A KiwiSaver scheme has bought a stake in a Kiwi medicinal cannabis company as part of its move into private company investment.
CareSaver, a new KiwiSaver scheme which was launched in July last year, has invested $420k in Rua Bioscience as well as $460k in investment platform Sharesies.
John Berry, chief executive of Pathfinder Asset Management, the investment manager for CareSaver, said it was just the start of its move into private equity investment.
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"Since about 2015 I have been advocating KiwiSaver schemes invest into private New Zealand companies."
The investment will involve around 4 per cent of CareSaver's $25 million going into private investment although Berry said over time it could go as high as 10 per cent of the fund.
Berry said it saw Rua as a healthcare investment with the potential for huge growth with regulation changing to allow medical cannabis to be prescribed by health professionals.
New Zealand has a cannabis company which is listed on the NZX in the form of Cannasouth.
Berry said it chose Rua because it had a "better opportunity" in terms of its pathway to revenue.
"We chose Rua in terms of the business case is strong."
Berry said it also liked what it saw in Sharesies after knowing the management team for quite a while.
"We really respect the operation. We are buying the talent behind it and the business opportunity. They are delivering on their growth."
CareSaver will become a shareholder alongside Trade Me which bought into the Sharesies business last year.
Berry said it was just the start of its private company investment.
"The thinking behind this is to build out a number of different holdings in different areas."
CareSaver is only the third KiwiSaver provider to jump into private equity. In 2017 Booster made its first direct investment buying into two wineries.
Milford Asset Management also invests directly through its KiwiSaver schemes.
But other providers have been reluctant to jump into direct investment amid concerns about liquidity and fears it would be too hard to sell an unlisted asset if they had a run on people pulling money out for financial hardship, first-home ownership or retirement.
Berry said it would manage the liquidity issue by making sure it was not too large a part of its investment portfolio.
"If it is 5 per cent of the fund and half the people withdraw money for hardship you are going from 5 per cent to 10 per cent, 90 per cent of the portfolio is still liquid."
The other challenge with private company investment is valuing it.
Listed companies are valued on a daily basis through the share market.
Berry said it would do an internal valuation on its private company investments on a quarterly basis and adjust the values accordingly.
While the investments would be part of an external audit undertaken once a year.
Berry said owning shares in a private company was similar to owning a house where there is a value but you don't see it changing every day.
He said the challenge in terms of KiwiSaver was that the value had to be adjusted to make it fair for both existing investors and new investors in the fund.
"You don't just leave it as the price paid."
Managers do their own valuations as getting external companies to value the investments was expensive, Berry said, and there was only a small universe of valuers.
Despite the challenges Berry predicts more KiwiSaver managers will invest in private companies.
"There have been some early adopters. But for some providers it might be driven by investors that drive the decision-making."