Lance Wiggs

NZHerald has a piece on private equity (PE). Several things stand out. Firstly there are apparently no NZ based PE funds looking for investors at the moment, secondly you can apparently get into PE with $10-20k and thirdly PE will get you returns of 20-30% per year.

There may well be funds being raised – but it may not be public knowledge. Given the porousness of the scene NZ business I would be surprised though if this were not true. There is room for a big smart fund though.

Any private equity fund accepting $10-20,000 investments is going to be spending too much time and money on attracting and handholding investors and not enough time on investing.  The ideal fund has a handful of big, long term investors and that is it.

The example given, Pohutukawa Fund (PF), is not a good one. It actually really isn’t a private equity fund, as the shares are tradeable. I would think of PF as an investment company – much like a junior version of Infratil. PF had 1750 investors and raised $53m – that’s just over $30,000 average investment, which is a lot to look after. Meanwhile, in the 2 years and 3 months since the fund closed, they have invested in a total of just 5 businesses, and committed 10% of their capital to another fund. Only $13.3m of the $53m was invested by November 30 2006. Indeed PF took until July 2005 to make their first investment, and many of them appear to be in Australia. This is far too slow in a market this sleepy, and the fund of fund structure seems unwieldy and expensive.

Let’s look at that 20-30% return number. Private Equity returns in the USA have been really impressive over the years, but recently the amount of money flowing there has meant depressed returns for all but the best funds. Funds are now looking at international markets to get returns – hence the sudden interest in little old NZ by the likes of TPG. However those great US based funds are closed to ordinary investors. My former Professor  Dave Swensen from Yale’s endowment may get a look-in at a new fund raised by KKR if he wanted (he probably wouldn’t), but even NZ’s wealthiest individuals would find it extremely difficult to invest in the likes of Sutter Hill, Carlye Group, TPG and other big Hedge /PE firms. Meanwhile the smaller and less established firms are really struggling as there is too much money chasing to few deals.

That said there should easily be 20-30% returns waiting to be realised in the NZ market, which has been neglected. What is needed is smart local players with big pockets and aggressive attitudes. The next 2 years should be interesting as the international players enter and the locals react.

Great little success story from Wishbone. $10m turnover, 100 employees,  13 stores, great supermarket distribution and, most importantly, a great product. (Terrible, out of date, single page website though)

Their business model is interesting – they manufacture yummy ready to cook food, and sell it through 3 channels – supermarkets, takeaway stores (either ready to eat or microwave it yourself) and now in a sit-down restaurant. Soon they will also market directly through eCommerce and export. I particularly like their Wellington airport store.

I’d guess (hope?) they have seperated the two business lines’ P&L’s – one focusing on providing great dishes that are in demand and delivered at low cost, and the other focusing on shifting as many of those dishes at optimised margins.

The nice thing about this model is that it removes much of the production planning problem, which is painful with (semi) fresh food. If one outlet (say the restaurant) is running low on dinners then more can be (made and) delivered from the central kitchens. Similarly if there is overstock at one place then some products can be redirected to other channels and planned production scaled back.

The risk they have is the increased managment overhead of too many distribution channels, which will blow out the number of staff, overheads and capex required. They are looking for investors – but if I was them I’d initially stay lean, deliver on the relatively cheap online/phone solution, then go for exports with local (i.e. foreign) J.V. partners.

Well done to founders Andrea Gibson Scarlett and Shayne Scarlett.

So much for confidentiality – Most if not all of the Yellow Pages bidders have been identified
by three(!) insiders. At least 9 companies are bidding, apparently, and KKR, CCMP Capital Asia, Pacific Equity Partners, Carlyle, Bain Capital, Providence Equity Partners, CVC Capital and TPG are eight Private Equity firms interested along with Sensis – Telstra’s directory unit.

Goldman Sachs is earning their fees – letting everyone know there is lots of interest will magnify the auction effect and raise the final price. But this is wholesale leaking of (most likely) confidential information, and it seems somewhat ethically challenging. It makes NZ seem like a gossiping backwater. I wonder whether the bidders knew their presence would be announced?