- Venture Capital (VC) and Private Equity (PE) firms invest in high-growing industries and markets which are yet to establish, promising future growths albeit with a risk of the investment turning into a bad decision.
- Both the Australian and New Zealand capital markets demonstrated promising growth in 2019 with an increasing interest from international investors.
- VC and PE investment activities have shown mixed performance with an increased number of deals indicating smaller deal size per transaction.
- The Australian market is experiencing a surge in investments from both domestic and international investors.
- With the coronavirus impact expected to sabotage business prospects, the earnings and returns on VC and PE investments are expected to take a hit.
Venture Capital and Private Equity investments primarily target companies which have the potential to grow fast or cater to an industry which shows promising future growths but is yet to establish as a prominent revenue-making one. This creates a risk factor with a significant chance of an investment going bad. In the present uncertain environment, that risk may worsen as it becomes almost impossible to assess what the situation might be in the future.
With the COVID-19 pandemic continuing to affect businesses worldwide, let us dig dipper on the PE and VC landscape across Australia and New Zealand.
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PE and VC Landscape in Australia
The amount of investment an economy makes indicates the potential of the economy. According to ABS, the value of investment increased by 11% from AU$11,001m to AU$12,162m since 30 June 2018.
*Venture Capital and Later Stage Private Equity (VC&LSPE)
As on 30 June 2019, financial commitments decreased by 1% year-over-year to AU$26,738 million. Though resident investor contributions remained high over non-resident investors from 2014 to 2019, the resident investor contributions reflected a decline with a rise in non-resident investors contributions.
During the 2018-19 financial year, 320 new investment deals received AU$1,145 million with follow-on investment of AU$307 million of made to 197 existing investment deals. Investee companies in late-stage expansion contributed 46% of the total investment value in 2018-19.
The Australian market is showing increased interests from both domestic and international investors. However, with Coronavirus impact expected to keep business operating challenges at continuum, the earnings and returns of the Venture Capital and Private Equity investments are expected to take a hit. Hence, it is crucial for investors to keep themselves updated regarding the business performance of the investees.
PE and VC landscape in New Zealand
The rise in the private capital in New Zealand over the years has boosted the private capital market as an alternative source of funding. New Zealand’s private capital market comprising private equity and Venture and early-stage investment grew significantly in 2019. According to New Zealand Equity and Venture Capital Monitor 2020 Full-year review:
- Total investment in 2019 reached by NZ$1,146 million driven by a higher number of investments in 2019. Average deal value in 2019 was NZ$14.9 million, a drop from NZ$17.6 from 2018.
- Private equity investment reached NZ$1,033.8 million, compared with NZ$823.9 million in 2018 and NZ$658.7 million in 2017. Average deal size decreased to NZ$13.8 million in 2019, an increase from NZ$12.9 million from 2018.
- Venture and early-stage investment retracted to NZ$112.2 million in 2019 that included a substantial domestic and international venture firm investment in Rocket Lab. Average deal size decreased to NZ$2.4 million in 2019, a drop from NZ$6.7 million from 2018.
- Mid-market investment activity reached NZ$398.8 million in 2019 from NZ$245.0 million in 2018 driven by a higher number of transactions (29), compared to 19 in 2018.
- Total VC investment recorded NZ$112.2 million in 2019, a significant decrease from NZ$269.7 million in 2018 because of Rocket Labs investment round in 2018. However, excluding the Rocket Lab transaction, total VC investment activity almost doubled in 2019 from that of 2018.
We can see from the above performance that venture capital funding is still at nascent stage and yet to pick up the pace with respect to the Private Equity market. In March 2020, New Zealand Venture Investment Fund (NZVIF) launched NZ$300 million 'Elevate' fund to promote R&D and Seed investments and to boost early-stage investment environment. The new funds will seek Series A and B investments within the range of NZ$1 million to NZ$10 million in businesses that will be subsumed into New Zealand businesses in the next 10 to 15 years.
According to Finance Minister Grant Robertson, New Zealand's productivity can be lifted through well-functioning capital markets allowing technology companies with good prospects to raise funds and prosper. He further added that the fund would address the problem of early-stage technology companies as they often struggle to secure capital, limiting their potential.
However, the funding activities have slowed down because of COVID-19 crisis. Nonetheless, technologically driven companies may see continued investments from investors. Post COVID-19 period is expected to boost up funding in New Zealand which will improve the business environment of the New Zealand economy.