This article has been written by Satendra Pratap Singh pursuing the Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho. This article has been edited by Ruchika Mohapatra (Associate, Lawsikho).
Table of Contents
Introduction
New Zealand has a small open economy with a population of only 4.7 million people. The workforce is well educated and 75%. of the population (aged 25-64) has qualifications above secondary education. It has a parliamentary democracy and constitutional monarchy, based on a proportional representation electoral system. The traces of English common law are quite visible in legal institutions, providing a well-defined, open and transparent business environment. Also, the government has made friendly moves to cater to various business needs like double tax treaties with over 30 countries across the globe.
The estimated GDP in 2016 was approximately $248 billion diversified in various sectors like manufacture, transport, communication, construction, and the primary sector which involves agriculture, fishing, and forestry. Due to its international competitive edge in the primary production sector, it has been successful in exporting various dairy products (milk powder, butter, cheese), tourism and meat. The rise in exports is one of the outcomes of the CER (Closer Economic Relations) agreement which was signed with Australia in 1983, which exposed the previously protected manufacturing sector to the international competition from Australia and ignited the process of specialisation.
Of late, Kiwi’s creative industries, as well as information technology, have been able to garner investment attention especially in screen production and digital animation. In 2018, the top 200 technology exporting companies had seen a growth of 11%, and around $.1.1 billion in private equity and venture capital funds were invested in the overall technology sector.
Three of the top 5 trading partners are located in the Asian region and the Kiwi nation has free trade agreements with all major trading partners including Australia, China, and ASEAN. Despite an international rise in public listed companies in the 1990s, New Zealand has private companies more than public listed companies. However, due to the overall blend of economic, legal, and social environment that provides strong preconditions for private equity investment it ranks 8th in an index for the most attractive market for private equity globally (out of 125 countries), comparable to European countries such as Germany, Denmark, Switzerland, and Norway.
Recent investments (SaaS)
In September 2021, Amazon Web Services decided to invest $7.5 billion for over 15 years in Auckland to base cloud computing data centers. The tech giant has chosen the city because of its telecommunications connections and skilled workforce. The AWS team has also estimated that the investment would create at least 1000 jobs and contribute $10.8 billion to New Zealand’s GDP over the next 15 years.
In May 2020, Microsoft announced plans to build its first data center in North Island, home to the cities of Auckland and Wellington adding it to its 59 other data centers across the globe. Dairy giant Fonterra was the first major company to sign up to be a part of the multi-million dollars project. Under the said agreement, Fonterra will migrate critical parts of its operations to Microsoft’s cloud service, Azure. Microsoft Surface devices will also be provided to key Fonterra staff across Australia and New Zealand to support business across its network of 19,000 staff and 10,000 farmers. Spark NZ, a leading digital services organization and Microsoft cloud customer has also partnered with it to empower innovation and focus on building cloud and digital capability. In New Zealand, around 886 SaaS start-ups are ranging from Artificial intelligence, cloud-based, project management, job management, web security, etc.
Pandemic – a hindrance?
Well, many might assume that pandemic might have led to a downward curve in terms of investment activity in comparison to the trends till 2019 but the overall figures were quite astonishing. The year to 31 December 2020 was characterized by a record level of investment activity capping it at $2,531m, an increase of $351m from 2019 ($2,180m) driven by record levels of activity in the Mid-market category. The figures for 2020 are also significantly higher than the decade average of $1,315m. Leveraged Buy-Outs (LBOs) activity was also on a higher side driven by the EQT infrastructure acquisition of Metlifecare. The most eye-catching figures were restricted to private equity investments which saw a staggering growth of $824m to reach $2,292m from $1,034m in 2019. The international attraction for investment in software/ technology in hubs like Wellington and Auckland continues the theme seen in recent years.
Venture and early-stage capital
The early-stage investment includes the activity of fund managers, angel networks, and individuals. The stage of early-stage funds varies from large venture capital funds (greater than $50m funds under management) to small and micro venture ($2m- $10m funds under management) The investors usually appoint a fund manager or general partner who is given a position inboard to have a check on the major decisions taken by the investee company and to manage the funds invested by the investor.
The total investment value of undisclosed venture activity in New Zealand was $127.2m in 2020 as against $112m in 2019. There has also been an increase in volume which rose to 92 in 2020 from 46 in 2019. The financial year of 2017 and 2018 saw the highest venture investment in the last decade. The figures for 2020 would have been staggering high if the pandemic could have been avoided.
Mid-market investment
Although there is no concrete definition of mid-size businesses (MSBs) across the world, it is usually decided based on two factors: manpower and revenue. Keeping in mind the geography and population of Kiwi nation as compared to other highly-developed economies, the MSB in New Zealand can be defined as businesses having revenue between $5m and $30m and having employed people between 20 and 99.
MSBs in New Zealand are the powerhouse of growth, employment, and revenue, which is unfortunately overlooked while pushing the small business and celebrating the victories of larger ones. The growth in new players in the mid-size market has increased significantly in the last decade which has placed MSBs at 10,698 as compared to 2,460 large and 4,71,021 small enterprises. Amongst these MSBs, 65% are 11 years or older.
The contribution in GDP in the year 2017 was marked at $35 billion from a total GDP of $204 billion. The statistics have the potential to witness drastic upward trends but that is possible only through government initiatives and major changes by businesses themselves. The MSBs also accounts for employment generation close to 4 lakhs in 2017 which is 21% of the total employment in New Zealand. The regions having a wide presence of MSBs includes and are not limited to Auckland (34%), Canterbury (14%), and Wellington (10%).
Interestingly, the MSBs in New Zealand have an equity to asset ratio similar to those with small enterprises which indicates that MSBs behave like small businesses when it comes to procurement and utilization of finance. The tendency of entrepreneurs to opt for debt financing instead of private equity is constraining the growth prospects. There is a sense of disliking in the mid-size market when it comes to dilution of control in businesses by bringing in investors which are eventually placing the entrepreneurs in oblivion to huge capital along with expertise and network.
Case studies
EQT infrastructures and metlifecare
In December 2019, Metlifecare announced to the New Zealand Stock Exchange that they had entered into a Scheme Implementation Agreement (SIA) under which EQT, a highly respected European investment company, will acquire all of Metlifecare’s shares for $7.00 per share. The said buyout transaction was revised in the month of July 2020 after a dispute between the two parties concerning the revised share prices. The company’s largest shareholder, NZ Super, which holds about 19.9% stake, agreed to vote in favor of the deal offered by EQT offering to buy shares at $6. The intention behind the partnership is to support the Metlifecare team to embark on the journey to develop and operate high-quality retirement villages and continue to provide exceptional care to New Zealanders which Metlifecare is known for.
TR group
TR Group is the largest heavy vehicle rental and lease company that has been facing market forces since 1992. It has a wide customer base of around 1,300 with a fleet of more than 6,500 vehicles from 15 branches throughout New Zealand and Australia. The company is headquartered in Auckland and employs around 150 dedicated staff members. In 2020, the company invited New Zealand’s largest private equity player Direct Capital, NZ Super Fund, and Kiwi investment to acquire 31% shareholding in TR Group alongside founders, Managing Director, and the Carpenter Family. The main mission for this investment was to expand TR Group’s presence in Australia which is according to them an untapped market.
Conclusion
The unprecedented disruptions caused by the covid-19 pandemic have indeed impacted some industries and sectors in 2020 but the rigid support provided by the private capital funds helped various businesses to recover and upgrade to new levels and adjust to new business practices. Although the economic recovery might take some time, the market is optimistic and the appetite of the investors (both domestic and global) for the private market is healthy. The figures across various types and stages of investment indicate a brighter picture in the coming years. The entry of new sectors like technology (SaaS) has been successful in attracting major players like Amazon and Microsoft to invest in their growing economy. Over the last decade more than $8.5 billion has been invested in Kiwi companies and interestingly in that same time over $4.6 billion has been returned to investors as earnings which are eventually reinvested in other areas. The mid-market continues to be a top performer in investment activity in New Zealand and the capital currently invested continues to accelerate the ambitions of existing companies in fund portfolios. There continues to be a huge amount of capital availability from domestic as well as international funds providing enough alternatives to companies to take a safe and better decision for sustainability and growth of the company. The Govt. of New Zealand has also been able to receive accolades at the international level for creating a vision lucrative for the entrepreneurial spirit of the country which further instigates confidence in both investors and investors.
References
- file:///C:/Users/hp/Desktop/PRIVATE%20EQUITY/20215-000676_NZPC-Monitor-2021_FINAL_Digital.pdf
- file:///C:/Users/hp/Desktop/PRIVATE%20EQUITY/New-Zealand-Private-Equity-Market-Overview-Report_website.pdf
- https://www.stuff.co.nz/technology/122292033/microsoft-signs-fonterra-as-first-major-anchor-tenant-for-new-data-centre
- https://www.stuff.co.nz/business/opinion-analysis/300418674/amazon-investment-new-zealand-has-10-years-to-supercharge-our-saas-sector
- https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/mckinseys-private-markets-annual-review.
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