The NZ Super Fund is "going hard" on the acquisition trail for stakes in prime New Zealand assets like rural land, state-owned enterprises, smaller high-growth companies and iwi businesses.
A "request for information" - or RFI - was recently sent to a wide range of players in the NZ agriculture industry and the fund has also signalled its interest in taking non-controlling stakes if shares are issued in any state-owned enterprises.
'We are actively banging on the door for anything that's collectively, co-operatively or currently Crown-owned," says Super Fund boss Adrian Orr. "We'll be saying if and when there's an opportunity for smart long-term equity, we'll want to be considered 'first cab off the rank' ... I would love first right of refusal over these types of assets."
Orr confirmed the Super Fund's Kiwi shopping list during an interview for Capital Markets 2010 - the first in this year's Herald business reports series.
Prime Minister John Key's Government will soon begin work on assessing which state assets - if any - will be put on National's "for sale" list heading into the next election. Herald sources suggest partial privatisations of assets like Kiwibank, and, possibly Transpower, could occur through the injection of additional private capital rather than a simple sell-down of the Government's existing holding as occurred in the 1980s privatisation era.
The Government's move comes in the wake of a recommendation by the Capital Markets Development Taskforce that it broaden the range of high-quality equity offerings for retail investors by encouraging partial listings of central and local government owned companies, agriculture businesses and local subsidiaries of financial services firms.
Orr acknowledges nothing will happen on the SOE front unless there is a political decision. "But you could have a commercial entity inside - which could be the fund - and the wider 'Ma's and Pa's' there knowing it would be getting its institutional come-uppance on a regular basis through better governance."
The fund is focusing on "three C's" - collectives, co-operatives and Crown-owned companies - which make up more than 60 per cent of New Zealand's productive base. "It's a very quick way of becoming an insider to the future productivity of New Zealand."
At April 30, the NZ Super Fund had some $3.1 billion (19 per cent of its assets) invested in New Zealand; about 32 per cent if cash is included.
The fund plans to invest half a billion dollars ($300 million to $500 million) over the next five years on "activities up to the farm gate" in major food-producing regions in the developed world. "It will be rural global, but we're doing the NZ part now ... we think it's heading into a relatively opportune time to be thinking about this space," says Orr.
Potential rural suitors have been asked to "write an essay" in response to the fund's RIF. The fund is expecting the full range of possibilities from taking slices of current portfolios, slices of current balance sheets, teams that can go out and spot good farms that are under-performing, or, large corporations who it can co-invest beside.
Dairy giant Fonterra is understood to be keen on tapping the fund for co-investment in its planned farms expansion in China. Orr wouldn't comment directly. But he noted the fund's strength was its ability to bring its balance sheet and financial disciplines for co-investment offshore.
Among the fund's target audiences are capital constrained vendors, which could theoretically include the controversial Crafar farms portfolio, or, dairy assets associated with Allan Hubbard's troubled South Canterbury Finance.
But Orr stressed the entry price was very important: "These things are long-dated assets with a relatively low nominal yield ... to get the capital gain is the big part of the fruit at the end of it.
The fund's New Zealand investment strategy has four-prongs: the rural land strategy outlined above, an NZ direct strategy for "significant" investments, an expansion capital strategy aimed at SMEs and a focus on public private partnerships for social infrastructure.
NZ Direct Strategy
The fund plans to make five to seven significant investments (over time) on what Orr calls the "big stuff". Stakes of 20-50 per cent in compatible partners with an individual investment size of $100 million-$250 million.
The fund's target audience are: Crown/state assets; collectively owned (iwi-based) businesses and agricultural co-operatives. "We're saying we would want probably a total of around half a dozen investments of large licks of large size businesses where we can pick up a premium that other people probably couldn't get access to. That is by the nature of our long investment horizon and liquidity."
Orr points to the fund's share in Shell's downstream businesses in New Zealand which it acquired earlier this year in a 50:50 consortium with Infratil. "The entry price reflected the fact there wasn't a lot of other obvious buyers and it was a multi-national corporate who wanted out at a scale where domestically it's normally hard to raise that amount of capital ($696.5 million ) in a short period... so we were able to get ourselves to the table in a relatively rarefied bidding position.
"There's not a lot of other people who are here for the long term like we are who have the liquidity and the investment horizon we do," adds Orr.
"That gives us the chance, the opportunity to get into empty rooms where we might be able to get a liquidity premium and a very good return on our investment."
NZ Expansion Capital Strategy
At last year's Jobs Summit business lobbies complained that many smaller Kiwi companies were capital-starved as a result of the global credit crunch.
The fund is now targeting SMEs which have an enterprise value of $15 million to $50 million. Orr says these might be family owned, too small to float through an initial public offering (IPO) or have maxed out all their access to external credit.
"We could sit here and argue about whether or not there is a shortage of capital ... we're saying we'll put up $100 million-$200 million over the next three years."
The metrics underline the importance of the fund's expansion strategy. NZ has around 3500 SMEs with annual revenues of $10 million-$150 million. Around 2500 are in the $10 million - $50 million revenue range.
The SMEs are attributed with contributing around one-third of NZ's GDP; have an estimated enterprise (debt + equity) valuation in the order of $50-$100 billion (the NZ listed market capitalisation is around $53 billion) and employ over 30 per cent of the of the Kiwi workforce. Eighty per cent of NZ's top 200 companies (by enterprise valuation) are unlisted.
"It's about providing smart long-term equity where we would have a minority shareholding where the business would still have to be run by the owners," says Orr. The fund will mandate external managers to identify firms, manage the relationship on an on-going basis and exit when needed. "We'll come in as a long-term equity partner - say 'We you know your business, we're convinced of its long-term future, we want a slice of the action and we're not a private equity eight-year exit term out the door'."
The fund's investments will primarily support SMEs' plans through strategic acquisitions, technology upgrades of market expansion. It will seek to exit after a three-to-seven year timeframe through an IPO, trade sale or recapitalization.
The fund has already committed $100 million to the Public Private Infrastructure Partnerships Fund and is keen to progress PPP opportunities in small to medim projects such as schools, hospitals and utilities.
The fund has been disappointed at the Government's tardiness in moving on the PPP front (it did recently earmark the Wiri prison). But it has a lot of investments in the pipeline on both sides of the Tasman. "It's probably got to the point where we're not asking for permission - we're doing it and actions will speak louder than words."
At April 30, the fund's ten largest Kiwi equity holdings were a ten per cent investment in Auckland International Airport worth $268.5 million, and investments in Fletcher Buildings ($153.6 million), Contact Energy ($112.6 million), Telecom ($100.6 million), Fisher & Paykel Healthcare ($58.6 million), Sky City ($57.3 million), Sky TV ( $42.7 million), GPG ($36.8 million) and Infratil ($31.6 million.
Through the joint investment in Shell (downstream) the fund also has a 17.34 per cent interest in the NZ Refining Company.
This story has been corrected. An earlier version said the Super Fund had "also signalled its interest in taking minority stakes if non-voting shares are issued in any state-owned enterprises."