The continued rise of private capital

  • Publications and reports

    08 February 2024

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With equity markets continuing to be subdued, and large corporates coming under balance sheet/earnings pressure as a result of inflation and a period of contracted demand, private capital, in all its forms, has become a dominant influence in global M&A.

New Zealand has been no exception to that, with the full spectrum of private capital investors doing deals in our market which include:

  • Sovereign wealth/government affiliated funds based out of Australia, the Middle East, and Singapore in particular.
  • New Zealand government, local authority and iwi organisations.
  • Large global pension funds, particularly those from Canada, the United States and Australia.
  • Large global infrastructure funds.
  • The largest global private equity funds, together with a host of mid-market Australian and New Zealand private equity funds.
  • Family offices – whether from New Zealand, Europe, the United States, Asia or elsewhere.

The relative stability of the New Zealand economy and political environment, the growing size of our population, and a historical under-investment in infrastructure in New Zealand, has meant that New Zealand has become a more and more attractive investment destination for the larger funds, which historically may have written off New Zealand as not having sufficient opportunities of scale.

More restraint being shown by investors

While there is clearly no shortage of capital available for global private capital investors, a far greater degree of discipline has been taken by private investors when considering investment decisions than was the case in 2021 and 2022. We expect that will continue into 2024.

Inflationary pressures on businesses, together with higher costs of capital for almost all investors, has meant more focus from private capital investors on the sustainability of earnings, and more scepticism around growth opportunities. That has resulted in longer processes, with a greater degree of due diligence being conducted, and more focus on deal mechanisms to provide protection for the buyers (e.g. earnouts).

While we are still seeing a focus on ESG diligence, particularly as a high level gating item as to whether a fund will consider a deal or not, there has been a subtle shift away from the operational implementation of some of the ESG measures, as companies are first seeking to shore up short term financial performance in order to comply with banking covenants and expected private capital owner returns.

Sectors of interest

New Zealand is experiencing a continued evolution of the sectors that are attracting private capital investment in New Zealand.

We expect there will be a focus from private equity investors on the healthcare, education and technology services sectors. Many New Zealand and Australian private equity funds have made highly successful investments in these sectors in recent years, and we expect that will continue to be the case. While 2023 was difficult for many pure tech companies, particularly in the venture space, AI focused companies have emerged as a success story, and the New Zealand companies that are doing AI well are attracting significant investments from offshore private capital investors.

For the larger private capital investors (including infrastructure funds, pension funds and sovereign wealth funds), there are three main areas of focus: data storage and handling, energy transition-related investments, and investment into New Zealand’s infrastructure/transport needs. In the latter case, there is a continued frustration from investors around the delay in opportunities actually coming to market, and the seeming inability of central and local governments to unlock some of the investment opportunities.

With subdued share prices, we are receiving more interest from clients wanting to make approaches regarding take privates of listed entities, although the costs and uncertainty of a listed company takeover does continue to be a deterrence for many private capital investors.

Finally, New Zealand continues to be a major player in the global forestry market, and there has been significant interest from large global investors in New Zealand timber assets, which we expect to continue into the foreseeable future – much of that is related to a desire to obtain exposure to carbon markets, but the bigger driver appears to be confidence in the underlying timber assets.

The year ahead

We expect that 2024 will continue to be dominated by private capital investors in the New Zealand M&A market over public capital/corporate investors. However, with relatively high interest cost, and uncertainty around underlying business earnings, we expect that deals will continue to take longer with more disciplined investment/deal pricing.

That being said, we continue to be impressed with the creativity and boldness of New Zealand and Australian private equity investors and the investments they have made in recent years, and we believe that 2024 will present private capital investors willing to be bold with a number of attractive investment opportunities.

Read the M&A Forecast 2024