Finance Minister Grant Robertson introduced new legislation last week.
The $55 billion New Zealand Super Fund would be able to take a controlling stake in companies under legislation introduced by Finance Minister Grant Robertson last week.
The law change opens the door to the Super Fund taking controlling stake in new investments - including infrastructure investments.
The Super Fund has been keen to get into the infrastructure game, and put up a proposal to build and fund Auckland’s light rail scheme. One of the challenges to the fund doing this had been a ban on taking a controlling stake in any investments, which has required the fund to find an investment partner.
This has caused some difficulty. Not just because it can be difficult to find willing investment partners for things like infrastructure. It also causes problems for the Fund if its co-investors wish to exit an investment. Another partner must be found because the Super Fund cannot, under its legislation, be left holding a controlling stake.
Robertson was unavailable for comment on Monday morning, but the Herald was pointed to an explanatory note for the bill which said that removing the rule might enable the fund to “access a wider group of viable investment partners and opportunities, particularly in New Zealand”.
The Super Fund said it supports the change.
National was consulted about the change and is taking a “wait and see” approach, according to Finance Spokeswoman Nicola Willis.
She understood the rationale for change, but is keen to see what feedback occurs at select committee.
“As [sovereign wealth funds] have got larger, they do develop more capital that is managed in house. There is a view that this could help develop domestic capital markets in New Zealand and would allow investment in strategic infrastructure.
“That needs to be weighed against the fact that the Super Fund could potentially crowd out other investors, which we wouldn’t want to see,” Willis said.
Recently released documents show the Government has been looking at changing the law since 2021.
In July 2021, Treasury delivered a report on the issue to ministers, which found that times had moved on since the Fund was established in 2001.
It said the “rationale” for the ban on taking a controlling interest was “appropriate for the maturity of the fund” when it was established, as well as the “relatively small exposure to Direct Investments within global practice of investment management in 2001″.
The rule (known as Section 59) was reviewed in 2011. That review allowed the Fund to invest in Fund Investment Vehicles, but the controlling interest rule remained. The changes allowed the fund to take a majority stake in entities for the purpose of making investments, but it cannot take a controlling stake in investee businesses.
Now, Treasury believes it is time for a change.
“Direct investment is a much more common feature of best practice portfolio management than in 2001, or the more recent review of section 59 in 2011,”
“The proportion of fund allocation to direct investments may continue to grow into the future and is particularly important for the NZSF to capture domestic investment opportunities, including infrastructure investments,” the report said.
A paper from Robertson’s office, circulated among other ministers, said the removal of the restriction would “provide access to a wider group of viable investment partners and opportunities in New Zealand and enable more of a principal/minority investor partnership”.
“This could attract institutional investors who are comfortable with the Guardians’ due diligence practices, deepening capital markets for domestic transactions particularly as the Guardians look for scalable investment opportunities such as strategic infrastructure”
" It would also provide a larger opportunity set for New Zealand investments and potential to increase the risk adjusted return of the NZSF,” the paper said.
New Zealand has a tortured history of superannuation funds carving out a place for themselves in the economy. The Third Labour Government’s compulsory superannuation was pilloried with the much-remembered dancing cossack TV advertisements because National argued that allowing the scheme to purchase private enterprises was akin to Soviet communism.
When the current Super Fund was established in 2001, the Fifth Labour Government assuaged these fears by being clear that the funds investments were purely on a commercial basis - and were not for public policy purposes.
That principle has been carried through into this amendment. Entities where there is a controlling stake, will still be commercial investments. Treasury officials and drafters at the Parliamentary Counsel Office wrote the legislation in a way that means companies controlled by the Fund will not be subject to thinks like the Official Information Act in the way a State Owned Enterprise would be.
The Fund’s 2022 annual report had the size of the fund at $55.72b.
The Green Party supports the changes, while Act said it was not opposed in principle.