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In this edition, we investigate M&A activity in New Zealand for July to September 2024.
We also explore the private capital market in New Zealand and look into how geopolitics such as next week’s US election could impact local M&A.
Deal activity decreased in Q3 2024 with 37 deals announced, down from 52 deals in the previous quarter, reflecting ongoing economic uncertainties. However, we anticipate the recent cuts to the Official Cash Rate (OCR) will positively impact M&A activity. This monetary easing is expected to boost business and investor confidence which should point to an improvement in underlying business performance.
The data reveals:
Private equity investors accounted for 22% of the total deals (8 deals) up from 17% (22 deals) in Q2.
41% of deals in Q3 (15 deals) involved domestic buyers, compared to 48% (25 deals) of deals in Q2.
Technology, media, and telecom (TMT) emerged as the most active sector, accounting for 27% of deal activity (10 deals), followed by Financial Services at 19% (7 deals).
Note:
The data has been filtered to exclude: (i) real estate transactions; (ii) early stage venture capital transactions where size is stated or estimated to be less than $1.5m; (iii) transactions announced but yet to complete; (iv) other transactions where applicable.
Sources: Mergermarket, CapitalIQ, Eikon, PwC analysis (1 October 2024)
Watch Regan Hoult, Partner, discuss the growth in private capital markets.
Australasia’s private capital markets have seen remarkable growth, with record levels of capital raised in recent years. Private capital Assets under Management (AUM) in Australia has more than doubled since 2018, reaching A$139 billion at June 20231.
Private equity is the second largest private asset class behind Real Estate, with A$46bn of AUM at June 2023. This includes A$15 billion of private equity “dry powder” i.e. funds raised but yet to be invested. Venture capital and private debt funds have also seen strong growth.
With the majority of Australian fund managers including New Zealand in their investment mandates, combined with capital raised by local private equity firms, there is a significant level of capital looking to invest in local businesses. This is positive for New Zealand companies considering sale or investment over coming years.
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Sources and notes: *Preqin figures as of June 2023. All figures are in Australia dollars, unless stated otherwise.
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Capital raising peaked in 2021/2022, with A$8.5 billion raised across 17 private equity funds in Australia in 2022 alone. This included a A$3.6bn fund raised by BGH, a Melbourne-based private equity firm whose New Zealand investments include Abano Healthcare, Fusion V and Pushpay.
We have also seen a number of large global private equity firms open their first offices in Australia. This includes Advent International (not to be confused with Melbourne-based Advent Partners), which opened a Sydney office earlier this year with the intention of increasing its Asia Pacific deal activity. Advent International raised a US$22bn global fund in 2022, its tenth global fund, and has previously invested in New Zealand based Transaction Services Group and Nuplex Industries (take private via portfolio company Allnex in 2016). Other global private equity firms that have recently opened Sydney offices include CVC Capital Partners and General Atlantic.
This complements a thriving local private equity sector, with established firms such as Direct Capital, Pencarrow, Pioneer Capital and Waterman all raising new funds over recent years. In addition, we have seen a number of new entrants, including Fisher Funds, establishing a dedicated private equity team in July this year.
Given each private equity fund typically has a 10 year fund life, the capital raised needs to be deployed over coming years. This will result in increased private equity deal activity, especially given the slower M&A market over the last 12-18 months.
While there are many similarities across private equity firms, there are significant differences when it comes to investment approach. This first is target transaction size (e.g. small cap, mid cap or large cap) which principally reflects fund size. Large global funds will primarily be focused on large cap transactions, however this is not always the case, especially in higher growth sectors (BV Investment Partners recent investment in Kami is a good example).
Other key differences include preferred shareholding (majority vs minority) and sectors of interest. Increasingly we are seeing funds focus on sectors where they have particular insights or areas of expertise, often based on prior investing experience or in-house capabilities.
Overall the record level of “dry powder” across New Zealand, Australian and global private equity firms bodes well for any business looking for sale or investment. There will be strong competition from private equity for good investment opportunities. Furthermore, the increased number of firms and investment strategies provides increased optionality for business owners when a full sale may not be preferred.
Certain fund managers have been diversifying their portfolios by operating multiple funds and implementing various investment strategies, which are raised and invested based on targeted investment criteria. This includes specialist sector funds (e.g. consumer, technology or infrastructure), impact or ESG related strategies, venture capital (i.e. early stage investing) and private debt in addition to their general investment funds.
This is a well-established trend offshore, with large global funds leading the way. KKR for example is an active investor in New Zealand across across different funds, including Education Perfect (from its Global Impact Fund, a fund focused on investing in companies that contribute towards the United Nations Sustainable Development Goals), Ritchies Transport (from its Asia Pacific Infrastructure Fund) and Natural Pet Food Group (from its Asian Fund IV).
Australasian firms have been following this trend, with multiple firms raising ESG/impact funds, specialist sector funds, credit funds and venture capital funds.
This trend is positive for business owners as it provides increased optionality, and in the case of specialist funds can bring increased focus and expertise to support execution of business plans.
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1 Source: Australian Investment Council: Preqin and Australian Investment Council Yearbook 2024
By Regan Hoult, Partner, PwC New Zealand
... there is a significant level of capital looking to invest in local businesses.
What impact could geopolitical developments have on New Zealand M&A activity? Watch Mike Shirley, Director in our Treasury Advisory team, outline some of the key matters, such as the US presidential election, free trade agreements, and shipping disruptions, and what effect these might have on local transactions.
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In terms of US presidential election outcomes, each alternative presents challenges and opportunities for M&A activity in New Zealand. The outcome is likely to be an influencing factor in the direction and magnitude of movements in global inflation, interest rates, and currency markets, as well as impacting trade relations, particularly with China.
Based on current understandings of policy intentions, a Trump win will likely see an escalation in the application of tariffs to all US trade partners, including New Zealand, with a stronger tariff stance taken against China. It is worth noting that the current Biden administration (the policies of which Harris is expected to continue), has selectively targeted Chinese imports with significant tariffs and proposed bans on imports of Chinese vehicles as well as curbing US exports of AI-related technology.
A broad-based tariff approach could be inflationary for the US. The inflationary aspect supports an elevation of US interest rates and, by extension, a stronger US dollar.
Elevated inflation and interest rates are unlikely to be confined to the US, presenting a fresh challenge for central banks in developed economies that are only now overcoming the post-COVID inflation era.
For the planning of M&A activity, the outlook for interest rates is always a factor. While the global expectation is currently for a lower borrowing cost environment, this could change, presenting an opportunity to reassess and optimise the viability of projects with significant debt funding components.
From a geopolitical perspective, the prosperity of NZ Inc. is closely linked to the economic fortunes of China - our largest bilateral trade partner. At the same time, New Zealand has traditionally aligned itself politically with the United States. Increased tensions between the United States and China present a significant risk to New Zealand’s trade relationship with China, as well as global trade more broadly.
Consideration should be afforded to acquisition targets with operations in, or material trade exposure with, China, ensuring diversification opportunities are available should geopolitical tensions create friction. If looking at China exposure, ensure adequate risk mitigation measures are in place to address potential geopolitical tensions.
New Zealand recently signed a free trade agreement (FTA) with the United Arab Emirates (UAE). For New Zealand, the UAE represents a top-20 export market and is one of our largest bilateral trade partners in the Middle East region.
More broadly, there remains an intention for New Zealand and India to continue to work toward an FTA.
In addition to a diversification of trade partners, trade agreements grant a measure of resilience during periods of potential geopolitical tension and economic disruption.
FTAs can lead to more robust economic ties between nations and potentially influence a greater degree of foreign direct investment (FDI). As companies on each side of the agreement come to understand the mechanics of operating in a newly opened foreign market, appetite for investment in the market is likely to increase, supporting M&A activity directly, and indirectly through financing arrangements.
While the benefits of FTAs may have traditionally focused on physical export and import markets, the reduced trade restrictions make it easier for companies to operate across borders and are equally, if not more, supportive of activity related to technology sectors.
Good things, like the development and expansion of FDI, take time. Initial stage steps with the UAE, and other future FTA partners, may include strategic partnerships and joint ventures as companies seek to capitalise on new market opportunities. These partnerships and ventures can lead to eventual M&A activity as relationships and market presence develop.
In recent years, conflicts and tensions in the Middle East have elevated global market uncertainty and have had a tangible impact on trade flows.
Shipping disruption in the Red Sea, as an example, has a ripple effect. Even for companies involved in the importing and exporting of physical goods from unrelated areas, disruption in one region can have implications, or prompt delays, in others. Reduced shipping vessel supply, even for a limited period, can also increase costs.
Shipping costs can, in some instances and to some extent, be forward managed, acting as a risk mitigant. However, not every risk can be managed, and companies involved in the buying and selling of physical goods from New Zealand cannot fully divest from these shipping risks.
The expansion of FTAs is opening up new markets for existing businesses, but New Zealand’s geographic isolation brings challenge alongside the opportunity. While our geographic location may present challenges, the structure and legal frameworks defining our business environment suggest New Zealand as a safe and attractive investment destination. New Zealand ranks third on the 2023 Corruption Perceptions Index by Transparency International and ninth on The Economist’s global business environment assessment. A robust regulatory environment, ease of doing business, and overall stability make a compelling case for investment and M&A activity in New Zealand from offshore entities.
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By Mike Shirley, PwC New Zealand Director
PwC has been the number one mid-market M&A advisor in New Zealand for the last 18 years
PwC New Zealand’s Corporate Finance and M&A team is the largest in New Zealand, with a proven track record across a diverse range of sectors. With a nationwide presence led by nine partners, we offer a full range of M&A advisory services including divestments, acquisitions, private equity, capital raisings and strategic relationships.
Our links to the global network of PwC firms provides relationships with key global market participants, and our close relationship with our Australian colleagues ensures a comprehensive understanding of the Australasian marketplace.
Our M&A team has been ranked the number one firm in New Zealand for the amount of M&A deals by Thomson Reuters (now Refinitiv) for the last 18 years.
Managing Partner, Te Waipounamu and China Business Group Lead, Canterbury, PwC New Zealand
+64 21 616 232
Partner, Deals - Corporate Finance & Infrastructure, Wellington, PwC New Zealand
+64 21 242 6075