Why Private Equity?

Why Private Equity?

Market conditions can present a compelling opportunity for private equity investors

In periods of weaker economic conditions and situations such as the credit crisis, there are likely to be private equity investment opportunities. Private companies are likely to raise equity to fund growth and for working capital needs. These factors combined, may lead to greater private equity investment opportunities, with less competitive pressure on investment valuations.  Also, businesses with private equity backing and strong balance sheets will be well placed to capitalise on investment opportunities to strengthen their competitive positions.

Long term returns from diversified private equity funds in established markets have been superior to returns from listed equity indices  

In the US, UK and Europe, private equity returns have outperformed relevant equity market indices.  This out-performance reflects private equity’s ability to perform detailed due diligence on investment targets, influence management and a company’s strategic direction, and provide the company with finance and resources for growth.  Management usually has an equity stake in private equity backed companies which is intended to strongly align their interests with private equity investors. 

Investing in private equity greatly increases the choice of investment possibilities

The private company market in New Zealand offers a broader reflection of New Zealand’s economy than the listed market.  For every listed company in New Zealand there are approximately 180 unlisted businesses with 10 or more employees1.  The unlisted business sector is also more diverse in terms of size, stage of development and the industries they operate in.

Succession of privately owned companies presents an opportunity for private equity funds

There is a large number of private companies in New Zealand that will need to address succession concerns in the short to medium term.  A significant portion of these private companies see private equity as a potential partner1.  

Private equity is becoming an increasingly important asset class for investors.  Allocations of 5%-10% in institutional portfolios are commonplace

Increased portfolio diversification and a low correlation between private equity and other asset class returns reduces overall portfolio risk for an investor. 

1   Pohutukawa Private Equity II Ltd Prospectus 21 November 2008.