jobless rate since 2008.

New Zealand's economy is performing well, with a strong GDP and low unemployment.

New Zealand private equity firms still going strong

Much has been written in the news recently concerning Australian PE firms and their involvement in New Zealand. Due to our strong economy, Australian PE firms have been making significant purchases of New Zealand businesses. BDO data indicates the value of deals coming from Australian PE firms came to $735 million in 2017, compared to $311 million for New Zealand firms and $573 million from other sources (including the US and Asia).

However, to paint this as a story of the large Australian firm coming in and taking over New Zealand businesses would be misleading, Simon argues.

"Put simply, the number of companies seeking private capital is larger than the amount of private equity available from New Zealand firms," says Simon.

"New Zealand is an attractive option because our economy is so strong, and I would argue that we are part of a wider, Australasian mid-market PE group, with strong interest from both foreign and domestic businesses.

" There is still a variety of well-established Kiwi PE firms that have been very successful at buying, investing in and growing companies. Many of them have sold their investments, made good returns and have managed to raise further funds to repeat this on an even larger scale.

It's misleading to paint a picture of large Australian private equity firms buying out NZ businesses.

The lure of private equity

Private equity is just one of a number of M&A options open to businesses. It is currently the most popular because of the number of mid-market businesses seeking capital. Venture capital tends to focus on early-stage emerging technologies, and therefore there are simply fewer companies seeking this type of investment at this time. Initial Public Offering (IPO) and buy outs are much quieter (there was only one IPO last year).

 

Businesses are seeking funding from private equity for a number of reasons. Many privately owned businesses in the mid market (with values of between $20 and $100 million) are currently considering succession options, and PE is one of the most attractive forms of exit.

This is because when you sell to a PE investor they might acquire between 50 to 80 per cent of the business, as opposed to a trade sale to a large competitor who will normally buy all of the business outright.

Private equity is currently a much more attractive option than listing on the New Zealand stock exchange.

Business owners can still retain a share through a PE sale, and continue their involvement in a sector that they have thrived in and got to know extremely well. PE firms are generally very good at buying businesses and helping them grow, so owners have the chance to see the benefits of expansion while also winding down their level of responsibility.

This ability to expand means private equity is also an attractive option for businesses wanting to grow. Management and shareholders often remain in place, yet at the same time a merger through PE means businesses can benefit from the added experience, systems, processes and extra capital of the acquiring PE firm, which can cause much quicker development than simply relying on organic methods.

This potential for strong expansion will subsequently contribute to the prosperity of New Zealand's own economy - another reason why people shouldn't be worried about the degree of Australian PE involvement in the country.

Winning the best private equity deal

With the strong performance of the PE market only set to continue in 2018 and beyond, it's essential that businesses seek independent advice to ensure they are getting the best deal possible.

The Corporate Finance team at BDO New Zealand has years of experience in helping everyone involved in a private equity deal to get what they want. Contact us today for more information.