The ANZ recently published a piece of much-needed research surveying closely-held companies.
According to the ANZ Privately Owned Business Barometer 2002, there are some 3,500 businesses with a turnover between $10 million and $150 million in New Zealand, the majority of which are privately owned. Given that some 55% of these are more than $20 million and a further 23% are more than $40 million, it comes as no surprise that the sector contributes more than $100 billion in revenue to the New Zealand economy.
These are established businesses too, with some 89% more than ten years old, and more than a third older than 30 years, in many cases with the original founders still in ownership and day-to-day control. The majority of these businesses have strong growth aspirations but when pressed it is evident the owner-founders consider the vague notion of organic growth their strategy.
It is also worth noting that, given the demographic of the majority of these businesses, the ageing owner-founders are quickly approaching the stage where they should contemplate their exit strategy, however it seems that at best, exit strategies are currently vague.
These observations suggest that there is a large segment of New Zealand business and the New Zealand economy that runs the risk of plateauing and eventually declining with the waning attention and appetite of their maturing owner-founders. However, if the investment resources and appetite are there, the same fact pattern presents a large segment of New Zealand business and the New Zealand economy that has huge growth potential. What is more, if the current owner-founders are enlightened, the issues of growth and succession, or exit, can be addressed in one fell swoop.
In short, there lies a world of opportunity for the New Zealand economy if the New Zealand investment industry is up to and up for the task.
Traditionally for the New Zealand investment industry, raising capital has not been an easy task. As a geographically isolated country New Zealand needs to work extra hard to raise capital from both domestic and international investment sources. However, the inherently difficult task is about to become markedly easier with the arrival of the long-awaited limited partnership regime. The Limited Partnership Bill was released on 7 August and if its passage into law proceeds according to plan, its provisions will impact in April 2008.
What are limited partnerships?
Limited partnerships are internationally the most common vehicles for investment funds and in particular private equity and venture capital funds.
In a limited partnership, the general partner runs the partnership and makes the investment decisions but has unlimited liability for the debts of the partnership. The limited partners contribute capital and generally stay clear of the management of the business. Profits and losses flow straight through to the limited partners, often bringing them tax benefits if the partnership makes losses early in the investment cycle.
New Zealand’s limited partnership
New Zealand’s limited partnership, like limited partnerships in other developed jurisdictions, is essentially a hybrid of the attractive features of (i) a general partnership and (ii) a company. The Bill is the product of some five years of consultation and drafting review, in which the New Zealand Private Equity & Venture Capital Association and other industry participants played a major role. The NZVCA’s advisers, including the writers, compared equivalent models in the US, UK, Channel Islands and Australia in a concerted effort to cherry-pick the choicest features of each regime.
The NZVCA’s view was that New Zealand needed to adopt an internationally recognised and recognisable model so that investors and managers can focus on making investments and not on understanding a quirky multi-company-based fund structure. The key features for managers and investors, and consequently the directors of any companies participating as either, are as follows:
the Bill ensures that so long as investors do not participate in the management of the limited partnership their liability is limited to their investment – just as in a company a shareholder’s liability is limited to the amount they pay for their shares
the limited partnership can be used for any type of business with the exception of banking and insurance, although it will be most useful for private equity and other venture capital funds
the limited partnership will be much easier to establish and administer than existing complex company-based fund structures
fund managers will have the right to keep the identity and contributions of their investors confidential, which is not the case for investors in company-based fund structures, where names and shareholdings can usually be found on the Companies Office website
the limited partnership permits unlimited numbers of general and limited partners, an unlimited lifespan (in contrast with the existing special partnership regime) and unlimited investment amounts (in contrast with the Australian limited partnership model)
the vehicles will be transparent for tax purposes so that losses and gains are attributed to investors directly. This will be particularly beneficial if losses are expected in the early stages of an investment (although losses in excess of a limited partner’s capital contribution may need to be carried forward due to a new proposed tax provision) or if a non-taxable gain is to be passed to investors; and as a result of which, and perhaps most importantly of all
the limited partnerships will be familiar to the offshore investors, which will make them more comfortable investing in a New Zealand fund.
The process from now
As with any new legislation there is a process to follow, including public submissions (although at the time of writing the closing date is yet to be set), select committee improvements and issues to be debated. A few key issues to be discussed will be:
the extent of the “safe harbours” being the activities a limited partner can be involved in without contravening the “no management” rule. Under the Bill, these are to be set out in regulations which are yet to be released, but they need to be developed well in advance of the enactment of the legislation
the point at which a person becomes a limited partner and takes the benefit of limited partner status. The Bill currently places the onus on the general partner, but the investor wishing to become a limited partner has the most at stake
the power to claw back distributions in the event of insolvency currently applies for three years, if the limited partner knew that the limited partnership would not satisfy the solvency test after the distribution
written partnership agreements are compulsory for limited partnerships but there is no requirement regarding their content. Ideally the legislation would set out sufficient rules to enable a limited partnership to operate with the lightest of partnership agreements; and
it is important that the names and investments of limited partners remain confidential, including when that information is set out in annual returns.
Those issues aside, when enacted, the regime can greatly improve the flow of domestic and foreign investment by introducing not just an internationally comparable framework for private equity, venture capital and other investment funds, but a truly competitive one.
For the New Zealand investment industry and the large segment of New Zealand business that is primed to benefit from some planning and capital investment (to say nothing of the New Zealand economy if this activity can be kept on shore) we look forward to a new investment-fuelled, limited partnership-enabled era.