Channelling Kiwisaver funds into early stage Kiwi businesses

  • Written by ​Binu Paul
  • Published on

With around $4 billion being invested in KiwiSaver funds each year, for most New Zealanders their KiwiSaver account balance represents a large part of their retirement savings, if not the largest.

For instance, if a 30 year old today earning $60,000 annually and contributing the minimum 3% were to continue doing so till they retire at 65, they would have a balance of around $680,000, assuming they are in a fund earning 8% p.a. over that period.

Over the last seven years, more than 2.3 million New Zealanders have collectively accumulated over $24 billion in assets through more than 200 different funds - by far the fastest funds flow show in New Zealand's managed funds history going back to the 1960's. Not surprising, considering the cumulative effect of an individual's contribution, matched by their employer's contribution and topped up by Government rebates, not to forget investment market returns which have been favourable in the last few years.

This provides an interesting challenge at many levels.

Consider for instance, on average each year around $4 billion of funds is seeking a home. Investment managers of KiwiSaver funds are always searching for the most optimal returns for their members - seeking out those assets that would best add value to their fund's performance. Trust mandates dictate what assets they are able to invest in and investment amounts.

With a steady flow of funds incoming it is only natural that it puts upward pressure on asset prices across the board as rising demand pushes prices up. The situation continues to worsen as more funds chase fewer assets that are fairly priced. Currently, the typical diversified fund (i.e. one that has spread its assets across a number of income generating assets as well as growth assets), owns between 60 - 65% in offshore assets.

Even for investments in domestic assets, the search for new investment ideas has meant that some managers have begun to step outside of the traditional publicly listed equities sector and started to move into alternatives such as earlier stage companies that are about to go public.

This bodes well for the domestic economy and especially for fledgling companies looking for funding to grow. As KiwiSaver funds continue to grow in assets, expect bigger allocations to private equity and venture capital deals, either directly or through intermediaries.

The private equity sector in New Zealand is still in its nascent stages when compared globally, although there are some long established players in the market.

Typically, private equity is a category of assets consisting of equity securities in operating companies that are not publicly traded or listed on a stock exchange. A New Zealand Venture Investment Fund study of 92 realised private equity investments in NZ between 1994 and 2012 found that average returns to New Zealand private equity deals were 22.0% per annum. Obviously, this asset class comes with a relatively higher commensurate risk as well. If invested wisely, these assets can be a good diversifier of investment risks.

Having said that, New Zealanders don't need to depend solely on their KiwiSaver fund managers to do their investing for them, even for gaining exposure to alternative sectors. Equity crowdfunding platforms such as Snowball Effect provide the opportunity to invest in early stage companies directly. While the disclosure levels may be lower and the work involved in researching these companies would be a lot more, with the right level of skills and time to do so, Kiwis now have the opportunity to tap into potentially high growth homemade investments.

Regardless of whether investment funds find their way from individuals directly, or through their KiwiSaver fund, the funding prospects for innovative, high growth potential Kiwi companies look bright.