Eric Watson: Private business a lost investment opportunity

KiwiSaver dollars would be better invested in SMEs that need capital. Photo / Hagen Hopkins

Opinion

Media excitement is centred on Meridian Energy at present but investing in private companies is what excites me. The real opportunity for New Zealand lies in its "private" businesses: those not listed on the NZX stock exchange.

If you choose your targets well, it's incredible to see what additional capital and fresh strategic perspective can achieve.

For years we've been talking about the shortage of capital faced by small- and medium-sized New Zealand companies. We've hung a big sign around the neck of SMEs that says, "Good Opportunity to Invest".

High net-worth investors, ACC and the NZ Superannuation Fund have all seen the opportunity, allocating millions of dollars to private-equity funds that seek out companies with great prospects.

But one key investor segment is missing the boat: KiwiSaver schemes. This is ironic because one of the key reasons cited for setting up KiwiSaver was the effect it would have on savings and thus the supply of capital for Kiwi businesses.

KiwiSaver has certainly been a success when it comes to creating a pool of retirement assets. A June survey by Morningstar showed assets in KiwiSaver schemes exceeded $15 billion. However, just 1.3 per cent of this pool was invested in a bunch of "other" assets, of which private equity forms a part.

This is a paltry sum, given that the industry raised on the order of $1 billion over the five years to the end of last year, according to the New Zealand Private Equity & Venture Capital Association.

Meanwhile, almost 12 per cent of the KiwiSaver pool, about $1.8 billion, was invested in NZX-listed companies. This makes little sense.

SMEs are the engine of our economy. By some estimates, more than 85 per cent of our gross domestic product is generated by SMEs, of which there are more than 30,000 with at least 10 employees. Compared with other countries, New Zealand is very much a "private economy".

So how do we address this? As a starting point we have to get rid of the structural impediments, and there are at least two.

First, the KiwiSaver Act 2006 says providers must act within 35 days on a member's request to transfer between schemes.

This is a problem because private equity is not a liquid investment. As a result, providers (rightly) avoid it in a world where members can shift schemes as often as they like on short notice.

Instead, providers should be permitted to set the redemption periods of schemes to match their investment strategies.

Then members can freely choose to invest in schemes that have long or short redemption periods which match their appetite for investment in illiquid assets such as private equity.

A second impediment is a rule in the Act that says a KiwiSaver may be a member of only one scheme. This is a problem because, simply put, some fund managers are better than others.

Under a multi-membership model, individuals would be able to allocate their retirement savings across schemes.

Making just these two changes would be a good start to positioning New Zealand to benefit from the billions of dollars KiwiSavers are putting aside for their retirement.