1. NZ Private Equity – NZSF Perspective
Charles Hyde
Senior Investment Strategist
New Zealand Capital Markets Symposium, 10 August 2017

2. NZSF Investment Approach
Over half of all NZSF capital is invested passively
Active investments in NZ private equity account for ~10% of Fund NAV
Direct investments
Kaingaroa, Kiwibank, dairy farms, Hobsonville
Indirect investments
NZ expansion capital, real estate
We distinguish between the investment idea (‘opportunity’) from its implementation (‘access point’)
If we can only access a median manager to implement a great investment idea, it may still be worth doing

3. NZSF Investment Approach
An opportunity is attractive if
It has an attractive risk/return profile – exceeds its risk-adj. COE
It is consistent with our TOM
Leverages endowments; scalable; aligns with RI principles; retain control
Preference is to invest directly if possible
We will hire external managers if we lack capability, capacity, or proximity to the opportunity
Or direct access is not cost effective
E.g., requires building an internal team that is not scalable
We can identify good, flexible managers at reasonable cost

4. NZ Private Equity Market
There are many small private companies in NZ
But most are very small
Partly reflects the small size of the NZ listed market
Investing at the smaller end has no impact on a $35b fund
Investing in a small company requires at least as much effort as a large company

5. NZ Private Equity Market
We segment the NZ private equity market as follows
Angel/VC is subscale and risky; returns not convincing
Buyout offers scale; but is well served in terms of capital
Expansion capital segment is where we see greatest opportunity

6. Expansion Capital NZ expansion capital space is characterised by
EV of $15-50m
Revenue of $10-50m; CAGR > 20%
Positive EBITDA (or close)
Low or no debt – CF too risky
Attractive firms in this space have
Clear and credible high growth plan
Proprietary/defendable IP
Operating below potential, but not in distress
Resolved any start-up issues; sound governance
Genuine investment opportunities over 3-7 year timeframe

7. Returns Investment returns have been strong
Average net return is well above any reasonable cost of equity
NZX Small Cap Index returned only 9% over the same period
We’ve been pleased with our portfolio performance to date

8. Current state of market
The listed market looks expensive
But recent PE transaction prices are close to average
And below the EV/EBITDA of the listed market

9. NZSF View
NZ expansion capital is attractive due to a structural deficit of equity capital funding
Strong demand for capital
Aging demographic means SMEs looking for exit options
Weak supply of capital
SMEs can’t access debt funding; too small to list
Few local sources of PE funding
Local PE managers; LPs; Trade buyers
Limited presence of offshore PE managers
Little access to retail investor capital
Informational asymmetries also create opportunities due to the small, opaque, closely-held nature of the space

10. NZSF View NZ expansion capital leverages our endowments
Long term horizon
Tolerance for illiquidity – certainty of liquidity profile
Sovereign status
Expect returns in high teens, assume volatility ~30%
Demand liquidity and NZ concentration premiums
Potential access points
Public market: very few listed SMEs in NZ
Direct investment: requires large, experienced team; costly to build
External managers: local managers exist with good track records

11. NZSF Commitments
Over the past 10 years we have committed $480m to NZ expansion capital managers
Pre-2016 vintages in harvest mode
We will invest up to $260m in NZ SMEs over next 5-10 yrs
Direct Capital V - $90m
Pioneer Capital III - $120m
Movac IV - $50m
NZSF also has an internal NZ direct investment team
Larger transactions: Kaingaroa, Kiwibank, Z Energy, Datacom
Leverage endowments: sovereign, long horizon with low liquidity needs
Hub focuses on specific sectors; co-investing with Iwi
Swim lanes being used for three managers.
The pre-2016 vintage funds are Waterman II, Pencarrow IV, Pioneer II, Direct Capital III & IV

12. Recent Developments Some issues we think about Capital commitments
2016 was a very large year for capital raisings (~$1b)
Are our managers competing for the same deals?
Discipline on origination critical
Now have ‘swim lanes’ in place
Competition
We are seeing more foreign PE funds targeting NZ
Monitoring situation closely
Control
Our opportunistic approach gives us the flexibility to respond to a changing environment
Our 2016 vintage funds give us flexibility