KiwiSaver providers consider private investments

Private companies are being suggested as a good place for KiwiSaver providers and other fund managers to find growth opportunities.

Friday, September 30th 2016, 6:00AM

by Susan Edmunds

John Johnston, of Milford Asset Management, said a disproportionate share of New Zealand’s economic output was concentrated in the hands of privately-owned enterprises rather than being accessible to investors via the listed market.

He said there were 243 businesses with a turnover greater than $200m and 2490 companies with turnover of between $20m and $200m. The average return on assets of the 2490 companies in 2015 was 5%, double the average of 2.5% return for businesses of over $200m in size.

“We believe these attributes taken together make the private company market in New Zealand an attractive place to look for compelling growth investment opportunities. In fact, Milford has had a successful track record in this market with 12 Milford Active Growth Fund private company investments over the past five years.”

Brooke Bone, who manages the private investments for the Active Growth Fund, said the private investments had performed very well and were well ahead of the overall fund performance, which sits at 13.7% over the past year.

Some investments, such as that in Manuka Health NZ or Kauri Property Fund, had been sold. Others, such as Orion Healthcare and AFT Pharmaceuticals, had ended up listing.

Bone said the high public profile of Milford meant that there was a large amount of information about private investment opportunities being submitted regularly.

He said the Milford team would then look at the options and select those that were the most likely to become listed companies. “We’ve been doing this for five years and started small but continue to add more businesses and new investments in this area. We are keen to get to the point where we can assist these businesses to become listed businesses, but we see some being sold as well. We’re not just collecting a big group of private companies.”

He said most diversified portfolios would aim to have between 3% and 8% in alternative assets, including private equity. The Active Growth Fund has just under 3% at present but has been as high as 7%.

”It’s helped to enhance the returns of the active growth fund and decreased the volatility of the return and enables us to have greater capacity going forward. We consider it to be a very good way to develop the New Zealand economy, by finding these good growth companies and adding capital to then enable them to grow faster.”

He said there were additional risks and there was less liquidity if shares needed to be sold, but the benefits outweighed the negative.

Norman Stacey, of Diversified, said KiwiSaver investing in private companies was one of the “great national benefits” of the scheme, which would lead to deepening markets and an increased capital pool.

“NZ Super Fund has to a very significant extent led the way. As with listed shares, private equity is best diversified – so best with a variety of selections to spread the issuer risk. I am peripherally involved in a private equity candidate in NZ, with a view to taking a more dominant role. Our objective will be the KiwiSaver capital pool."

Massey University commentator Claire Matthews said it was a legitimate option for funds.

“But I think it would be important for funds to make it clear if they are doing so in order that their members understand what their funds are being invested in. There are different risks associated with private equity, and I would generally expect only growth and/or more aggressive funds that are inherently structured for higher levels of risk to be doing much in this regard.”

Some fund managers have said private companies are not a feasible option for KiwiSaver because of issues around size, efficiencies and problems valuing the asset.

Tags: KiwiSaver