Charles Hyde New Zealand Capital Markets Symposium 10 August 2017 Senior Investment Strategist NZSF Investment Approach Over half of all NZSF capital is invested passively Active investments in NZ private equity account for 10 of Fund NAV ID: 782537
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Slide1
NZ Private Equity – NZSF Perspective
Charles Hyde
New Zealand Capital Markets Symposium, 10 August 2017
Senior Investment Strategist
Slide2NZSF Investment Approach
Over half of all NZSF capital is
invested passively
Active investments in NZ private equity account for ~10% of Fund NAVDirect investmentsKaingaroa
, Kiwibank, dairy farms, Hobsonville
Indirect investments
NZ expansion capital, real estate
We distinguish between the investment idea (‘opportunity’) from its implementation (‘access point’)
If we can only access a median manager to implement a great investment idea, it may still be worth doing
Slide3NZSF Investment Approach
An
opportunity is attractive ifIt has an attractive risk/return profile – exceeds its risk-adj. COE
It is consistent with our TOMLeverages endowments; scalable; aligns with RI principles; retain control
Preference is to invest directly if possibleWe will hire external managers if we lack capability, capacity, or proximity to the opportunity
Or direct access is not cost effective
E.g., requires building an internal team that is not scalable
We can identify good, flexible managers at reasonable cost
Slide4NZ Private Equity Market
There are many small private companies in NZ
But most are very small
Partly reflects the small size of the NZ listed market
Investing at the smaller end has no impact on a $35b fund
Investing in a small company requires at least as much effort as a large company
Slide5NZ Private Equity Market
We segment the NZ private equity market as follows
Angel/VC is subscale and risky; returns not convincingBuyout offers scale; but is well served in terms of capital
Expansion capital segment is where we see greatest opportunity
Slide6Expansion Capital
NZ expansion
capital space is characterised byEV of $15-50mRevenue of $10-50m; CAGR > 20%
Positive EBITDA (or close)Low or no debt – CF too risky
Attractive firms in this space haveClear and credible high growth plan
Proprietary/
d
efendable IP
Operating below potential, but not in distress
Resolved any start-up issues; sound governance
Genuine investment opportunities over 3-7 year timeframe
Slide7Returns
I
nvestment returns have been strongAverage net return is well above any reasonable cost of equity
NZX Small Cap Index returned only 9% over the same periodWe’ve been pleased with our portfolio performance to date
Slide8Current state of market
T
he listed market looks expensiveBut recent PE transaction prices are close to average
And below the EV/EBITDA of the listed market
Slide9NZSF View
NZ e
xpansion capital is attractive due to a structural deficit of equity capital funding
Strong demand for capitalAging demographic means SMEs looking for exit optionsWeak supply of capital
SMEs can’t access debt funding; too small to listFew local sources of PE fundingLocal PE managers; LPs; Trade buyers
Limited presence of offshore PE managers
Little access to retail investor capital
Informational asymmetries also create opportunities due to the small, opaque, closely-held nature of the space
Slide10NZSF View
NZ expansion
capital leverages our endowmentsLong term horizon
Tolerance for illiquidity – certainty of liquidity profileSovereign status
Expect returns in high teens, assume volatility ~30%Demand liquidity and NZ concentration premiums
Potential access points
Public market: very few listed SMEs in NZ
Direct investment: requires large, experienced team; costly to build
External managers: local managers exist with good track records
Slide11NZSF Commitments
Over the past 10 years we have committed $480m to NZ expansion capital managers
Pre-2016 vintages in harvest modeWe will invest up to $260m in NZ SMEs over next 5-10
yrsDirect Capital V - $90m
Pioneer Capital III - $120mMovac IV - $50m
NZSF also has an internal NZ
d
irect investment team
Larger transactions:
Kaingaroa
,
Kiwibank
, Z Energy, Datacom
Leverage endowments: sovereign, long horizon with low liquidity needs
Hub focuses on specific sectors
; co-investing with
Iwi
Slide12Recent Developments
Some issues we think about
Capital commitments2016 was a very large year for capital raisings
(~$1b)Are our managers competing for the same deals? Discipline on origination criticalNow have ‘swim lanes’ in place
CompetitionWe are seeing more foreign PE funds targeting NZ
Monitoring situation closely
Control
Our opportunistic approach gives us the flexibility to respond to a changing environment
Our 2016 vintage funds give us flexibility