These private companies, however, have the same need for investment and capital as public companies. To enable our private companies to grow, we need to provide them with the capital to help execute on their growth plans.
A number of New Zealand institutional investors have recognised this private market opportunity and have channelled capital to private companies by investing through New Zealand private equity fund managers or, on occasion, by investing directly.
By way of example, Waterman Capital has received investment from the New Zealand Superannuation Fund and Accident Compensation Corporation amongst others, with a mandate to provide capital and skills to help grow New Zealand's private businesses.
Recently, we have also seen a number of local community trusts, iwi groups and others allocate part of their investment portfolios to New Zealand private equity.
It's an attractive investment class for those investors with longer term investment horizons. Research shows that historical returns to private equity are materially higher than the returns of the equity market.
For KiwiSaver, as a long-term retirement savings vehicle, the fact you need to be patient for strong returns seems like a natural fit.
KiwiSaver providers need to consider giving savers access to an asset class that historically has delivered strong returns over time. If the asset class is attractive enough for our crown investment entities, for community trusts and iwi - why aren't KiwiSaver providers also embracing New Zealand private markets?
John Berry of Pathfinder Asset Management recently wrote an article on KiwiSaver and private equity and while he supported the investment class, he pointed out three key hurdles that a KiwiSaver provider may highlight which I think are worth addressing.
• A lack of asset liquidity.
It's true that private equity is a long-term asset class, but so is KiwiSaver. For KiwiSavers who have 10 or 20 years of contributions ahead of them, given the historical returns, this is an asset class that should be highly attractive to them.
• No daily asset valuation makes it difficult for KiwiSaver providers to mark these assets to market.
Private equity funds tend to revalue their assets every three to six months, so yes, it's not daily, but again let's look at what KiwiSaver is. It's a long-term investment class, and therefore should we really be concerned that part of the investment portfolio is not being priced daily? It's what a KiwiSaver has in his or her fund on turning 65 that matters, not daily asset valuations when they are 20 years away from retiring.
• Fee structure. Fees are sometimes highlighted as an issue. Firstly, as an investor in any asset class it's net returns that matter (that is, after all fees are paid). The returns that are reported are after fee returns and it's these returns that have been impressive, in some cases almost twice those of equity markets.
Secondly, fees for private equity firms are in the main performance based. Unless investors are making a return, private equity fund managers aren't receiving a large part of those fees. That alignment of interest between investors and private equity fund managers is a key attraction to investment.
Finally, managing a private investment requires a far greater hands-on role than managing other investment classes. Investing in private businesses requires an active management role, not merely a passive one. It is this contribution of skills and help to private businesses that helps drives the superior returns to investors.
In my opinion these hurdles for KiwiSaver providers can all be positively addressed.
KiwiSaver has been a wonderful development for New Zealand and for its capital markets. As this pool of savings flows through to New Zealand business we all benefit from the jobs created and from the economic growth that flows from this.
But as KiwiSavers we are currently investing in only the publicly listed part of the economy. Private businesses, as an important and large part of our economy, also need some of the "oil" that Cullen envisioned at the launch of KiwiSaver.
Private equity, or private company investing, can provide outstanding returns for investors who can be patient. For KiwiSavers who are committed to investing to fund their retirement, private equity is an important option that should be available to them. Eight years on, it's time for KiwiSaver providers to consider alternatives.
Lance Jenkins is an executive director of Waterman Capital.
