The Startup Advisors Council wants the Government to remove barriers impeding KiwiSavers from investing in local startups.
The recommendation is one of 25 in the council’s UpStarts 2023 report, which was commissioned by the Government to find ways to boost the sector.
Reserve Bank data shows that of the total $97b held in KiwiSaver funds at March this year, 0.18% was invested in unlisted shares.
This compares to the US where a 2022 endowments study found long-term endowment managers typically allocate 30% of funds to private equity and venture capital, and 28% allocations to public equities.
Research by international consultancy Startup Genome found New Zealand has around 2,400 startups with 58% in Auckland, 15% in Wellington, and 8% in Christchurch. The research suggests the ideal number per million people is around 1,000.
The report says New Zealand currently invests $400m a year in startups. It wants to double the number of startups over the next seven years and which it estimates will take another $2b in new funding sources and then sustained investment of $800m+ per annum after that.
The report says, “This gap suggests that New Zealanders are being deprived access to a significant growth asset class.”
It identified three main barriers to KiwiSaver providers investing in PE investment.
The first is the requirement for daily liquidity to allow KiwiSaver members to switch funds at any time, requiring managers.
Then the requirement for daily valuation. The report says to support daily liquidity means KiwiSaver managers need to be able to mark illiquid assets to market regularly. “Those managers who are investing in the sector have developed the capability to do this between the quarterly reporting cycle of the venture fund managers, but others have not.”
The third is regulatory focus on low fees is another barrier as investing in venture funds or directly into private equity increases overall fees and creates a short-term drag on returns .
The Council also said it had observed that the level of understanding of how venture capital and private equity worked – the drawdown profile, risk/return profile, the J-curve effect – was “surprisingly” immature.
“Our view is that New Zealanders should all be able to access the dynamic, high-growth investment opportunity that investment in UpStarts represents, and that these ‘blockers’ should be removed to enable capital the opportunity to flow.”
The report proposes four measures to reduce the barriers. It asks the Government to guarantee the short-term liquidity of any investments in an eligible New Zealand venture fund.
“So if a member withdraws, transfers, or triggers a fund to move outside its internal approved allocations to the venture class, the Government would stand-in as a buyer and subsequently seek to sell that interest to another fund. This would eliminate liquidity as a barrier to investment in venture funds.”
It also asks the Government to consider moving from daily liquidity to 90-day liquidity to reduce potential short-term switching volatility and provide more operating certainty for KiwiSaver funds invested in illiquid assets.
“90-day liquidity would be more consistent with how the wider savings industry operates globally.”
On fees, the Council proposes that the fee reporting regime be refined to break out the underlying asset classes that KiwiSaver managers are investing in.
“The reporting could be done in a way that celebrates investments in New Zealand illiquid assets – infrastructure, private equity, venture capital – that help grow New Zealand.
Finally it asks the government to provide guidance on asset allocation as is done by the Australian Prudential Regulatory Authority (APRA).
“Providing similar guidance to the New Zealand KiwiSaver industry will help build confidence in allocating capital to illiquid assets.”
Speaking at a conference where the report was released, Minister of Research, Science and Innovation Ayesha Verrall said the Government would take time to “carefully consider” the recommendations. Meanwhile Act said of the 25 recommendations, removing KiwiSaver barriers was the only one it would support. While National finance spokesman Andrew Bayly has already said he would look at removing KiwiSaver barriers.
The Startup Advisors Council was set up last year by Verrall. Movac founder Phil McCaw is the Chair, and the Deputy Chair is Suse Reynolds who also chairs the Angel Investors Association. Other members are Marian Straker, founder of the Ministry of Awesome; Grant Straker, founder of AI translation platform Straker Translations; Mike Carden, founder of Sonar 6; Imche Veiga, CEO of Outset Ventures; and Carl Jones, managing partner of WNT Ventures.