The NZ government has floated the idea of launching yet another investment fund to fill a perceived capital void in the mature, mid-market private company sector.
According to a Cabinet paper released last week, many NZ companies need access to capital but are too small to list and don’t qualify as venture or private equity candidates.
“There are various other initiatives that should be kept in mind when exploring options to support other gaps in the capital market, including new proposed financial regulatory measures, and other sector or asset specific funds,” the Cabinet document says.
The paper, which also reviews the recently restructured NZ Venture Investment Fund (now known as NZ Growth Capital Partners – or NZGCP), says that “neither public nor private markets serve the full range of companies by size or investment stage”.
NZGCP now runs the $300 million Elevate NZ Venture Fund (previously the NZ Venture Investment Fund) and the smaller Aspire NZ Seed Fund. Elevate is a fund-of-funds vehicle overseen by the NZ Superannuation Fund (NZS), which also diverted $240 million of its annual government contribution to the new operation.
“While the Elevate NZ Venture Fund will bring much needed capital to the venture investment stages, it will do little to address a historical gap that smaller firms (with revenue between $3-$30 million) face in accessing growth capital,” the Cabinet paper says. “This includes companies that, for example, are more mature but still lack scale. That is, they are able to generate revenue and profit but are unable to generate sufficient cash to fund major expansions, acquisitions or other investments.”
Minister of Economic Development, Phil Twyford, says in the document that NZGCP funds are on track to deliver capital to their respective markets despite the COVID-19 disruption.
“The Elevate NZ Venture Fund and the Aspire NZ Seed Fund are well placed to support investment into promising high-growth New Zealand businesses in the next six to eight weeks,” Twyford says in the paper. “I will reaffirm the Government’s desire to ensure this timeframe does not slip.”
In particular, Elevate is “progressing well”, the report says with the appointments of three independent investment committee members: Hong Kong-based Danny Lee, Blue Pool Capital partner; Matt Ocko, partner in San Francisco firm DCVC; and, Dana Settle, partner in the Los Angeles-headquartered Greycroft.
Elevate also named US “entrepreneur, investor, lecturer and author”, Randy Komisar, as strategic adviser.
However, the government briefing was prepared before the surprise departure of NZGCP chief, Richard Dellabarca, in August. Dellabarca was facing an internal enquiry following a complaint.
The paper notes that the NZGCP mandate bypasses the NZ mid-size mature market, which could face extra funding difficulties in the COVID-19 era.
And the NZX most probably won’t step into the breach, the report says.
Most NZ firms “are not of sufficient scale to justify listing on the stock market, due to prohibitive issuance costs and high compliance standards”.
“This has been exacerbated by recent global stock market trends which have seen larger trading volumes, and more traders, but a halving of the number of publically listed firms. Trade volumes and investor access are boosted through the fractionalisation of investment opportunities (via schemes like Sharesies) and the rise of passive investments and exchange traded funds,” the paper says.
“However, trading commissions have declined and broker research coverage has fallen, making it harder for smaller companies. The outcome is that the domestic stock market is unlikely to provide capital to most companies in New Zealand.”
Furthermore, the mid-tier company sector could face an offshore funding squeeze due to the pandemic and changes to the overseas investment rules that allow government to “impose conditions on, decline, or unwind transactions… to protect the essential interests of New Zealand” during the COVID-19 crisis.
“The Committee noted that if we were to prevent overseas entities acquiring a substantial share in companies due to some national interest or security reason, we would need to ensure there were other avenues for those companies to raise debt or equity or be acquired,” the paper says.
Government is already the largest funds management entity in NZ with about $90 billion split almost equally between NZS and the Accident Compensation Corporation funds. As well as the government also owns the $6 billion plus Kiwi Wealth, manages a further $6 billion or more in public servant pension funds along with the NZGCP money and several other smaller investing entities.