KiwiSaver schemes may ultimately have to hold 15 per cent or more of their portfolios in illiquid assets, according to Simon O’Grady, Kiwi Invest chief investment officer.
O’Grady said with an increasing number of companies globally leaving, or never joining, listed exchanges long-term investors will need to access the “large and growing pool of private assets” or suffer diminishing returns.
“If you look at the Australian superannuation, 10 to 15 per cent is in illiquid assets,” he said. “We think this is a journey all KiwiSaver schemes will have to make.”
Last week the Kiwi Wealth KiwiSaver scheme, via sister firm Kiwi Invest, took its first step on the illiquid path with a cornerstone $54 million commitment to a new NZ technology-focused fund managed by local private equity specialist, Movac.
All of the underlying Kiwi Wealth KiwiSaver funds (conservative, balanced, growth etc) would have varying exposure to the Movac vehicle, O’Grady said.
While the Movac allocation only represents about 1.5 per cent of the Kiwi Wealth KiwiSaver current funds under management (about $5 billion as at the end of June), he said the plan was to increase the illiquid holdings to about 10 per cent over the next decade.
Both global and other local private assets would be in the frame over time, O’Grady said, depending on availability and the underlying investment case.
Once filled, the new Movac private equity pool (Fund 5) would hold about 20 relatively mature NZ technology companies – although the mandate allows a small portion in start-ups.
“One of the attractions of the Movac fund is it will invest in established companies in series A and B capital-raising,” he said. “In my view long-term funds like KiwiSaver schemes have to no need to invest in start-ups with the aim of getting out after a quick IPO.
“If you can access good companies with long-term growth prospects you can hold them almost in perpetuity.”
The Movac investment marked a slight tilt back to local assets for Kiwi Wealth, which has been an outlier in the KiwiSaver universe for its dearth of NZ equities.
For example, the Kiwi Wealth KiwiSaver growth fund has only 0.7 per cent invested in Australasian shares. By contrast, Australasian equities exposure in the KiwiSaver growth category ranges from 11 per cent for Mercer to almost 37 per cent in the Milford fund, according to the Melville Jessup Weaver June 2020 investment survey
Eschewing the local share market has hurt Kiwi Wealth in a relative sense over the short-term but O’Grady said the manager’s risk-budgeting process ranks NZ shares as poor value for now.
“We are able to invest in NZ shares,” he said. “But there are a lot of factor risks in the NZX – it’s a dividend, defensive play, which is cyclical.”
Investing in the Movac fund would direct a greater proportion of Kiwi Wealth money back home, although that was only a minor consideration, O’Grady said.
“The decision [to invest in Movac] was driven by our investment process. We think it’s a good counter-cyclical investment with idiosyncratic risk and return factors,” he said. “And as a side-benefit, we’re also helping NZ Inc, which our members tell us they would like to do with their money.”
Kiwi Wealth is investing alongside its part-owner, the NZ Superannuation Fund (NZS), NZ Growth Capital Partners (NZGCP – formerly the NZ Venture Investment Fund) and a range of other private parties including iwi. NZS is chipping in $70 million to Movac 5 (it already invested in the previous fund in the series) while NZGCP has committed $30 million to the effort. The NZS also advises, oversees and has contributed $240 million towards the new $300 million NZGCP venture capital fund.
O’Grady said the Kiwi Wealth/Kiwi Invest link with the NZS had provided further assurance on the investability and environmental, social and governance compliance of the Movac deal.
The two government-owned investment organisations have worked together previously on several projects, he said.
In a carefully worded statement, Kiwi Wealth says the Movac allocation “marks the first time an institutional player within the KiwiSaver space has entered the growth and venture capital ecosystem at this scale”.
Other schemes, however, have dabbled in the private asset space, notably: Simplicity (through an allocation of up to 5 per cent of its growth fund to venture capital manager, Icehouse); Booster in a number of direct property and NZ agricultural business investments; and, Mercer, which has a real assets exposure.
Historically, KiwiSaver schemes have baulked at holding private assets due to the administrative complexities and liquidity risks involved.
O’Grady said investors are “right to be concerned about liquidity”.
“Most of us can still remember in the GFC when investors were caught with illiquid assets in often poorly constructed funds,” he said.
And with KiwiSaver members free to switch schemes at any time, O’Grady said schemes do have to be mindful of liquidity and fairness in pricing private assets.
Kiwi Wealth would regularly price the Movac assets based on independent advice as well as “internal processes”, he said.
“We will also have the ability to adjust the pricing in times of market stress,” O’Grady said. “Nothing is perfect but this is more than adequate.”
However, if the KiwiSaver market increases exposure to private assets as per his prediction of 10-15 per cent, he said the system would have to develop a better solution to the illiquidity administrative puzzle.
“Maybe members can elect to have two KiwiSaver providers, leaving the illiquid assets in one scheme if they switch to another,” O’Grady said. “We will have to evolve the mechanism.”