Investment focus to shift toward technological innovation

Private equity firms will need to add new skills and shift their focus from financial restructuring to technological innovation CHAMP Private Equity co-executive chairman Bill Ferris believes.

Ferris outlined his view of a typical private equity firm of 2020 in his opening keynote address to the 2016 New Zealand Private Equity & Venture Capital Conference last month (October).

By 2020, he said, private equity investment teams would be largely comprise people with technology skills.

Ferris, who is also chairman of Innovation Australia, said the industry was currently focusing on the “low hanging fruit” of financial restructuring but this would not last as large investment institutions would increasingly take these opportunities in-house to save paying what they regarded as “outrageous” private equity fees.

In this new environment, private equity firms would have to seek out and invest in opportunities to build businesses through innovation.

This would require the development of a detailed disruption strategy before making an initial investment in any industry. The investee company should then become a disruptor rather than a disruptee.

To develop such strategies, private equity firms would in future need to recruit more investment team members with technological skills than banking experience and would be likely to recruit these specialists directly from universities. Required skills would range from clinical areas through to big data analysis.

Private equity firms would need to act quickly to stay ahead of the “fast moving bus” of innovation, Ferris warned.

But, by driving technological change, private equity would build companies that investment institutions would, he hoped, be “delighted to pay even more fees” in which to invest.

Ferris said it was clear venture capital’s time had now arrived with disruptive technologies providing a flow of opportunities for early stage investments. But locally the sector still had to deal with some old challenges including the difficulties of scale which large investment institutions faced to invest in small venture funds.

He said it was uneconomic for institutions with billions of dollars under management to allocate less than $40 million to a fund so many venture funds were still unable to access this source of capital. Recent raisings of $200 million and above by Square Peg Capital, Blackbird Ventures and AirTree Ventures, plus Brandon Capital in the medical technologies space, had, however, been large enough to attract institutional support.

Ferris said he was excited by the imminent launch of the $500 million Biotechnology Translation Fund (BTF) − which is to be funded equally by the federal government and the private sector. This fund should be effective in helping biotechnology companies bridge the commercialisation “valley of death” which, in the past, had often resulted in technologies being licensed at low values or companies embarking on IPOs too early.

Ferris outlined how the $500mn BTF will be downloaded to private sector life sciences funds managers. A competitive selection process was well advanced to ensure that investment decisions would be made by people with domain experience and “scar tissue”, he said.

Meanwhile, the CSIRO’s planned $200 million capital raising for its new venture fund − backed by institutional investors as well as some of the CSIRO’s returns from pioneering wi-fi − was on track and would assist commercialisation of technologies from government-based research institutions and universities.

Ferris said he anticipated institutional scale venture funds would also be raised in New Zealand but he suggested capital for a first such fund might be easier to raise were its investment mandate to include Australia as well as New Zealand.