NZ is proving to be an increasingly difficult destination for offshore private equity funds, a new paper from law firm Buddle Findlay argues.
The Buddle Findlay article says tighter enforcement of the Overseas Investment Office (OIO) regime in NZ has put new hurdles in place for foreign investors, including private equity funds.
Under the current rules, offshore investors looking to buy ‘sensitve land’ or ‘significant business assets’ (generally, where value or price paid exceeds $100 million) must gain OIO approval for the purchase.
However, the complicated rules include a number of traps that can easily catch out foreign private equity funds, the paper says.
For example, the OIO includes an exemption for Australian non-government investors that bumps the significant business asset threshold up to $530 million that is “less helpful in practice than one might initially think”.
According to the article, authored by Buddle Findlay corporate partner Grant Dunn and senior solicitor Amy Cunniffe, the exemption only applies to entities that are established and operate in Australia.
“We generally see that, for offshore private equity funds, the benefits of investing in New Zealand through a newly established New Zealand holding company outweigh the benefits of structuring the investment to fall within this ‘Australian non-government investors’ exemption,” the paper says. “Hence this exemption is more commonly utilised by Australian trade investors rather than private equity firms.”
Changes in underlying investors during capital-raising could also see private equity funds investing in NZ inadvertently breach OIO disclosure regulations.
The OIO rules require offshore private equity funds making an investment caught by the law to disclose the fund structure and identities of all underlying investors. If an investor holds 25 per cent or more of the fund in question then a separate OIO consent for that individual may be necessary, the Buddle Findlay article says.
“Therefore, the fund manager needs to be mindful of the exact ownership percentages of its larger investors,” the paper says.
“Closing a fund and completing an equalisation adjustment may trigger the need for consent. For this reason, new funds may decide to wait until their fundraising is closed and their investor list settled before making any New Zealand investment that will require OIO consent.”
Furthermore, the OIO is ramping up oversight of staged purchase processes where offshore investors initially buy stakes in target NZ assets just below the 25 per cent ownership threshold requiring approval.
Often foreign investors purchase 24.9 per cent of the NZ asset but also demand veto over certain decisions of the company in question.
“The OIO is increasingly scrutinising such stepped investment plans more closely and requiring foreign investors to offer a compelling commercial explanation for investing in two steps rather than seeking consent before making any investment,” the Buddle Findlay paper says. “… If the OIO considers that an overseas investor has gained control of sensitive land or significant business assets even if that investor holds less than 25 per cent of the target portfolio company, the OIO is likely to take the view that its consent is required for the investment.”
Overall, the report says the OIO rules can “create headaches” for offshore private equity funds even if they rely on “structures and investment practices” common elsewhere.
“Mistakes can be costly,” the paper says.
A full copy of the Buddle Findlay article, originally published in the ‘Australian Private Equity & Venture Capital Journal’ June issue, is available here.