Parliament has inched closer to overturning a long-held investment constraint for the NZ Superannuation Fund (NZS) after kicking off committee stage hearings on a proposed law.
In a brief Finance and Expenditure Committee (FEC) appearance late last month, NZS chief, Matt Whineray, backed a move to allow the $60 billion plus sovereign wealth fund to take controlling interests in portfolio companies.
Whineray told the FEC the in-transit New Zealand Superannuation and Retirement Income (Controlling Interests) Amendment Bill would give the fund further “options” to pursue its direct investment strategy.
The bill, which passed its first reading on March 23, would amend Section 59 of the 2001 establishing legislation that prevented the NZS from taking majority ownership of underlying businesses.
While the rule was tweaked in 2015 to allow the NZS to “create and control” investment vehicles, according to the bill summary, the proposed change would sweep away all ownership barriers.
“The original policy rationale for the control restriction was that the NZSF’s purpose was to get exposure to investments and not to own businesses—if the Government wished to take ownership of businesses, it would have a policy rationale for doing so,” the summary says.
However, Whineray told the FEC the investment environment has changed considerably since the 2001 law was passed.
“We’ve seen a significant evolution in global best practice in terms of institutional investment management, our peer funds and the like,” he said. “And likewise our capability and experience has evolved as we’re implemented our direct investment strategy over that time.”
Stephen Gilmore, NZS chief investment officer, told the FEC that the ownership restraint had proven problematic in some previous deals.
For example, Gilmore said the fund would have preferred to take a controlling stake in Kaingaroa Forest when it first acquired a stake from the Harvard University endowment fund in 2006, gradually increasing its share to more than 40 per cent over subsequent years.
“At the beginning we bought 20 per cent but, conceptually, if we had been able to go to 50 it would have been a lot easier for us,” he said.
Gilmore joined the NZS as CIO late in 2018 soon after it brokered a deal to bring in the Canadian Public Sector Pension (PSP) as a 30 per cent shareholder in the forest.
“We had to bring in PSP, which now owns the majority, so we didn’t even have the possibility of acquiring 50 per cent,” he said.
Whineray, who will leave the fund at the end of this year, said dumping the controlling interest rule would free up the NZS to compete better for local assets against offshore investors, potentially in partnership with other domestic players such as iwi.
However, he said the fund would continue to invest alongside international peers as appropriate.
Under the bill the NZS will also have to create a “statement of investment policies, standards, and procedures that covers the appropriate policy and oversight of how the NZSF direct investment strategy is given effect, including where the option to take a controlling interest is utilised”.
The FEC is due to report back on the proposed legislation by September 10 with a leisurely pace through parliament likely given the impending general election this October.
All parties bar Act supported the bill in the March reading.
Just seven submissions were received on the controlling interests bill prior to the late April deadline, mostly off-topic comments from individuals such as this one:
“Respectfuly I would like to object to the Retirement Fund speculating through investments.
Monies put into the fund should be reliable and boring.”