An initial $23.75 million was committed into high return but relatively risky private equity investments by the New Zealand Superannuation Fund yesterday.
The fund's first private equity investment is with the $75 million AMP Pencarrow Private Equity Fund which will invest in local management buyouts and expansion capital transactions.
Earlierthis year, the fund increased its planned private equity and alternative investment allocation from 7 per cent of the fund to 25 per cent over the long term. It also appointed advisory firm, Quentin Ayers, to review New Zealand private equity investment opportunities. The AMP Pencarrow investment followed that review.
"The key factor was the manager's track record in this area, which gives us confidence in their future performance," NZ Super Fund chief executive Paul Costello said.
While track record was not a reliable predictor of fund managers' performance on public markets, "we think in private equity it's quite different".
"What we're doing is backing the capacity of the management team to be able to identify successful emerging businesses, invest in them, help them to grow and ultimately list them."
He said private equity tended to have a relatively long investment cycle. Managers might not draw down all the money committed for up five years and the investor might not see full returns for up to 10 years.
However, the returns were expected to be healthy when they did come in - 7 per cent to 8 per cent per annum above the performance of listed markets.
But that premium reflected the illiquidity of invested funds and a higher risk profile.
"There's no doubt about it compared to listed equity markets private equity does carry more risk and that's why investors need to seek substantially higher returns from them."
Costello said NZ Superannuation Fund's revised 25 per cent allocation target for private equity and alternative investments was expected to take a lot of time and effort to achieve, and the fund had set an interim target of 13 per cent or about $100m by June 2007.
The value of the fund as at May 31 was $6.4 billion.
