BIS 2 - 2018
(L-R) Joanna Lawn, Nigel Bingham, Mark Henderson and Kerri Dewe (Chair)

Valuable Advice from Workshop 2

Current Capital and Growth Opportunities, and How to Work Towards Realising Capital

Held on Thursday 27 June 2018


Most businesses want to grow, and that generally means finding capital. For SMEs – our small and medium enterprises – that can be quite a challenge.

It may become an even greater challenge. Surveys show that business confidence is subdued. Lowndes Principal Kerri Dewe contemplates that may, in part, be due to New Zealand’s familiar 10-year recessionary cycle, remembering the 1998 Asian crisis and 2008 GFC – will 2018 see hard times for business?

How SMEs fare affects the whole country as they account for 26% of GDP. We know that most are challenged in one way or another; for example, 61% of SME owners say they have not yet contemplated retirement. That suggests that a good number recognise they’ll have little choice but to keep working well past the day they qualify for a Gold Card.

With that as background, speakers at this Business Intelligence discussion were charged with identifying capital and growth options for SMEs, and the key issues for owners to consider. Among them, choosing between a public listing, seeking private equity or other financial investors, or trade sale.


Joanna Lawn, Head of Issuer Relationships at NZX Limited

Joanna develops commercial relationships with the exchange’s current and prospective equity, debt and fund clients, grows awareness of NZX’s products and services, and works with stakeholders in the broader New Zealand’s capital market to help grow it.

Joanna previously worked at ANZ in the Institutional Banking Division, and as Head of Client Insights & Solutions and Head of Business Management. Before ANZ, Joanna worked for Deutsche Bank Australia on buy and sell side mandates, capital raisings and project infrastructure transactions, and for nine years in London in the M&A markets divisions of Deutsche Bank, Bankers Trust and Lazard Brothers & Co.

Nigel Bingham, Managing Partner of Pencarrow Private Equity

Nigel has over 30 years in private equity and investment banking and is a council member of the New Zealand Private Equity & Venture Capital Association. He was a partner with investment bank Cameron Partners, and an executive at Fay, Richwhite. Today, Nigel represents Pencarrow, New Zealand’s longest established private equity firm, on the boards of portfolio companies MMC, Netlogix and Seequent. He is part of an investment team investing Pencarrow’s most recent fund targeting small to mid-market buyouts and succession and expansion capital opportunities in the New Zealand market.

Mark Henderson, Operating Manager at Snowberry New Zealand Limited

Having played a central role in the development of Snowberry over the last 10 years, Mark oversaw its sale to P&G in January this year. He remains as Operating Manager with responsibilities in finance, operations, production and bio-discovery management.

Before Snowberry, Mark founded and sold two successful businesses – Fleximak, a supplier of fluid transfer products to the oil, gas, marine and construction industries throughout the Middle East, and Seal Jet, manufacturer of custom-made industrial polymer and elastomer products.


Kerri Dewe, Principal at Lowndes

Kerri has been named “Next Generation Lawyer” by Legal 500 Asia Pacific and an “Associate to Watch” by Chambers Asia-Pacific. With extensive experience in mergers, acquisitions and disposals, and broad corporate and commercial law experience, her practice is focused on transactional M&A matters and business establishment, restructuring and joint venture advisory work. Since joining Lowndes in 2011, Kerri has had a leading role in a significant number of the larger transactions the firm has advised on, both on buy and sell side, and on corporate refinancing matters.



Joanna Lawn: It’s about growth

Companies seek capital for one reason above all, said Joanna, and that’s growth. Even when it looks like another reason is at play. For example, when Fisher & Paykel Appliances sold a stake of the company to Haier, that was widely reported as a strategic partnering initiative designed to give Fisher & Paykel Appliances access to a greater distribution network, which translates into more sales, which equals growth.

Similarly, when Fletcher Building sold its Formica brand in 2007, financial pundits dubbed it “capital recycling”. But what is capital recycling, asked Joanna, if not an opportunity to redeploy funds to somewhere where they can generate a better return?

Many companies listed on the NZX enjoy market capitalisations that put them well outside the SME camp. But that doesn’t mean SMEs – companies with a market cap below $50 million – can’t grow in the public market. SMEs represent 65% by number of all companies listed on the three boards, and $9.8 billion market cap (of $138 billion total listed equity). NZX is working hard to provide “a compelling service proposition making access to capital easier and more efficient for our issuers”.

The benefits of listing are increased profile (making it easier still to attract capital), credibility thanks to complying with the more rigorous requirements of the public market, and potential more funding sources for future capital raising ventures, and of course, growth.

The benefits of listing are profile (making it easier still to attract capital), credibility thanks to complying with the more rigorous requirements of the public market, and more potential funding sources for future capital raising ventures.

In the last 14 years, through 20 capital raisings and a 2013 listing on the NZX, A2 Milk has seen its market capitalisation increase from $9.6 million to $8.7 billion, a compound annual growth rate of 69%. Pushpay has also seen stellar growth, increasing 1,488% over 4 years from $74 million to $1.2 billion. It compliance-listed in August 2014 on the NZAX and migrated to the main board nine months later. Four of the top five fastest-growing New Zealand technology companies (see the TIN 2018 Report) are listed on the NZX and boast a three year compound annual growth rate of over 100%.

So does that mean any company with growth ambitions should seek a public listing? No – especially during the early, developmental, stages (see diagram below) or if a roll-up, consolidation or restructuring is on the cards. In those cases, private equity is likely to be a far better fit.

Other considerations include impact on employees, how much control the owners are willing to relinquish, and time frames for return (private equity investors tend to seek returns in less time than is expected from a publicly listed company).

As to whether private equity backing gives companies an advantage when they eventually list, the evidence suggests that while such an advantage may exist, companies must embrace all the elements of being listed to cash in on it. That includes having a strong corporate governance framework.


Nigel Bingham: Creating businesses that others would aspire to own

Private equity, primarily through limited partnerships, is becoming better known in New Zealand as a source of capital. Nigel said that New Zealand has one of the best LP regimes in the world, making the model attractive in this market.

Echoing Joanna’s comment, Nigel said each fund has a typical investment period of five years during which investments in portfolio companies are made, after which those portfolio companies are managed for long term growth. A typical PE fund will have shareholdings in up to 12 companies at any one time. At the time of raising a new fund investors will place keen scrutiny on the past performance and the team – it’s a “Darwinian industry” in which you need a good track record to survive.

By NZX standards, the typical PE investment is small. Because New Zealand’s economy is largely made up of unlisted companies, PE investment represents a massive opportunity for growth. However, typical investments are in companies with enterprise values ranging from $20 to $100 million in value. In NZ that represents a “target universe” of about 5,000 companies. The challenge for companies seeking PE capital is the small number of PE players at this end of the market. That means pricing is not particularly strong like the $100m-plus end and also means PE firms can be picky about where they put their money. Investment by private equity in these size businesses generally corresponds to cheque sizes of $5-50m. The attractive high growth characteristics of these businesses combined with sensible pricing of the investments means on average over the past 20 years, investment by private equity in those firms has generated 35% gross IRR. This compares to 8% for investments of up to $5m, 15% for those between $50 and $100m, and -1% for those over $100m in value.

“Accelerating growth highlights capability and organisational gaps needed to meet the challenges growth brings,” said Nigel. “We back CEOs and teams and try to fill those gaps.”
That starts early, with Pencarrow working alongside management “to develop a comprehensive plan in advance of making an investment”. That’s followed by (usually) two Pencarrow professionals sitting on the company Board, who bring skills in such areas as acquisitions, financing and business strategy and development. In addition Pencarrow identifies independent directors with specialist industry knowledge or domain capability to complement it and the management teams.

Emerging global champions – think Icebreaker – are especially attractive, particularly when led by high quality management teams who will make a financial commitment to the business. That creates a real opportunity for Pencarrow, and the company’s management, to “create value by building businesses that others would aspire to own.”


Mark Henderson: The 10-year-old start up

“It’s important for SMEs to seek growth capital,” began Mark. “But that’s difficult when you’re at a point of not signalling to the market that it should want you.”
He should know. Snowberry spent a good 10 years or so investing heavily in R&D to differentiate itself from its competitors. “We were an emerging local champion but had a lot of red ink, especially from investing in science,” he said. And in the early years, the science was unproven.

For about six years, Snowberry partnered with the University of Auckland and a clinical partner to demonstrate the dermal delivery of peptides. Success would create brand authenticity and a strong platform for commercialisation, but when things are tough, there’s a temptation to diversify and to over-reach, and we were guilty of both, which meant there were times “we were throwing money in the wrong places”

That was a mistake and subsequently, the company self-imposed constraints and set key milestones related to the core business. If the science didn’t work at key points, “we could not deliver on our consumer-value proposition, and we would close the doors.”

But proving the science was no guarantee of capital-raising success either. The fact is, said Mark, cornerstone investors for science-based products are hard to find. If they’re at all risk-averse, and frankly, investors of that kind were mostly, in our experience, they want to see successful commercialisation. But that or course, is a different scenario. So, there were many times when we felt we were talking with investors at cross-purposes – and for a small company that’s very frustrating.”

The breakthrough for Snowberry came in 2015 with the commercialisation of its world-first science in its New Radiance Face Serum. “We were the only skincare brand invited to present an anti-wrinkle serum at the World Conference of Dermatology in Vancouver,” said Mark, “and we sold six weeks of stock in 20 hours.”

Even so, the company was still “science hungry” and still in search of a cornerstone investor. “We always felt too small, though, to talk to Joanna or Nigel.” That limited Snowberry’s options. Crowd-funding maybe? Banks? Venture capital?

Or there was a third area: a capital realisation strategy. That, too, posed major challenges since to some investors, Snowberry now appeared to be “a 10-year-old start up still making no money,” operating in a market awash with skincare brands.

The payoff came in February this year when Snowberry sold to Procter & Gamble. “In hindsight, it’s clear and probably understandable that P&G had far greater understanding of Snowberry’s value proposition than local investors, and had greater appreciation of its growth potential. Ultimately, the best opportunity for investment came from within our own industry, from a company whose values and mission are surprisingly close to our own.”

“The best opportunity for investment came from within our own industry,” said Mark.

Lessons learned along the way include never losing sight of the original business vision and avoiding the distraction of parallel ‘opportunities.’ Advice when taking to investors: Be sure you have a quality information memorandum. Second, be well prepared for due diligence. Get your data room set up and gather all the information you can, including things you think a potential investor won’t need. “It lends a strong sense of surety,” he said. Third, be realistic about your company’s value and establish a value model appropriate for your business. Being geared (or not) for a global market will impact value. Finally, there is no doubt that 3-4 years of audited accounts showing steady growth, and ideally profit, is pretty much essential to win local investor confidence.

Snowberry’s sale has seen the existing management team remain in place, and friends and family who supported the company throughout its first 10 years well-rewarded.


For a pdf version of the valuable advice.


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