IT in New Zealand IT Financing

IT Financing in New Zealand leaves a lot to be desired. Like many other aspects of IT in New Zealand, it does exist but is not pronounced either in terms of private or public funding for IT companies. The good news is that the AUT Technology Park sparks communication, development, and sometimes even dollars between start-ups, established businesses, and venture capitalists. Some more good news is that there are venture capitalists in New Zealand willing to part with some investment dollars, even after the dotcom crash. Little funding exists from private sources for R&D, however the government does provide some resources in this area. This is discussed in Size of Domestic IT Market.

According to the ICT Taskforce, capital markets in New Zealand for both private equity and listed companies are fairly underdeveloped. making it difficult for companies to raise money in New Zealand to grow their businesses. 36

HIGHLIGHTS

2000

In 2000, Telecom made New Zealand's largest corporate investment in a venture capital fund. Telecom stumped up $40 million in seed capital to get TMT Ventures under way, a new venture capital fund that will specialize in telecommunications, media and technology companies. The fund expected to invest $150 million over the next two to four years using money provided by Australian, New Zealand and international corporations and institutions.

While Telecom expects good financial returns in time, the rewards would begin immediately given the window to new developments financed by the fund and through its relationship with global venture capitalist Advent International. TMT will be jointly managed by US-controlled Advent and the formerly listed local venture capital specialist Direct Capital. 37

2002

"Venture capital fund TMT Ventures has bought a 40 per cent stake in fast-growing secure internet infrastructure provider EMS Global for $5 million. TMT, which is on the shortlist to manage some of the Government's Venture Investment Fund, is a $100 million fund put together by Telecom New Zealand, Alcatel, Lucent and Marconi and financial investors. The fund is managed by New Zealand-based Direct Capital and Advent International, a United States venture firm. EMS Global chief executive Waynne Dartnall said the investment complemented the position taken last year by listed European technology venture capital investor 3i, which paid $5 million for 35 per cent of the company." 38

FDI SWEETSPOTS

"FDI Sweetspots New Zealand should proactively develop a portfolio of sweet spots to ensure that it meets its greenfield FDI target of several billion dollars in 2011. Our analysis of four sample sweet spots (wireless technologies, functional foods, film production, and agricultural biotechnology) indicates potential FDI inflows to New Zealand of approximately $200 million to $250 million per annum in each sweet spot. This analysis is based on New Zealand's potential share of estimated global FDI inflows in the particular sweet spot." 39

Figure 1. Identification of Sweet Spots for FDI Attraction

VENTURE CAPITALISTS

Direct Capital

"Direct Capital Private Equity ("Direct Capital") is New Zealand's leading 'private equity' and 'venture capital' house. We are both a direct equity investor and a manager of venture capital funds for institutional and corporate investors.

Direct Capital's activities range from technology start-ups to buy-outs and development capital. Because of its scale Direct Capital has an ability to provide several rounds of funding using different managed funds. Direct Capital is owned by executives and has a high level of executive resource available. There are three areas to our business:

1. Private Equity: leveraged buy-out, MBO, MBI and development capital. Traditionally this area covers large corporations divesting non-core business units, expansion capital in the manufacturing sector and businesses in attractive sectors that require new leadership. Businesses suitable for leveraged buy-outs are typically bricks and mortar businesses with strong, reliable cash flows.

2. TMT Ventures: $150m corporate venture capital program seeded by Telecom New Zealand focusing on the digital economy - communications, technology, e-commerce and media. TMT Ventures offers a unique blend of corporate and institutional partners, with world-class venture capital management. It is jointly managed by Direct Capital and US based global private equity investor Advent International. Other partners include Lucent Technologies and Marconi.

3. Carter Holt Harvey Venture Capital: corporate venture fund that invests in new ventures linked to Carter Holt Harvey's various businesses. CHH VC invests in both internally generated and external opportunities.

Direct Capital typically takes minority equity stakes in privately held, growth oriented businesses in New Zealand and Australia. We invest in a wide range of industries, with the only excluded sectors being resources and property. We have made 12 of our 25 investments to date in the technology sector and continue to view communications and technology opportunities favorably.

Direct Capital seeks to partner in businesses with existing shareholders and management, in order to maximize growth and enhance shareholder value. We have a preference for minority stakes, and while not having involvement in the day-to-day running of the business, we are an active shareholder. Board representation is a usual requirement.

Direct Capital is a provider of 'patient equity' and typically has a long-term investment horizon. We focus on increasing the wealth of all shareholders over this period. Cash generated in the business is expected to be re-invested to fuel further growth.

Our team brings considerable investment experience to investee companies, together with a network of leading global venture capitalists, investors, investees and professional advisers. Our investment team is experienced in all aspects of acquisitions, mergers and disposals, and has undertaken many such transactions on behalf of its portfolio companies. We also have specific expertise in the areas of corporate governance, public listings, financial governance, corporate structuring and strategic planning.

In the last six years Direct Capital has made 25 venture capital and private equity investments totaling more than $140m. In addition Direct Capital has made 7 investments with our investee companies. Direct Capital has created liquidity in 11 investees including 4 successful IPOs." 40

Direct Capital 's Investment Partners

"Global private equity house Advent International is Direct Capital's joint venture partner in managing TMT Ventures. Advent is a major international player that has made over 500 investments since its inception and has US$4.5 billion under management. Among its portfolio companies Advent has achieved more than 125 IPOs, 67 of them since 1996. Operating in more than 30 countries, with six offices in Asia, Advent has a strong history of investment in communications companies through its DMC (Digital Media Communications) family of funds. The company raised its third DMC fund (of US$345m) in 2001.

Established in 1945, 3i has undertaken 50 per cent of the transactions in the British venture capital industry. It is Europe's leading specialist provider of investment capital to unquoted businesses, with 29 offices throughout Europe and Asia. It provides investment capital - both equity and long-term loan capital - to businesses that do not have ready access to capital markets. 3i has completed more than 13,000 transactions to date, with total investment of more than $31 billion (more than 35% of New Zealand's GDP). Today, 3i has a portfolio of investments in over 3,000 businesses, most of which have a turnover of between £1 million and £100 million. Technology businesses represent 40% of 3i's portfolio and in the 2000 financial year 3i invested in over 350 technology businesses. 3i invests over US$8.6m each working day.

AMP Henderson Global Investors is Australasia's largest private capital investment company, with over $7 billion committed to private capital world-wide. Recognizing good opportunities for private capital in New Zealand, AMP commenced private capital operations locally in 1998. AMP Henderson Global Investors is a significant private capital investment manager in New Zealand. Direct Capital has also made two investments with AMP Australia." 41

IPO PROBLEMS

"The primary area of local capital market failure was identified by the Taskforce as being at the initial public offering ("IPO") stage. The New Zealand share market has "failed to fire" for over 10 years and is not seen as providing an attractive basis for raising capital for ICT companies or providing liquidity for founders to sell part of their shareholdings.

This becomes relevant once a company grows to a market capitalization of around $50 million. Before that stage, direct investment by other entrepreneurs or venture capitalists is, for the reasons stated above, preferred to investors from the market. For this reason, the NZSE New Capital Market is not considered a mainstream source of capital. The Taskforce welcomes the current initiatives to improve the performance of the New Zealand Stock Exchange.

The total value of the New Zealand sharemarket is in the order of NZ$45 billion24, of which 21% by value is accounted for by Telecom, with all other listed ICT companies accounting for a further 1%. The market capitalization of the Australian share market is approximately 20 times that of New Zealand for a population that is less than five times greater. Nasdaq listing currently provides the most attractive pricing and liquidity for IPOs but the entry hurdle is high with a market capitalization of US$150 million being regarded as a minimum entry point. There are currently only two New Zealand-originated companies listed on Nasdaq, compared to 26 for Ireland and more than 70 for Israel." 39

	IT Financing
PAGE SOURCES	IT Financing in New Zealand leaves a lot to be desired. Like many other aspects of IT in New Zealand, it does exist but is not pronounced either in terms of private or public funding for IT companies. The good news is that the AUT Technology Park sparks communication, development, and sometimes even dollars between start-ups, established businesses, and venture capitalists. Some more good news is that there are venture capitalists in New Zealand willing to part with some investment dollars, even after the dotcom crash. Little funding exists from private sources for R&D, however the government does provide some resources in this area. This is discussed in Size of Domestic IT Market. According to the ICT Taskforce, capital markets in New Zealand for both private equity and listed companies are fairly underdeveloped. making it difficult for companies to raise money in New Zealand to grow their businesses. 36 HIGHLIGHTS 2000 In 2000, Telecom made New Zealand's largest corporate investment in a venture capital fund. Telecom stumped up $40 million in seed capital to get TMT Ventures under way, a new venture capital fund that will specialize in telecommunications, media and technology companies. The fund expected to invest $150 million over the next two to four years using money provided by Australian, New Zealand and international corporations and institutions. While Telecom expects good financial returns in time, the rewards would begin immediately given the window to new developments financed by the fund and through its relationship with global venture capitalist Advent International. TMT will be jointly managed by US-controlled Advent and the formerly listed local venture capital specialist Direct Capital. 37 *2002* "Venture capital fund TMT Ventures has bought a 40 per cent stake in fast-growing secure internet infrastructure provider EMS Global for $5 million. TMT, which is on the shortlist to manage some of the Government's Venture Investment Fund, is a $100 million fund put together by Telecom New Zealand, Alcatel, Lucent and Marconi and financial investors. The fund is managed by New Zealand-based Direct Capital and Advent International, a United States venture firm. EMS Global chief executive Waynne Dartnall said the investment complemented the position taken last year by listed European technology venture capital investor 3i, which paid $5 million for 35 per cent of the company." 38 FDI SWEETSPOTS "FDI Sweetspots New Zealand should proactively develop a portfolio of sweet spots to ensure that it meets its greenfield FDI target of several billion dollars in 2011. Our analysis of four sample sweet spots (wireless technologies, functional foods, film production, and agricultural biotechnology) indicates potential FDI inflows to New Zealand of approximately $200 million to $250 million per annum in each sweet spot. This analysis is based on New Zealand's potential share of estimated global FDI inflows in the particular sweet spot." 39 Figure 1. Identification of Sweet Spots for FDI Attraction 39 VENTURE CAPITALISTS *Direct Capital* "Direct Capital Private Equity ("Direct Capital") is New Zealand's leading 'private equity' and 'venture capital' house. We are both a direct equity investor and a manager of venture capital funds for institutional and corporate investors. Direct Capital's activities range from technology start-ups to buy-outs and development capital. Because of its scale Direct Capital has an ability to provide several rounds of funding using different managed funds. Direct Capital is owned by executives and has a high level of executive resource available. There are three areas to our business: 1. Private Equity: leveraged buy-out, MBO, MBI and development capital. Traditionally this area covers large corporations divesting non-core business units, expansion capital in the manufacturing sector and businesses in attractive sectors that require new leadership. Businesses suitable for leveraged buy-outs are typically bricks and mortar businesses with strong, reliable cash flows. 2. TMT Ventures: $150m corporate venture capital program seeded by Telecom New Zealand focusing on the digital economy - communications, technology, e-commerce and media. TMT Ventures offers a unique blend of corporate and institutional partners, with world-class venture capital management. It is jointly managed by Direct Capital and US based global private equity investor Advent International. Other partners include Lucent Technologies and Marconi. 3. Carter Holt Harvey Venture Capital: corporate venture fund that invests in new ventures linked to Carter Holt Harvey's various businesses. CHH VC invests in both internally generated and external opportunities. Direct Capital typically takes minority equity stakes in privately held, growth oriented businesses in New Zealand and Australia. We invest in a wide range of industries, with the only excluded sectors being resources and property. We have made 12 of our 25 investments to date in the technology sector and continue to view communications and technology opportunities favorably. Direct Capital seeks to partner in businesses with existing shareholders and management, in order to maximize growth and enhance shareholder value. We have a preference for minority stakes, and while not having involvement in the day-to-day running of the business, we are an active shareholder. Board representation is a usual requirement. Direct Capital is a provider of 'patient equity' and typically has a long-term investment horizon. We focus on increasing the wealth of all shareholders over this period. Cash generated in the business is expected to be re-invested to fuel further growth. Our team brings considerable investment experience to investee companies, together with a network of leading global venture capitalists, investors, investees and professional advisers. Our investment team is experienced in all aspects of acquisitions, mergers and disposals, and has undertaken many such transactions on behalf of its portfolio companies. We also have specific expertise in the areas of corporate governance, public listings, financial governance, corporate structuring and strategic planning. In the last six years Direct Capital has made 25 venture capital and private equity investments totaling more than $140m. In addition Direct Capital has made 7 investments with our investee companies. Direct Capital has created liquidity in 11 investees including 4 successful IPOs." 40 *Direct Capital 's Investment Partners* "Global private equity house Advent International is Direct Capital's joint venture partner in managing TMT Ventures. Advent is a major international player that has made over 500 investments since its inception and has US$4.5 billion under management. Among its portfolio companies Advent has achieved more than 125 IPOs, 67 of them since 1996. Operating in more than 30 countries, with six offices in Asia, Advent has a strong history of investment in communications companies through its DMC (Digital Media Communications) family of funds. The company raised its third DMC fund (of US$345m) in 2001. Established in 1945, 3i has undertaken 50 per cent of the transactions in the British venture capital industry. It is Europe's leading specialist provider of investment capital to unquoted businesses, with 29 offices throughout Europe and Asia. It provides investment capital - both equity and long-term loan capital - to businesses that do not have ready access to capital markets. 3i has completed more than 13,000 transactions to date, with total investment of more than $31 billion (more than 35% of New Zealand's GDP). Today, 3i has a portfolio of investments in over 3,000 businesses, most of which have a turnover of between £1 million and £100 million. Technology businesses represent 40% of 3i's portfolio and in the 2000 financial year 3i invested in over 350 technology businesses. 3i invests over US$8.6m each working day. AMP Henderson Global Investors is Australasia's largest private capital investment company, with over $7 billion committed to private capital world-wide. Recognizing good opportunities for private capital in New Zealand, AMP commenced private capital operations locally in 1998. AMP Henderson Global Investors is a significant private capital investment manager in New Zealand. Direct Capital has also made two investments with AMP Australia." 41 IPO PROBLEMS "The primary area of local capital market failure was identified by the Taskforce as being at the initial public offering ("IPO") stage. The New Zealand share market has "failed to fire" for over 10 years and is not seen as providing an attractive basis for raising capital for ICT companies or providing liquidity for founders to sell part of their shareholdings. This becomes relevant once a company grows to a market capitalization of around $50 million. Before that stage, direct investment by other entrepreneurs or venture capitalists is, for the reasons stated above, preferred to investors from the market. For this reason, the NZSE New Capital Market is not considered a mainstream source of capital. The Taskforce welcomes the current initiatives to improve the performance of the New Zealand Stock Exchange. The total value of the New Zealand sharemarket is in the order of NZ$45 billion24, of which 21% by value is accounted for by Telecom, with all other listed ICT companies accounting for a further 1%. The market capitalization of the Australian share market is approximately 20 times that of New Zealand for a population that is less than five times greater. Nasdaq listing currently provides the most attractive pricing and liquidity for IPOs but the entry hurdle is high with a market capitalization of US$150 million being regarded as a minimum entry point. There are currently only two New Zealand-originated companies listed on Nasdaq, compared to 26 for Ireland and more than 70 for Israel." 39