When it comes to non-traditional investment classes hedge funds are flavour of the month at present, but they're not the most popular.
"Private equity is the most popular form of non-traditional investing," AMP Henderson head of private capital Martin Turner told the IPAC investment conference last week.
Private equity is quite an established sector in New Zealand now and has grown significantly since the first fund, Greenstone, was established in 1993, he says. In that year $25 million was invested compared to nearly $800 million in 1999.
Currently there are 15 firms and 63 professionals working in this area and 81 companies are funded through private equity.
Turner draws a distinction between venture capital and private equity. He says venture capital is the money that is applied to companies for the start up or early stage development of a business. Private equity kicks in when the companies are more established and are looking for capital to expand or for management buy-outs.
He says nearly two-thirds of the private equity money being raised at present is being used for expansion purposes and 19% is going into start-ups, generally in the technology sector.
Last year there was a significant amount of activity in the management buyout sector, with AMP alone providing $50 million for this type of activity.
Turner says the Government is trying to encourage companies like AMP to move in to the earlier stages, or more risky area, of capital provision.
AMP is interested in moving into this area, but not as soon as the Government wants.
He expects AMP will roll out its first venture capital fund in three to five year's time. In the meantime it is looking to establish a second private equity fund late this year or early next year.
Turner says there is a much higher failure rate for companies in the venture capital end of the market, but the returns can be better than in private equity.
"Our focus is on the lower risk end (of the market)," he says.
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