The NZ Superannuation Fund (NZS) expressed concern about “several key aspects” of the new $300 million government venture investment initiative, document released under the Official Information Act (OIA) reveal.
In a letter to Finance Minister Grant Robertson this July, NZS chief, Matt Whineray, notes the proposed short timeline to establish the fund, its tax structure, “legislative architecture” and requirement to appoint fellow government-owned entity – the NZ Venture Investment Fund (NZVIF) – as manager were problematic.
Under proposals announced in this year’s budget – and now entrenched in the Venture Capital Fund (VCF) Bill – the government plans to establish a $300 million fund-of-funds to invest in local “growth businesses”, seeded mainly by $240 million of contributions originally intended for the NZS. The Labour-led government restarted regular contributions to NZS (amounting to about $1 billion annually) in 2017 after an eight-year hiatus.
As well as giving up some of its annual contributions next year, the NZS will have administrative and governance duties across the yet-to-be-established venture capital fund. The NZVIF, however, will select underlying managers for the fund-of-funds.
Whineray says in the letter that the ‘policy statement’ approach included in the VCF legislation is “inconsistent with the fundamental design settings of the [NZS] Guardians”.
“[NZS] was intentionally formed to operate with a high level of independence from Crown/Government in respect of investment decisions,” he says. “The Policy Statement cuts across this independence by requiring the Guardians to “give effect” to certain Ministerial decisions regarding the VCF (the Guardians is currently only required to “have regard to” directions)…
“… the Minister assumes a high level of accountability for investment performance and responsibility for meeting the [VCF] legislative purpose.”
For instance, Whineray notes that the legislation requires NZS to appoint NZVIF as manager of the VCF “regardless of our confidence in the NZVIF as best manager of a fund of funds”.
“Our usual due diligence and conviction assessment in respect of NZVIF are underway and will continue in parallel with the legislative process,” he says. “NZVIF is currently re-building its fund-of-funds team following a period of staff turn-over, so final outcomes are not known.”
The NZVIF, headed by Richard Dellabarca, manages about $180 million of assets via two vehicles – the Seed Capital Fund and the Venture Investment Fund – that invest alongside other funds and investors in NZ start-ups and growth companies.
Dellabarca says in the recently-published NZVIF annual report: “The past year saw three staff depart to set up their own fund, which was unfortunately not a possible pathway internally given the mandate of NZVIF. The most significant of these being that of highly regarded Investment Director Aaron Tregaskis, who became synonymous with NZVIF over a 15-year period.
Tregaskis and fellow NZVIF manager, Chris Jagger, decamped to launch the AmpliPHI venture capital fund earlier this year.
NZVIF now includes three investment analysts, two investment managers and a new investment director, James Pinner, who joined in August.
Aside from the VCF set-up restraints, Whineray said the decision to tax the proposed $300 million fund was “inconsistent with the policy decision”.
If the VCF is “not exempted from tax, then our view is that the same tax regime should apply to the VCF as applies to our other mandate [NZS] given efficiencies will arise by using our current tax processes and procedures”, he says.
In reply this August, Robertson agreed to align the VCF tax treatment with the NZS but knocked back Whineray’s other concerns.
The Minister says the VCF bill was “specifically drafted in a way that avoids any impact on the Guardians’ independence in respect of the NZ Super Fund”.
“In the case of the Venture Capital Fund, we see it as vital that the Guardians skills are brought into this system, but, unlike the New Zealand Super Fund, which has a very long-term objective, the Crown should have the opportunity to be responsive to the effectiveness of [the VCF] policy,” Robertson says.
He also says while the fast pace of the VCF legislation “can increase execution risk” there is a need to “balance this risk with the benefits of addressing the venture capital gap currently being experienced with New Zealand firms as quickly as possible”.
Submissions closed on the VCF bill in September with a select committee report due in December. The $300 million fund is expected to go live in the middle of next year.