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Adding value through private equity

AGL NZB media 20170905

Under the watchful eye of private equity firm Pencarrow, ARANZ Geo has grown exponentially. And with its latest investment, the future is looking even brighter.

ARANZ Geo (AGL) is a unique software business which started out making a diagnostic aid for wound care before being adapted for use by Weta Workshop technicians to generate some of the extraordinary animations in the Lord of the Rings film trilogy.

AGL has grown exponentially under the watchful eye of Pencarrow, New Zealand’s longest established private equity manager, to become a leading global provider of 3D geological modelling software for mining and exploration geologists.

Nigel Bingham, managing partner at Pencarrow explains: “AGL could be seen as an unusual venture for us. Private equity (PE) is traditionally interested in more mature businesses. Software businesses have the potential to disrupt and be disrupted and mining is a ‘boom or bust’ industry and so may be outside what many private equity funds might be comfortable with.

“So it took considerable investigation by us to be assured of the potential.”

In July 2014 the Pencarrow IV Fund made a significant minority investment in AGL, providing mainly expansion capital to become the largest single shareholder.

“We see hundreds of companies that need investment, many of which are not right for us; but there were several things that attracted us to this one including its strong global market position as the software of choice among most mining geologists and its strong management team,” says Nigel.

“We were first introduced to AGL via Andrew Simmonds who was its legal adviser. I’ve developed a high regard for Andrew over the years. He told us the AGL story and set up the meeting with the co-owners and the CEO. New Zealand is a village and Andrew knew we were a group the company could work with and had the right chemistry to be a good partner.

“He turned out to be bang on. Successful PE investment is all about successful partnering.

“That successful partnership is built on the people and the management team already in the business,” continues Nigel. “We look at the combination of co-owners, directors and the CEO. We believe in backing the CEO and don’t like to change the CEO out if we can help it. If you have to do that it means you’ve made a mistake getting involved in the first place.

“Of course, we have to look at whether the business can be grown and has substantial potential value. We did the due diligence which confirmed our confidence in the business and ended up taking a substantial minority stake and were very comfortable with that.”

Accurate underground imaging

AGL’s flagship product is Leapfrog, which uses sophisticated mathematical functions to rapidly analyse scattered data for surface interpolation (constructing new data points within the range of a discrete set of known data points) – enabling the creation of 3D images of ore bodies much more quickly and efficiently than other software.

Nigel explains: “A really big problem for geologists is that they can only have limited geological data and therefore only have a partial picture of what is going on underground.

“The AGL system can take all the data and produce much more accurate imaging of what’s underground in minutes or hours instead of weeks or months. We were impressed by the software’s ability to handle very big data sets, the sophisticated mathematical functions and the amazing 3D graphics that come out.

“Our due diligence investigations also revealed that the company’s user clients also felt the same and AGL’s software has become the software of choice among mining geologists around the world.”

Early steps

ARANZ (Applied Research Associates NZ Ltd) was established in 1995 as a private-sector research and development organisation, in Christchurch. It developed FastScan, an innovative handheld 3-D laser scanner, and FastRBF – ground-breaking software to model very large 3-D datasets, originally for medical 3D imaging.

The laser scanners were then used in Lord of the Rings by Weta Workshop to create 3D images as the templates for some of the animation features.

The potential for other uses was spotted by a consulting geologist to some of the world’s largest mining companies and ARANZ developed an application for the mining geology field. Subsequently it became two new and separate companies: AGL, developing and marketing products for the mining, hydrogeology, and geothermal industries, and ARANZ Medical, which develops and markets Silhouette wound imaging, measurement and documentation systems.

“Before we committed we wanted to understand how well AGL was positioned versus competing software businesses,” says Nigel. “We looked at where they had a presence in the mining value chain and where there was further potential in that chain to exploit.

“Part of the role of due diligence is to investigate unmet possibilities and where a business could grow. AGL worked with us collaboratively and shared their insights – especially how their customers viewed the software. They have very strong client relationships and very high retention rates.”

Global footprint

AGL now has a global client base encompassing more than 50 countries and more than 400 mining and exploration companies, including most of the major operators. It serves these customers through an infrastructure of 13 global offices.

The business has strong recurring licence revenue and has performed strongly despite the recent downturn in the mining sector.

“Pencarrow’s investment was made to assist AGL to enhance its product suite and provide capital for potential complementary acquisitions,” Nigel points out. “AGL has been one of the most acquisitive of our companies. We provide general commercial expertise and have worked alongside their team on the acquisitions.

“It takes a lot of discipline and attention to detail to put a successful acquisition in place. You need to have a sound plan right from the start. That’s where the mistakes can be made.”

Immediately following Pencarrow’s investment, AGL acquired several of its global distributors, and one of the leading geological consulting companies based in Perth, QG. These acquisitions will enable it to achieve a higher margin through direct sales and distribution and allow it to provide high-end complementary consulting, an important part of the sale process.

More recently it has made further acquisitions and added businesses in Calgary and South Africa that will enable it to expand its offering to clients.

Pencarrow’s funding will also enable AGL to accelerate the buildout of its next generation software product, Central, which will provide several significant enhancements over the current product including a cloud-based platform to allow effective project collaboration across mine sites and offices and bring decision-making and analysis up to senior executive level within the mining businesses.

Future possibilities

Nigel is very optimistic about the company’s future growth. “We were convinced from the start that software demand would continue to grow at around 30 percent and were reassured that 99 percent of revenue was generated offshore.

“Looking ahead, Africa and the old Soviet states are a growth area, and we’re enthusiastic about the positive impacts some very large global projects will have, such as a copper and gold project in Mongolia being brought to production by Rio Tinto.

“There are good possibilities further up and down the mining chain – from exploration and prospecting to mining operations, and even the hydrology side of things.

“Other industry verticals involving earth science such as civil engineering, environment and oil and gas exploration are expansion horizons that each provide a much larger addressable market than mining. 

“AGL is now contributing to geothermal energy work with NGOs worldwide, hydro dams in Turkey, transport tunnels in Europe, and a wide range of water quality and resource management projects.

“This is the sort of business where private equity can genuinely add value over and above what is in the sector already. So although we have had a number of approaches from overseas by people interested in acquiring AGL, we think there is more to be done.

“There is a lot of optionality still to be explored before we even look at an IPO, sale to a strategic player or sale to another PE player.”