Do we live in a tax paradise?

For a society that provides a full range of services aren’t we remarkably low-taxed in New Zealand? I was comparing notes with my Australian-based brother this week, and the differences are stark.

Our top income tax rate is 33%, and we have no capital gains tax, while property rates (for me in Auckland) are just 0.29% of assessed value. We also have GST of 15%.

In Australia they pay 49% top tax rate (45% + 2% +2%). They also pay tax on any capital gains – the net capital gains are simply added to the taxable income, but net capital losses can’t be deducted from income. The family home is exempt from capital gains, but ordinary investments are not. You can get some relief by placing your money into a super fund – and you can self-manage this – but money going in is still taxed at 15% and is limited. If you contribute too much then the excess is taxed at 47%, and if your total income is over $300,000 in a year then there is another 15%. GST in Australia is also more complex than here, though lower at 10%. 

Whew – as you can see it’s also a much more complicated system – you’ll probably need a lot more expensive advice than here in NZ.

In the USA the top tax rates are over 40% just for the federal component, then you add state tax, not to mention health insurance and all the other things that their state does not provide. It gets over 50%. Sure their system is so rigged and wretched so that the effective rate for the wealthy is lower – so be prepared to pay a lot to a CPA as well. Let’s not get started on the absurdities of cascading regional taxes, nor regional taxes on  goods and services. It’s all incredibly expensive, complicated, and biased towards the very very wealthy. 

I like it here – our tax system is understandable and efficient. Sure we can do better, but it’s worth pausing now and then to say “well done” to a series of governments. 

Posted in NZ Business | 4 Comments

Punakaiki Fund invests in NZ Artesian Water

Crosspost from Punakaiki Fund.

New Investment: NZ Artesian Water

We’ve seen plenty of headlines recently about offshore companies bottling our water and making fortunes. So when I met Nelson-based Kiwis Andrew Strang and Wayne Herring through a Better by Capital engagement, I was eager to see how their New Zealand Artesian Water business (NZAW) was progressing. The answer was “very well”, and that they were actively looking for funds to grow.

We are very impressed by their supply strategy – working closely with the Tasman District Council – their product and their plant, as well as their plans for expansion. Their premium alkaline water, E’Stel, comes in elegantly designed bottles and also in boxes, and is mainly sold into China, although NZAW has supply contracts across the world. They have also developed a new blended-water product for China aimed at mothers using infant formula. For now their primary challenge appears to be scaling the business to deliver on sales demand. Investors living in or visiting the South Island can help with that demand – E’Stel is available at selected retailers there.

The brothers-in-law have a background in West Coast mining, and Andrew also has a background in the high end fashion and jewellery business and a lot of experience in Asia. Their unusual combination of experiences, combining New Zealand’s natural resources with fashion sense, trading in Asia and grit started to pay off from when the Prime Minister opened their plant in March 2015, and since then the company has grown quickly.

Andrew and Wayne know how to get things done, and their story will continue to attract attention as their business grows. We are delighted to be able to join them on their journey.

The investment
Punakaiki Fund has invested in a 11.8% shareholding in NZAW, and has options to bring the shareholding up to 20%. I’ll be joining the board of directors (as I will also do for Linewize).

But is this hi-tech?
We set up Punakaiki Fund to invest in all sorts of high-growth companies, but in particular those in technology, internet and that are design-led. We increasingly believe that quality high-growth companies combine most or all of these elements, and NZAW certainly uses design and technology to gain an advantage. Their bottles, for example are square-based and round topped, but with a curve and thickness that means they not only look good on the shelves, but they also stack higher in shipping containers and are reusable. Their infant water is a designed product – building on MIT research to deliver the optimum product for babies. Most of all though we see that their growth prospects are very strong, and that our funds will help them a lot on their journey.

Posted in NZ Business

Punakaiki Fund invests in Linewize

Crosspost from Punakaiki Fund.

New Investment: Linewize

Managing Internet access is hard – do you allow staff or your family to view the unfiltered internet, or block everything except for approved sites? It’s even harder at schools. On the one hand, you don’t want students accessing inappropriate content, or spending their time and the school’s bandwidth frivolously. On the other hand, you don’t want to restrict their learning opportunities, for example by blocking information on breast cancer. You also want to teach students how to think critically about their own activity so that when they leave the protective environment of the school they’ll have the skills to keep themselves out of harm’s way.

That’s where our latest investment, Linewize, comes in. Their internet firewall, management and control service is easy to use, administrated centrally and gives teachers discretion about what is or isn’t allowed. It runs on just about any hardware, integrates with Google Apps For Education, is really cost effective, and most importantly, help students learn from their choices.

Linewize have sold their open source firewall and cloud-managed service solution to over 200 New Zealand schools so far, and they have done so when their main competition, Network for Learning (N4L) provides a free alternative. Linewize are winning because their solution is easy to install and manage, and it gives teachers the control they need in the classroom. They are also pushing offshore and have good early traction, and our investment will allow them to accelerate these efforts.

Linewize prices start at $75 per month for tiny schools and increase with the number of students, with a lower price per student as the roll-size grows. The product is mainly sold through a 20-strong growing network of resellers, who also install and provide the first latter of support for the product and service.

Scott and Michael
Linewize was founded by Michael Lawson, CTO, and Scott Noakes, the CEO. I’d heard about the company originally through judging the Hi-Tech Awards in early 2014, and again for this year’s awards, where they were a finalist in they category. Scott and I talked at the Hi-Tech Awards gala evening and after a series of meetings and exchanges we came to an agreement on the 31st of May. Since then we’ve worked through the legal process we all eventually signed a week ago.

Our investment will primarily help to accelerate sales, particularly into international markets and looking to double their New Zealand market share.

The Investment
Punakaiki Fund made identical investments into the two Linewize companies – Linewize Limited and Linewize Services Limited. The fund now owns 8.05% of each company and has agreed to invest another tranche, subject to fund raising, to bring the ownership up to 20%.

Posted in Punakaiki Fund

Punakaiki Fund invests in Populate

Crosspost from Punakaiki Fund.

New Investment: Populate

One of our core motivations at Punakaiki Fund is being able to help and watch companies create a large number of sustainable new jobs. And one of the best people around at hiring new people is Kirsti Grant, who was in charge of the rapid ramp-up of Vend’s team, and who is a fellow director on the board of Weirdly.

So when Kirsti and her partner Lance Hodges told us they were developing a new product that would make it easier for companies to manage hiring, we knew this was a real problem that she had felt. She and Lance backed up that experience with over 100 interviews and tests with prospective clients, and only started coding when they were sure their product had both end users who were demanding it now, and paying customers who would be willing to buy.

The company is called Populate, and while it is pre-launch, we decided that Kirsti and Lance deserved our early support.

The investment
We made a relatively small investment into Populate and own 9% of the company. The product will help companies collaboratively plan and track their hiring plans – a task done these days mainly on spreadsheets and email, or with very large and cumbersome ERP systems. Each manager will be able to track their team, plan for growth and run basic statistics on team composition. The information scales up to the company level, allowing heads of HR and CFOs the ability to forecast and manage.  Populate is especially useful for companies that are growing very quickly, often much faster than an annual planning cycle can handle, and it will allow rapid and informed decisions about hiring.

We are looking forward to tracking Populate’s progress, especially their recurring revenue growth, and are delighted to welcome Kirsti and Lance to the fold.

Posted in Punakaiki Fund

The latest SCIF term sheets – the Punakaiki Fund mark-up

At Punakaiki Fund we like to keep things simple, and we encourage other investors and all founders to do the same.

However in past years the contracts used for many NZ-VIF/SCIF deals have been arguably quite toxic against founders, and these can make it very hard for investors, founders and the next round investors.

But things are getting better, and it’s good to see the NZ-VIF/SCIF standard documents posted on their website.

We have also observed that these contracts are negotiable to much simpler form, and encourage founders and investors to do so.

Help is available from Simmonds Stewart, who have represented companies we have invested into. They have marked up several SCIF documents, including the latest SCIF term sheet, which I highly recommend founders and investors in this space consult.

However Punakaiki Fund goes further, and we believe the rest of the industry should to.

  • We would like to see contracts that are more founder-centric and less investor-centric;
  • We would like to see contracts that trust the boards and founders and not be prescriptive about what the business does and retain actions;
  • We would like to see contracts that say less, and rely on the excellent NZ law to provide investor protection;
  • We would like to see simpler, shorter documents that are easier to understand (and sign). (We would like to see lawyers paid less and do more deals.);
  • We would like to see terms where companies receive a net sum from investors and do not have to pay any kick-backs (6% in the SCIF world), investor legal fees or for any investor-directors; and
  • We would like to see more deals done – and simpler contracts will help that happen.

So I have taken the blue pen to the Simmonds Stewart mark-up, and here is a  SCIF Term Sheet mark-up from the perspective of LWCM and Punakaiki Fund. Tell us what you think.

Posted in NZ Business

Is there a future in food for New Zealand?

New Zealand’s traditional leadership in agriculture is due to our land, climate, hard work and invention from generations of farmers, and our universities and business that have supported them with increasingly valuable technology.

But our position is under threat, not today, but in the medium term certainly. The threat is that high quality food will be grown essentially anywhere for lower cost of inputs, and that global demand for meat will fall. Perhaps something’ll come along to make it easy replace milk as well.

High Density Gardening

There is a trend towards growing plants in more controlled environments in agriculture (CEA). The neat trick with high density gardening is that the control of temperature, energy and climate not only reduces the amount of inputs (water, energy and so on) but also allows for control of insects and pathogens. And when you control the access of pathogens then you don’t need so much fungicides and pesticides, if at all. The result is not only faster growing plants, but food that is almost organic in its lack of pesticides and other additives. It can be delicious.

At the moment it is relatively rare to see crops grown using tightly controlled environments for the whole lifecycle. But observe in the supermarket that some crops, such as tomatoes and blueberries, are now available – and incredibly tasty – year round. I suspect the same is happening with many high value flowers. These crops are grown in glasshouses, but there is, apparently, still a good gap between current practices and true CEA.

The goal, still fairly seldom seen, is vertical farming, with leaders like Plantagon and AeroFarms. With this very high intensity farming there is no reason why the farms need to use a lot of land footprint – a farm can be on floors of a tall building, with controlled LED lighting delivering the light-based to the plants.

But there is a problem, as it costs money to power those LED lamps, while on traditional farms the plants receive free energy from the sun.

The answer is tied up in the lowering costs of renewable energy, such solar panels, and batteries. These costs are already at to the point where it makes little sense to build traditional power plants, with Warren Buffet bragging in his latest letter that

“Berkshire Hathaway Energy (“BHE”) … … has invested $16 billion in renewables and now owns 7% of the country’s wind generation and 6% of its solar generation. Indeed, the 4,423 megawatts of wind generation owned and operated by our regulated utilities is six times the generation of the runner-up utility.

We’re not done. Last year, BHE made major commitments to the future development of renewables in support of the Paris Climate Change Conference. Our fulfilling those promises will make great sense, both for the environment and for Berkshire’s economics.”

If you are not content with a quote from a capitalist, then Al Gore has popped up with a new TED talk, The Case for Optimism on climate Change, last week and included this slide:

He also showed slides showing the precipitous fall in prices for storage batteries and solar panels. These curves will keep going, so while today it’s hard to economically justify building a thermal power plant, at some stage soon it will not be economical to even fuel a thermal power plant. Once we reach and pass that point it’s clear that generating and storing the power to drive those LEDs will be relatively cheap and a relatively low capital or opex cost for a vertical farm.

So Malthus  can wait a while longer it seems. But the problem is not solved yet, as this Guardian article shows the energy requirements for indoor crops are very large.

Better Meat

But we also eat meat, and as the more of the world enters the middle class the demand for grass and grain eating inefficient methane belching animals will continue to grow. We can gain more efficiencies and control effluent and CO2 by keeping animals inside, and that’s done in many countries. If that’s the future for meat and milk then New Zealand has no structural advantage over any other country, and the resulting products will be priced accordingly at very low or negative margin.

There are alternatives – The Economist has a video article, The Meat Makers, on two companies with different approaches to replacing meat. One which is attempting to grow meat in-vitro and the other is trying to use plants to create a beef substitute. The video shows poor progress for both companies, but it does show that a lot of investment is going into moving directly from plants into meat. In New Zealand SunFed Meats is attempting the same, and seems to be making great progress turning peas into chicken.

Now if we combine the two trends together it seems logical that someone will figure out how to grow a plant that is able to be easily process into substance that we find very close to meat. Will it be tasty? I suspect that for many years a very good steak will continue to attract demand, but would not be surprised to see meat eating consigned to the same shameful dustbin as cigarettes within the next 50 years.

Malthus is wrong again

When I was younger, many years ago, I remember reading Green literature about the end of days. The World was going to run out of resources and food, and quoted Thomas Malthus, who wrote in 1798:

That the increase of population is necessarily limited by the means of subsistence,
That population does invariably increase when the means of subsistence increase, and,
That the superior power of population is repressed, and the actual population kept equal to the means of subsistence, by misery and vice.

Malthus was right, but he also thought that population would increase exponentially and food production linearly. However productivity of food (and other) production improved exponentially over the ensuing years and the techniques above will continue that trend. It’s a future where we can produce more with less, as a globe, and one where there is no need for our plants at least to not be tasty and fresh.

Existential crisis

All these trends are great for the world, but will they also trigger an existential crisis for New Zealand? If anybody anywhere in the world can use small amounts of energy, water and nutrients to create the same quality food as we can here then why would anyone buy from New Zealand? If good-enough meat made from plants is able to substitute for a large amount of meat eaten globally then won’t the demand and price for our cattle and sheep fall? And surely someone will figure out how to more efficiently produce milk from plants?

The future of New Zealand is unknown, and these trends could be decades away. But we should be leading and not reacting late to these trends. We do have a good Agri-Tech sector, with many companies helping traditional farming get more efficient, and others like Sunfed Foods and Autogrow, who make controllers for glasshouses, aiming ahead of the curve. We should support them.

We should also focus on the quality end of food production, aiming to be the purveyor of the best food in the world rather than shifting tonnes of powder and meat. We’ve moved a long way in this direction over the years, but our polluted rivers are evidence that we can  no longer collectively hold our heads high.

Or perhaps there is another path – fast adoption of these intensive techniques to increase production and lower land and other resource use per output, followed by the return of some of the less productive land under grazing to native forest and birds. That’s a New Zealand we could all live in.

 

Posted in NZ Business | 8 Comments

Is NZVIF Directionally Correct?

The New Zealand Venture Investment Fund was set up 14 years ago with the best intentions – to foster an early stage investment sector in New Zealand by being a fund of funds. It’s has $250 million for VC and PE funds, but only $129.7 million of that had been invested to June 2015 and $100 million of it is an underwrite facility.

NZVIF  later added the now $50 million Seed Co-Investment Fund (SCIF) which co-invests alongside accredited angel investors. As at June 2016 they had placed $38.2 million of that.

It’s been a long while since NZVIF was formed, but even with time the results to date for the fund itself are pretty unspectacular. When I as at McKinsey there was a phrase – “directional correct” – which meant that someone had tried to do the right thing, but ended up down the wrong path. Is NZVIF directionally correct?

The latest investment report to June 2015 is just released. (As an aside it is months late versus the June 14 report, which was released in November 2014.) Back in 2014 was Jamie Ball at NBR wrote a scathing summary, and this year gives little to cheer about again.

Let’s look at the two parts of the business, the fees on fees, the road ahead and some comments about whether this is personal.

1: NZ-VIF VC Fund of Funds

The VC fund portfolio reported $120 million invested into funds and a Net Asset Value of $93.2 million as at June 2014. In June 2015 that was $129.7 million invested into funds and a value of $99.8 million. That means they added $9.97 million in cash, but lost $5.17 million asset value, for a average rate of return of (1.74%) – or negative 1.74% – per year.

In comparison Punakaiki Fund has raised $12 million and has a net Asset Value of over$16 million, as we did this in less than two years. We use the same IPEV standards for valuation and our IRR for the original April 2014 investors was over 50% per year when we last officially released data in November 2015. It’s quite remarkable to think that Punakaiki Fund’s value today is already a sixth of the value of NZVIF’s VC fund as at June 2015, and we have not received any funds from the NZVIF fund of funds nor had over 12 years of investing returns for the fund.

NZVIF accepts that the early performance was poor, and breaks down their VC investments by vintage. The latest report shows that the original investments from 2003 to 2005 saw an annualised return of (5.47%), and a loss of 30% overall to June 2015. Looking at the two reports however I see that in 2014 NZVIF reported $65 million was invested in 203 to 2005, but in 2015 that historical figure has climbed to $67 million. The return was reported as a loss of 35% in 2014, so things are improving.

But that’s a lousy result overall. In 2003, for comparison, I was trying to buy shares in Trade Me, and Xero launched in 2006. I wonder if the conversation with Trade Me would have been different if I’d had access to a $10 million fund.

The second wave of investments, was from 2007 t0 2012 (2014 report) of 2007-2014 (2015 report). There were five funds in this cohort in 2014, and six in 2015. The annualised returns for NZVIF were 8% in 2014 and dropped to 4.36% in 2015. Neither of these are acceptable for early stage investors, and what’s happened is that NZVIF, under their mandate, had limited their upside by allowing funds to buy out the best investments for near the investment value. So for the rather late-stage investment in Xero by Valar, for example, the NZVIF money was essentially a free extension of their funds for a few years. Valar didn’t need extra cash to make a return, a great return, but it sure was nice that NZVIF was there to support this offshore fund. NZVIF unfortunately gets essentially no return from the deal, which is why I use the “buy-out adjusted” returns to the NZVIF fund rather than their unadjusted returns. Those unadjusted returns for the period were reported at 26% per annum in 2014, but fell to 12.67% per annum in 2015. That was a 2.11 return as at June 2014 and a 1.46x return as at June 2015, remembering that this is funny money, not reality.

As good as that sounds, it’s not great for early stage investing.

For comparison during the first 2007 to 2012 period I invested in Define Instruments (solid), 200Square (still selling houses), Pocketsmith (growing well over the years), Vend (over 600% returns, including more cash out than invested), Valuecruncher (failed), Lingopal (in quiet mode), and Pacific Fibre (we tried), as well as some sweat-equity firms like My Tours (doing very well), Groupy Deals (exited to Yellow), Powerkiwi (2nd in Deloitte Fast 50, contract bought out by Powershop), AllAboutTheStory (closed) and others. Later on I invested in Syft (4x cashed out return), and then Punakaiki Fund (52% up so far.) I just took a very brutal ruler to those investments, and valuing rather harshly the unrealised investments I still see over 400% or 500% return on investment (one company valuation could drive the that a lot higher). Of the over $900,000 off that I invested only $150,000 can be deemed a failure, and some of that is still being worked out.

So while I was making four or more times the money invested – the NZVIF fund of funds was actually losing money operating in the same space. And meanwhile other early stage investors with larger amounts at their disposal did extraordinarily well. Take a look at the shareholder registers for Xero or Vend.

Meanwhile NZVIF stated on page 3 of the 2015 investment report that “no private venture capital funds have been established over the last 15 years without NZVIF’s involvement.” At LWCM, the manager of Punakaiki Fund, we were somewhat incredulous to read this claim. We have not exactly been hiding under a (flat or otherwise) rock.

2: SCIF

The SCIF fund, which operates deal by deal, had invested $29.7 million to June 2014, and $38.2 million to June 2015. That’s an increase of $8.5 million year on year. Punakaiki Fund invested, for comparison, about $10 million in the 21 months since launch in April 2014.

SCIF is not self-limited by the same clawback mechanism, and neither, as I understand it, are the new NZVIF VC investments. That’s good.

The average SCIF investment per company was $310,000 in June 2015. That’s a lot lower than us at Punakaiki Fund, which is averaging near $700,000 invested and $1 million in asset value per company.

The SCIF returns are fairly sad though, with NZVIF reporting just 1.04% annualised return in June 2015. That’s even lower than bank debt, but at least it is positive. The SCIF investments vary by partner – they have 15 or 17 (depends how you count) and only 8 are delivering positive returns. I suspect one or two of those will be very successful, and the rest marginal.

Overall NZVIF estimates that the SCIF portfolio returns on investment will be between 0.8 and 1.5 times the money invested, by 2026. Read that again. SCIF is saying that after 10 years they are promising, at best, an annualised rate of return of 4.1%. This is not successful early stage investing.

3: The Fees on Fees

The returns from both parts of the fund are lousy – and I accept that NZVIF is trying as hard as they can to downplay the value of their investments and there should be plenty more upside. If their approach to valuation is, as they state, “conservative” and they are carrying assets at lower values than their co-investors then then everyone needs to re-read the IPEV guidelines, which are pretty clear on using fair values. (We use them at Punakaiki Fund too.) The accountants and auditors (Audit New Zealand) for NZVIF should have strong fairness opinions about the valuation methodology and the individual valuations.

However you cut it, the reported returns from NZVIF’s VC Fund of Funds and SCIF are unacceptably low for early stage investing.

But we have not yet mentioned fees. NZVIF’s 2014 annual report and 2015 Annual Report show that in NZVIF received $2.33 million from the government in 2013, 2014 and 2015, and they spent $4.4 million, $4.6 million and $5.3 million  in expenses in those three years respectively. A significant part of that, $1.9 million in 2013 and 2014 and $2.6 million in 2015, was for “fund management fees and costs paid to fund managers”. I don’t know what that means – was this for external people to manage their fund of funds? Or was it paid to the funds that they have invested in? Either way it doesn’t appear to be matched in the revenue line. Is it taken from the investment principal?

With $137,500 spent on directors fees, $1.33 million on employee benefits, $1.0 million on “other administrative expenses” and $120k on auditors the basic costs to run NZVIF (excluding the “fund management fees and some other items) was $2.58 million. That represents 1.9% of the funds under management, while the full $5.3 million of expenses represents 3.9% of the fund under management. I am not sure how this works, but I suspect (and hope) the the 3.9% represents both layers of fees – those incurred directly by NZVIF and those paid to their VC fund managers.

NZVIF is a fund of funds, and even the SCIF part relies on others to do the work. The VC funds that they invest in and the angel clubs and small funds that they invest alongside with SCIF charge their own fees beyond those above. The end result is that the overall fees to the investor (us taxpayers) are very high.

Investors don’t mind high fees when the returns are great, but in this case it’s tough to take. NZVIF is charging a lot more than a funds on funds investor should, and while they would argue that they perform a a lot more services than just funding, it’s hard not to point at the tepid results and ask questions.

I feel frustration that NZVIF is accepting and promulgating these low returns and high fees as acceptable for early stage investing. I understand their need to justify their mandate, but it’s arguably creating a chilling effect for newer funds, like Punakaiki Fund, to convince larger investors that the asset class is amazing. And it is amazing.

4: The road ahead

The good news is that some of the NZVIF investments are going better as at the end of 2015, but it’s unclear what the “buy-out adjusted” returns were at that stage.

It’s also great to see some new funds coming on line, with Chintaka Ranatunga looking to close GD1 II soon, and the ICEAngels closing a fund between $5 and $10 million, and others circling. But we are still hundreds of million short – at Punakaiki Fund we are overwhelmed with deals and could place $50 million easily within 3 months, if we had it.

NZVIF itself is in transition, and with a new CEO yet to be announced there is an ideal chance to make a solid change in structure and mandate.

Last year I commented to the NBR that I’d like to see five things:

  1. Equality: Invest on equal terms to other investors into funds – with no buy-back provision. My understanding is that this has now happened.
  2. Simplicity and speed: Impose no conditions on the funds, such as contract criteria, and fund structure, investment process etc. (The VIF conditions were dreadful). Invest or don’t invest based on the offer, and make decisions quickly. My understanding is that the terms are a lot better these days, but it’s still dreadfully slow for VC funds to raise money from all investors. 
  3. Quantity: Have a strong bias to invest at least something into any local fund which is investing in the target markets/stages. Not done – we are still waiting for a call. I suspect this article will delay it further.
  4. Performance-led: Invest small amounts at first into many funds, and reinvest progressively larger amounts into funds that perform. Not done – the GP/LP structure used by funds means VIF can only invest in lumps when new funds are raised. This can take years.
  5. Reporting: Commission outside experts to deliver reporting on the overall early and growth-stage funding markets in NZ, placing the NZVIF funds in the list next to private investors and non-aligned funds. Not done, but it is good to see the second investment report from NZVIF. I expect the numbers will get better.
  6. and a bonus 6th: Report NZVIF progress to the public on a deal by deal and fund by fund basis, with ability to do so as a pre-requisite for any investment in a fund. Not done – and to be fair this is hard as companies don’t like releasing results.

To those I would add three new suggestions.

  1. Lower the management costs for NZVIF to say 0.5% or 1% of assets under management, more normal for a fund of funds. Ask the leadership to restructure accordingly. That means an annual budget of $650k to $1.3 million, well under the $4.6 million today; or
  2. Pass the entire fund to an existing government-owned professional fund manager, and if the government wants to invest in more funds or deals then the fund manager can allocate the funds. The Superfund is the perfect vehicle for this (ACC is an alternative), but the asset class is very small for either shop. One option is to move say two people from NZVIF into Superfund and have them managed there; or
  3. Run a tender to ask for proposals to run the fund and pass the fund to the private sector. Selected the manager based on the response in costs and evidence that new ownership would drive higher returns for the fund.

The final alternative is to keep going, but it should be clear by now that more of the same is not necessarily the best course.

5: It’s not personal

I commend everyone inside NZVIF and in the funds they have invested into. Everybody works hard to change NZ’s investment climate and to deliver returns for investors and founders. Some people in the ecosystem have gone well above and beyond.

This is an attack on a dated mandate for NZVIF, a structure that is unwieldy (though getting better) and in an ecosystem that has marched far ahead.

As investors, advisors and taxpayers we should be unafraid to call out when we perceive there may be an issue, in this case with a business. It can make things tough when people don’t understand that this elephant hunting is never personal, but over time essentially everyone respects that things do need to be called out, and an intervention is better than no intervention.

In this case I’d really like NZVIF to succeed, and I’d really like to see a lot more funds in our ecosystem – we need them. But at the same time we need to broaden the ecosystem away from NZVIF. Punakaiki Fund has shown that it can be done from the ground up, as have many high net worth investors, while Milford Asset Management have done the same as a larger investor top down.

The high growth investing ecosystem still needs to earn the right to have the major brokers and banks get behind the space, and the only way we will do that is to show consistent and strong returns, resetting the standard for what proficient early stage investing can achieve.

I love it when investors in our ecosystem make great returns. Here’s to the early investors in Diligent, the folks who backed Xero pre-IPO, the few and the brave behind Adherium and the countless quiet investors who back the thousands of companies we never hear about. Let’s keep investing into great companies.

And let’s hear it for the founders – all of this energy is focused on helping founders start and accelerate the growth of companies. We have an abundance of founders and great companies in New Zealand – we need to get on with giving them what they need.

Posted in NZ Business | 3 Comments