Ministry of Business, Innovation and Employment (MBIE) investment policy manager Landon McMillan said the Government put $500,000 towards investigating how the fund could be established.
“We expect this investigation and industry engagement to be finalised in early 2023,” he said.
Meanwhile, the Reserve Bank is running a consultation on how much capital banks need to hold in relation to the amount they invest in the fund. Submissions need to be in by February 28.
Nash said the fund would provide an opportunity to gear up Kiwi businesses finding it difficult to raise funds.
“This is a scheme that’s worked very well in a number of other jurisdictions, so it’s not as if we’re the first in the world to do this,” he said.
“This is asking banks to commit quite a lot of money. We need to change some of the prudential rules from the Reserve Bank. So, it’s quite a lot of work that needs to take place to get this across the line. But I’m very confident we will get it across the line.”
The Reserve Bank, in its consultation document, defined the problem the Government is hoping to solve.
“For debt finance, the Government identified that SMEs are faced with a narrow range of lenders, pay internationally high interest rates, and typically to access credit and working capital must risk personal assets to get loans (e.g. offer their home as collateral),” the Reserve Bank said.
“And for equity finance they found that SMEs often lack the capability, investor readiness, and willingness to relinquish control to access significant equity capital.”
Nash said the fund would always be a minority investor in a SME and have a seat on the board. It would offer guidance and expertise, but always leave owners in control of the business.
“Business growth funds have more modest return expectations and no hard exit deadlines, allowing business owners to set their own growth targets and identify the most appropriate time and path to exit,” Nash said at the Budget.
MBIE’s McMillan said: “We anticipate [the fund] will be set up as an independently managed, private investment company, with a board responsible for overall strategy and investment guidelines, and independent management that would make investment decisions.
“Internationally, business growth funds’ boards are not involved with any investment decisions so as not conflict their shareholders.”
The Reserve Bank, in its document, noted these types of funds tend to invest in established SMEs with a track record of revenue growth and profitability – typically 10 to 30 SMEs each year.
They also tend to “invest minority economic interests of between 10 to 49 per cent of total, fully-diluted, share capital in SMEs for an average investment duration of five to seven years”.
The Reserve Bank said the Australian Government contributed A$100m towards its business growth fund alongside six banks to create a A$540m fund. Its goal is to have A$1 billion fund in time.
As for how the fund would fit into the Reserve Bank’s capital adequacy rules, it said overseas experience suggested a lower risk-weight helps incentivise banks to contribute funding to a business growth fund.
But the risk weight was still relatively high.
It explained risk weights could be lower because the risk of an investment in a particular business would be spread across the fund’s investors.
The Reserve Bank said banks would benefit from further diversification, as the fund would invest in a range of businesses.
“However, as there is still risk associated with equity investments, we propose a cap on contributions as a percentage of CET1 [common equity tier 1] capital to mitigate the risk, consistent with the approach taken for the Australian business growth fund,” the Reserve Bank added.
Spokespeople for ANZ, ASB, BNZ, Kiwibank and Westpac told the Herald it was too soon to say whether they would partake in the scheme or not.
