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OIO gives green light for Colorado Group's owner to buy Tegel in NZ$600m leveraged buyout

OIO gives green light for Colorado Group's owner to buy Tegel in NZ$600m leveraged buyout

Affinity Equity Partners, the private equity firm that owned the now in-receivership retailer Colorado Group, has been  cleared by the Overseas Investment Office (OIO) to buy poultry producer Tegel Foods.

In a leveraged buyout worth about NZ$600 million, Australia's Pacific Equity Partners is selling a 43% stake in Tegel and ANZ and related entities are flicking a 30.37% stake as Affinity buys 100% of Tegel's parent company NZ Poultry Enterprises through a subsidiary, the Singapore incorporated Claris Investments Pte.

Affinity's purchase of Tegel, reported by in January, is backed by financing from a syndicate of banks including ASB's parent Commonwealth Bank of Australia, Westpac, Macquarie Bank and Rabobank.

It's understood this financing will replace Tegel's existing NZ$300 million plus in borrowings in place with ANZ, BOS International, Rabobank and Westpac.

Tegel employs about 1,550 people.

Affinity describes itself as an independently owned Asia-Pacific buyout fund manager run by the former investment professionals of UBS Capital Asia Pacific – the private equity arm of Swiss banking giant UBS AG.

It was spun out of UBS Capital Asia Pacific in 2004.

The firm's website says it aims to hold companies for four to six years before exiting and that it manages funds and assets worth about US$4 billion.

Affinity has offices in Hong Kong, Jakarta, Seoul, Singapore and Sydney.

Colorado, which has stores in Australia and New Zealand, was tipped into administration and receivership yesterday owing A$396 million to 18 banks and hedge funds.

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This sort of debt-fueled madness is what you get when interest rates are cut and then suppressed at low levels.

Banks and investors get pushed out to the margins and tempted into nutty deals.

Like Yellow Pages. Or Mediaworks.

And now our largest chicken supplier.

This sort of deal is why interest rates need to be higher all around the world.



With all do respect Bernard this is a completely ill informed / ignorant view from someone that has an emotional attachment to a 'world financial view.'  No doubt - Affinity Capital / Ironbridge / PEP are all losers as far as private equity funds go.

They all made tremendous sums of money during the boom years - they thought they were gods because everything gained in capital value, and by leveraging made a geometric return on your equity with the rising capital values.  And it worked for a couple years (because of the bubble).  And THAT is the problem.  The private equity industry multiplied many times over with completely unqualified individuals that didn't know the first thing about creating value and optimising company peformance and returns WITHOUT over relying on leverage.  And all these subar PE firms went on to raise money - things got extremely competitive as a result, accelerating company valuations, and then the bubble burst.  Sure debt was a financial accelerator as well - but it is not the root cause.

Make no mistake - these private equity failures could happen to even the best of the blue chip PE firms.  But these firms do something that you don't appreciate nor understand: they fundamentally create value by identifying inneficiencies in strategic direction, improve corporate governance, optimise and control capital expenditure to programmes with higher returns on funds, etc.  These guys raise funds and funds again because their limited partners have identified that they do not rely on leverage, cutting costs, etc.  The use of leverage obviously helps supplement returns, but it does tremendous things to balance cost control and discipline.

So the madness in PE worldwide and in Australasia is more a function of an out of control industry which is rapidly rationalising.  You know only 1 significant firm in the last 2 years has raised a new fund. Many others are going bust and good riddance.

But interest rates should be a function of economic performance, not about waging class warfare, a general hatred of all thigns debt, a general hatred of all things inflation, a general hatred of all things property, etc etc etc.  I find hard to sit here and listen to your lecture about things you don't know about.


Thanks for the reply, which details the madness pretty well.

But I'm curious and therefore obviously uninformed.

Can you help inform me.

You say of leveraged private equity investments: "They fundamentally create value by identifying inneficiencies in strategic direction, improve corporate governance, optimise and control capital expenditure to programmes with higher returns on funds."

And: "The use of leverage obviously helps supplement returns, but it does tremendous things to balance cost control and discipline."

Can you give me some examples here in NZ and overseas where value has been created for shareholders, customers, creditors employees and the public generally?

Having covered these sorts of deals for 20 years as a financial journalist for Reuters, FT Group and Fairfax Media (therefore not qualified to operate/observe in the same hallowed halls as the masters of the universe that have actually done some of these wonderful deals) I can't think of many of these deals that have created much value.

But I'm very happy to be proved wrong.



PS. By the way, how is all this debt-fueled investment in property and other leveraged assets working out for the world?

All going well is it?

Low interest rates and leverage not responsible?


Well I give you a good example to look into which I had some indepth knowlege of, Blackstone Group, Universal Studios and The Wizarding World of Harry Potter, Orlando USA.

Great example of vision, excution of private equity investment, stakeholder value and exit, all done within a recession, sweet business case.

Even the customers love the product, show me a loser in all of this, it is often done well.

I don't know this example (and hoping its not sarcastic example of another bust) but I'm hoping it is true because all successful companies that benefited from private equity investments you never hear about.

Despite all the press on Tegel's new owners it grew significantly under PEP's previous ownership - and they really did well on this one by growing it during the recession. 

Expansion capital is a subject that people never bring up. It is a serious part of private equity - where the PE investor injects new capital into a company for new shares to fund projects.  It is a major component of Australasian PE.

Examples? Think Ryman Healthcare - that was a PE deal back in the 90s, capital injected in, the company has grown rapidly and is one of the biggest companies on the NZX.  Think Phil & teds - an amazing success story.  Think Pumpkin Patch before it was listed on the NZX. Think of all the PE companies that went on to make acquisitions, expand into Australia, have the capital to open a new plant, to fund the working capital, and to promote succession within their company.  Think all sorts of companies that and the masses don't think about.  There are far, far more success stories than there are failures.  In aggregate - despite all the failures - PE has outperformed the listed market consistently before and after the recession.

But funnily enough - that's just a function of what it is: private.  They are private companies.  Just like how the world has no right to know how much a private family business makes, no one has the right to know about other private companies.  So BH might write articles about the subject - he is so far removed from what is actually happening. 

And from someone who might have an informed view, I will tell you what the real scam is: listed markets.  PE firms do months upon months of detailed due diligence.  And even then they can get it wrong.  With companies who release the bare minimum - a 1000x less than a PE acquisition candidate - will provide a mom and pop with the same level of information and that they will be able distill it?  You think that because their craigs broker sent them a reseaerch report where the analyst writes 4 reports a year on that company (and 10 others) will do any better?

The listed markets do not function.  The efficient market hypothesis is a joke.  It is a bigger "scam" and more inifficient market than investing into a property syndicate, let alone private equity.  So instead of shooting off on PE: dig deeper into the real rot.


You make a good point about the listed markets.

But don't these private equity plays depend on an eventual exit through those same capital markets?

Or can they just sell to each other? Although, fair eough, there's also the trade sale route.

And you're right that not all debt is bad. Too much debt is bad. And what's happened in the recent years of falling and very low interest rates (along with barely regulated hedge fundies/Private Equity funds/investment banks) is very high rates of leverage. 

I get a bit cynical when I see the likes of this comment from Macquarie (who I agree in advance may not be the operators in the leveraged investment space). This is from Gareth's story earlier today.

"Macquarie is one of the world's biggest operators in the PPP space. In a presentation on PPPs Macquarie Capital New Zealand division director Duncan Olde says financing metrics are improving post the Global Financial Crisis with debt at 80% to 90% of funding and equity at 10% to 20%."

You argue that these are private companies and why should we care or be as impertinent to question them.

Our recent experience in NZ is of the Yellow Pages and Mediaworks variety. You could argue that no one (public) lost anything. But the bankers have lost a bundle. Eventually we all pay for that with higher borrowing costs and lower term deposit rates.

And then there's the broader issue. If the public capital markets aren't trusted or used, who will fund growth except the very rich and informed who can afford to (or have the risk appetite) to invest in them.

Are the rest of the hoi polloi sentenced to bank deposits and government bonds forever?

Or rental property?

Who does that benefit in the end? How do we avoid the sort of American-style capitalism that has driven most of wealth into the hands of a very few and created an increasingly grumpy, uneducated and unemployed underclass?



PS Always enjoy a good debate. Thrashing things out may not look pretty. It may not be a sober, considered view. But that's how we progress things here. And I've learnt a few things from your comments. Very useful.


No - stop reading for what you want to hear - read what I am saying.  When you say, "You say of leveraged private equity investments" - no, I said of private equity investments.  Leverage is but a tool of many that should be used responsibly and carefully.  Not all investments should have any leverage whatsoever. 

But since you are so vehement in that debt absolutely is nothing but a killer - and you repudiate the absurd insinuation that it in moderate amounts can actually be quite a useful management tool then fine, it will be my pleasure to send you thoroughly independent academic studies on the matter.  And I am not talking interested party hacks: think Josh Lerner at Harvard University.  I would also be happy to email you personally offline Australasian case studies (obviously cannot name specific names, but that is how it has to be).

But oh lord - ever so sorry for having the absolute nerve to put forward thoughts and ideas on debt that you don't have to dig too deeply into academic and economic history to find.  That is the problem with this blog - too much knee jerk emotion - too many crazies - not enough rigor.

I like you passion, not worth wearing yourself out on thou :-)

Repudiating the absurd has always been an honorable activity.

Here's an interesting article at NYTimes' Dealbook about a big Brazilian Private Equity firm that makes good money without any debt.

Billions of dollars are rushing into Brazil’s economy. International private equity firms like Blackstone and the Carlyle Group are scrambling to capture of a piece of this emerging market before it has fully emerged. JPMorgan Chase recently bought 55 percent of Gávea, a seven-year-old investment fund with $6 billion under management co-founded by Arminio Fraga, the former president of the central bank of Brazil from 1999 to 2002.

But perhaps the most unusual aspect of the private equity industry here is that its success thus far has had nothing to do with burdening its acquisition targets with heaps of debt. Indeed, this version of the private equity business is exactly the opposite: improving a company’s operations instead of turning to financial engineering to squeeze out performance. It is a mantra that many private equity firms in the United States and Europe pay lip service to but do not follow in practice.

The reason that private equity firms in Brazil do not use debt is simple. In Brazil, money does not come cheap, Mr. Magalhães explained over coffee in the firm’s offices along one of the main sections of downtown São Paulo.

A private equity firm looking for a loan from a bank in Brazil might have to pay as much 20 percent interest annually. A loan in the United States, on the other hand, might pay only about 6 percent. The reason for the lack of leverage, at least for now, becomes obvious.

So this looks like yet another private equity rape and pillage buyout.  This will be classic move in, sell stuff off to get a great short term return, load up with debt to get that again and sell the 1/2 dead company for way more than its worth....1550 ppl jobless in a few years...just great for NZ...


We all remember Feltex and I hope investors don't forget for a very, very long time



..... and yet Cavalier Carpets , who were publicly listed long before Feltex , and who continue to trade profitably long after Feltex  , .... and who chug along quietly , delivering fat dividends for investors ....... and earning munny in export markets ....

... interesting comparison between two carpet manufacturers .

How many investors have even heard of Cavalier  ?....... a bloody sight less than those who are shit-scared of the NZX because of Feltex , I'll wager .

GBH, I used to work for The Independent before Fairfax bought it and it was funded by Tony Timpson of Cavalier. A top, understated bloke.

Feltex's demise can be traced to the acquistiion of Shaw Carpets in Aussie in about 2000. This took 'em into synthetic carpet and competition with Chinese manufacturers with lower costs. And of course, saw the PE owners at CSFB lump debt onto Feltex. Even right at the end Feltex's NZ wool carpet operations were still making money as the Aussie side of the business lost it.

Back to Tegel, we probably should keep in mind that, leverage aside, it operates in a very different market to the cut throat retail market Colorado's in. Tegel is a duopoly alongside Inghams and there's no importing.

Yes indeed Bernard, the Feltex story, right up to the directors' court case, should be required reading for every high school student. 

Thanks for the article Gareth and your comments Bernard, I really appreciate this website.   

Hmm, and you confirmed my fears on this one.  Apologies for ranting but can anyone tell me: 

When will the greedy buy-out activity end? (obvioiusly there is some which is beneficial) it was started by the baby boomers wasn't it? can't they see the destruction they are leaving for their offspring?  

FYi from a reader via email

I was just wondering about Affinity Equity Partners. According to a few articles on the web regarding the purchase of companies by private equity companies, quite a few run into trouble with massive debt. 

Im sure you know the jist with the private equity company buying the other company saddling it with massive debt to pay itself out through dividends, fees etc.


Is anyone not worried that Affinity Equity Partners has Colorado run into the dirt (no more jackets for us) and now they want Tegel!!!

Soon no more chicken for us???????


Im not totally convinced that the highway robbery perpetrated by these private equity companies is a good thing for a country that is going nowhere! Good on the OIO(sarcasm)