Opportunity in private equity - The Headliner

Pohutukawa II, has been launched as a vehicle for retail investors to invest in private equity.

Direct Capital is raising $250m for its new fund which will invest in what Ross George, Direct Capital’s managing director describes as ‘New Zealand Inc’.

This will be mid-sized private companies that require more capital to continue growing, expand into Australia or simply release capital for their owners.

It’s a familiar theme with Direct Capital investing more than $375m into 60 companies since 1994.  These include Ryman Healthcare, Blue Star, Ezibuy, NZ Salmon, Max Fashions, Rodd & Gunn, Innovair, Paper Coaters, NZ Pharmaceuticals, Express Logistics and GoBus.

George notes that the private market is substantially larger than the listed equities market and more representative of the economy, with some 80% unlisted.  He estimated some 1,500 companies exist in the mid-market that Direct Capital IV will target.

Direct Capital IV will be investing over the next I-3 years “a period we believe will offer very good opportunities as companies seek to reduce debt and move back to a more traditional equity base for funding growth and making acquisitions”.

It’s a reality of this economic environment that well funded companies with strong balance sheets will do well in what is going to be a tough period generally.

Direct Capital has been through a number of economic cycles and claim to have achieved “outstanding returns” for their investors. (Direct Capital I & II 22.6% annualised return; Direct Capital Ill 32.6% to 30.9.08; Pohutukawa 1 19.5% to 30.9.08.) 

The firm was established by George, Bill Kermode and Mark Hutton and they continue to own and manage the business, these days employing 13 investment professionals.

Back to Pohutukawa II.  It will be jointly managed by Direct Capital and ABN AMRO Craigs. Investors will invest a minimum of $25k to be drawn down as investments are made, typically over 3-5 years.

The investment approach will once again be to target mid market transactions (companies valued between $2Om and $150m) in NZ and Aussie.  It will invest in expansion, succession buy-outs and pre IPO deals. With the ease of credit over the last 5-7 years, banks provided the capital for what traditionally would have required new equity.  There is now a big shift from debt back to equity.

One of the advantages of investing in private equity is that valuations are less volatile.  Private equity can complete detailed due diligence on a business and the people involved well before investing, and the investment and terms can be tailored to reduce risk.

The private equity manager will normally join the boards of the companies in which the fund invests

We’ve seen headlines proclaiming the death of PE but Direct Capital believes that the years following major market falls have seen the best returns for P.E. investors.

Direct Capital IV will be larger than Direct Capital Ill and Pohutukawa I (in total $l3Om) but it will need to be with mid-market companies of up to $l5Om in value.  A fund of $250m allows them to have a good selection of 10 or so investments at an average of about $20m.