Money to Grow

When you look at the so-called ‘facts of the matter’ as they apply to raising capital for SMEs (small and medium enterprises) they paint a particularly bleak picture. But, typically, as with most issues in New Zealand, when you scratch beneath the surface, people are “making a plan”; muddling through; and a fair number have come up with alternative sources of capital.
According to the experts involved in correcting the situation through their work on the Capital Market Development Taskforce, for privately-held companies most capital is provided from families and individuals (the three Fs – friends, family and fools – as they are rather irreverently known in investment circles), retained earnings and institutions. Few companies rely on outside capital, or on outside talent for governance or advice.
“From a capital market perspective there are issues on both sides of the market – owners tend to be sceptical about the benefits which capital markets can bring and often have little ambition to grow their businesses, while investors often
find it difficult to access investment opportunities in this part of the market.”
SMEs are reported to be turning directly to capital markets to raise debt and particularly equity. Indeed, the ‘new normal’ for the New Zealand economy compared to the previous decade is likely to involve more conservatively geared household and firm balance sheets and a more constrained and conservative banking sector.
When you add the taskforce’s observations on SMEs in particular – “these companies have a high reliance on bank debt and little access to alternative sources of external financing: New Zealand has one of the most bank-dominated financial systems in the OECD” – you begin to think we are all being slowly strangled financially, and our growth prospects, along with the much-heralded ability to match Australia, are but a pipe-dream.
Raising the bar
Chris Due has been a local ‘angel investor (see sidebar) for many years. He works with one of New Zealand’s leading venture capital firms, specialising in start-up/early-stage investments, with a focus on assisting their investee companies. He continues to serve as a director on a number of SMEs, including those seeking to raise venture capital funds and/or local finance – so he speaks from experience, some less-heavenly than one might have hoped for.
“The traditional banks have definitely raised the bar in providing additional working capital to SMEs. As the old adage has it: ‘when the business needs money, the banks do not want to lend’.
“I know of one company with an undrawn ‘approved’ facility, which, when it presented its business plan – now requiring more funds because business activity was down in the current market – was promptly declined by the bank.
“In another case, the funder – a second-tier lender – has made some additional finance available (less than was asked for) and only by locking-in the major shareholder with more guarantees, etc. The ‘pledges of support’ previously given to the company, were completely ignored,” says Due.
Action capital
There’s no question it is tough out there.
Why then would anyone go plunging into a highly-charged and thoroughly volatile environment – especially with New Zealand’s physical environment and clean technology as a focus?
Milestone Capital has established the Rutherford Innovation Fund (RIF) to raise capital to back companies needing financial assistance and business skills to take their innovative ideas to a commercial level on the international stage, according to principals, Nick Gerritsen and Kenji Steven.
“This is a new type of capital – action capital,” says Gerritsen.
The RIF claims to be the first managed fund in New Zealand with a focus on ‘clean tech’. It’s a portfolio of private equity companies which include algae fuel manufacturer Aquaflow Bionomic Corporation and carbon sequestration firm Carbonscape.
“A lot of people will become wealthy by investing in clean tech companies, but it is hard to choose which companies will be successful among the plethora of scientific projects working on new ways for the world to live,” Steven says. “There is huge engineering, scientific and technical skill in New Zealand, waiting to be commercialised. The missing ingredients are the business understanding, the networks, the systems and the capital.
“We have real expertise – between us we have established around 150 companies and learned from the successes and failures.”
Gerritsen is a recognised clean tech pioneer in this country and Steven has institutional investment management experience, while currently chairing a claimed US$1 billion-plus global alternative investment firm.
Milestone Capital reckons they gain an additional investment edge through having their principals as cornerstone investors and hands-on fund managers. They believe the first mega-trend was the transistor and semiconductor; then came the personal computer and the growth of the Internet. The third mega-trend was biotech, medical technology and pharmaceuticals. They are convinced clean tech is next.
“New Zealand abounds with clean tech ideas; after all it has a long history of creative engineering and scientific brilliance. That is why the fund is named after Ernest Rutherford, the Kiwi who was the first person to split the atom and the father of modern nuclear physics.”
Milestone will choose the businesses and then “give them the tools and resources they need to ensure global best practice”.
“We will share our global networks and operational skills and put in place good financial systems and best practice in corporate governance to enhance the chances of being successful,” Steven says.
“We will prepare them to collaborate with the big strategic players because collaboration is the most efficient way of building smart companies. In clean tech, some of the biggest companies in the world are collaborating with start-ups.”
Venture capital does not work for these companies because venture capitalism is about cutting a sharp deal and selling on for a profit, Gerritsen claims.
“We want to run really fast hand in hand with these creative innovators. It’s like high altitude training – taking these companies into an environment focused on performance,” he says.
The passion to assist
Milestone’s focus on clean tech would be endorsed by legendary Warehouse founder and chair, Sir Stephen Tindall, recently appointed the first ever New Zealand Arch Angel.
Angel Association chair, Andrew Hamilton, a significant player in the angel sector in his own right, notes Sir Stephen has invested more than $150 million in seed and venture capital companies – both directly and as a fund-of-funds. He and his family have invested in more than 100 Kiwi companies.