Napier City Council has kicked off its in-development perpetual fund outsourcing process with a search for potential investment manager partners now underway.
In registration of interest (ROI) papers filed late in February, the Napier local government is looking to appoint a third-party manager to “construct and manage an investment portfolio” expected to top-out at $50 million by 2033.
The Council established Ahuriri Investment Management (AIM) last year to oversee more than $170 million of assets, of which most is currently tied up in property.
According to the ROI, the AIM portfolio holds about $103 million of leasehold property, $50 million of development land, a $14 million chunk of Hawke’s Bay airport shares and $5 million allocated to the under-construction diversified fund. The Council has pencilled-in other unspecified assets that could also be transferred to the new investment vehicle.
But the fund is expected to grow from the $5 million seed to between $25 million to $50 million “over the life of the 2024 Long Term Plan (to 2033) through capital retention and any diversification of other assets the AIM Board may choose to invest”.
Garry Hrustinsky, Napier Council corporate finance manager, said about half of the fund growth would likely be “sourced from the sale of existing assets”.
“For the purpose of forecasting, leasehold property sales are the primary source of capital over that time (retained earnings from the portfolio are a secondary source),” Hrustinsky said. “Once AIM is operational, these will be strategic decisions for the company to make.”
Scott Hamilton, founder of Tauranga-based Rautaki Consulting, is advising Napier Council on the fund.
Hrustinsky said Hamilton would “be part of a panel reviewing the ROIs”.
Among other career highlights, the Rautaki Consulting founder served as head of investment operations for ASB Group Investments from 2005 to 2010.
AIM already has published a statement of investment policy and objectives (SIPO) for the fund, laying out a fairly wide range of potential assets and an exclusion list specifying whale meat, tobacco, cannabis, weapons, gambling and sovereign bonds of countries under NZ government sanctions as no-go areas.
“This list is not exhaustive,” the ROI states. “Council also acknowledges the benefit of positive screening in investment selection, and expects this approach to also be adopted.”
Once appointed, the investment manager would also be able to allocate to external funds (including private equity).
AIM has targeted a 3 per cent annual distribution from the fund as “a source of intergenerational income to Council to supplement rates income” while protecting the capital base from inflationary erosion.
The SIPO also sets out an 80 per cent tilt to growth assets.
Kirsten Wise, Napier Mayor, said in a release last December: “Just like when we save into our KiwiSaver, the further away we are from retirement, the better off we will be with higher-risk investments. AIM’s investments will be medium to high-risk because it will be there for the long term. We need to balance this though, to enable AIM to pay dividends to Council to help us fund our activities.”
The ROI closes on March 24 ahead of a fast-following closed request-for-proposal beauty parade to select the winning bidder.
Interest in the Napier proposal has been strong with 25 downloads to date, Hrustinsky said, although actual applications may be lower.
“We expect healthy numbers from the parties that have downloaded the document so far,” he said.
Like most NZ councils, Napier has been facing budgetary pressures that have seen rates soar in recent years with several local governments exploring perpetual funds as a partial financial relief valve.
For example, the Auckland Council established the Future Fund (AFF) last year seeded by the $1.3 billion proceeds of selling its shares in the city’s airport.
The AFF has appointed Mapua Wealth (ex MyFiduciary) as investment adviser to help with the third-party manager selection – likely to be an implemented solution – now into a closed tender phase.