New Zealand PE picks up in 2016

Executive director of the New Zealand Private Equity and Venture Capital Association, Colin McKinnon talks to PEI about the positive year ahead in local private equity investing, as well the regulatory challenges.

Private equity activity in New Zealand is poised to rise. Wellington based Pencarrow expects to raise a new fund this year now that Pencarrow Fund IV, an NZ$124 million vehicle ($82 million; €74 million), is almost fully deployed, as reported by Private Equity International.

The New Zealand Superfund is a cornerstone investor in Fund IV with a NZ$30 million commitment. The local LP has sharpened its focus on direct investments backed by boosted staff numbers and the appointment in December of an alternatives specialist as deputy chair of its board of Guardians, as reported by PEI.

Last month, Champ Ventures became one of the latest Australian firms to invest in the local market, with its acquisition in January of a significant majority stake in New Zealand outdoor clothing and equipment retailer Macpac.

PEI sat down with the New Zealand Private Equity and Venture Capital Association executive director Colin McKinnon to get an overview of the market.

Q. What’s is the outlook for 2016?

A. There are a number of reasons why the outlook for the private equity industry is positive. And one of the main ones is that private equity firms are expected to share in future M&A activity.

This is substantiated by the November 2015 Australasian Capital Confidence Barometer by Ernst and Young, a six monthly survey of business leaders and their expectations. This survey shows that global M&A activity is expected to reach a six-year high in 2016, and this includes strong M&A activity in New Zealand.

Q. What else specifically supports this strong outlook?

A. Changes in regulations are expected later in the year, including legislation in respect of employee share schemes.

These will have a positive impact on the private equity industry because private equity needs to align its interests between investors, funds and management. One of the ways to ensure the company gets best performance is by incentivising senior management with a share in the company.

Q. What key challenges do private equity firms face in New Zealand?

A. One challenge facing private equity firms, either doing business in New Zealand or planning to do so, concerns the tax on patents and its effect on growth companies. This issue may arise this year and is one the government should look at.

International companies, including private equity firms domiciled outside the country, and intending to invest in New Zealand, would need to consider the tax companies would have to pay on patents. This legislation could discourage investment in New Zealand growth companies.

The legislation on patents dates back to the 1940s, and it is time that it was overhauled. An obvious way to minimise future cost is for investors to encourage companies to shift intellectual property to competitive offshore jurisdictions early in the life of the company. At the moment, New Zealand is not such a jurisdiction.

Q. What limitations are there on LPs?

A. Another challenge is that the KiwiSaver scheme is predominantly run by banks rather then private equity firms and does not invest growth capital into privately owned businesses.

While KiwiSaver is a voluntary work-based saving scheme for retirement that was initially designed to increase the pool of capital available for investment in growth companies, this is not happening.

The conservative offering of schemes, dominated by banks, has failed to make any significant investment in New Zealand private market assets. This is an issue created by the design of the scheme and market forces. Therefore, the main objective of KiwiSaver has not been achieved.