Wednesday 30th October 2019
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The government is so convinced that the market in New Zealand has failed when it comes to providing venture capital to fledgling businesses, particularly technology businesses, that it is setting up a $300 million fund to fill that gap.
Lance Wiggs' Punakaiki Fund is not only demonstrating it can be done without government funding, but is doing it through a public company with retail shareholders.
The fund, now valued at $49.3 million, says on its website that it's the only such retail fund in New Zealand but Wiggs isn't ready to list Punakaiki on NZX until it's much larger - “at least $100 million of assets, if not $200 million,” says chair Mike Bennetts – Z Energy's chief executive – in the company's latest product disclosure statement.
Founded in April 2014, Punakaiki already has more than 800 shareholders and so could easily do a compliance listing on NZX – that requires market capitalisation of at least $10 million with at least 20 percent of the shares owned by at least 100 non-affiliated shareholders.
Punakaiki's top 20 shareholders own a little under 34 percent.
Wiggs says his pre-conditions for listing are “a function of how much it costs to be listed and the pain that goes with it,” although Punakaiki is already abiding by many of the NZX rules.
But there's clearly little push for a listing from his investors as yet – every quarter, he runs a service matching sellers to buyers and says typically there are four or five sellers and more than 50 would-be buyers.
Punakaiki regularly raises new capital so those would-be buyers do have other opportunities to buy in.
“At some stage we will list. We're just not focused on that now. We've done the hard work of establishing a portfolio and we're just getting on with it,” Wiggs says.
The lure for would-be investors is evident because Punakaiki already has a track record.
As Bennetts says in the latest offer document, the fund has delivered 25.8 percent in annualised gross returns since inception.
But it hasn't all been plain sailing and anybody wanting a steady, dependable stream of earnings and dividends shouldn't be investing in any venture capital fund.
As the offer document spells out, this investment is “by its nature, high risk” and “you may lose some or all of your investment.”
The US National Venture Capital Association estimates that 25-30 percent of VC-backed businesses fail altogether, another three or four out of 10 will repay the original investment and only one or two will deliver substantial returns.
Punakaiki's offer document details that the fund had a bad year in 2017 with the internal rate of return going backwards at minus 3 percent.
The culprits included Linewize, which has since been sold, NZ Artesian Water, a business Punakaiki mostly wrote off after funding three successive rounds, and RedSeed, another business written off.
The fund started to make up lost ground in 2018 with a 9 percent internal rate of return and bettered that in 2019 with 30 percent.
Learning from its failures, Punakaiki recently refined its mandate to focus only on areas that had delivered the best returns to date – early stage technology companies that nevertheless already have reasonable revenue.
Wiggs makes no bones about it being a tough game. “When you invest, you have a honeymoon period and then things get tough.”
Punakaiki has invested in 20 companies altogether since inception. With one sold, that's down to 19 and five of those account for less than 1 percent of the fund's value.
But some are now substantial companies. Weirdly, for example, now has revenue of $500,000. Punakaiki owns about 30 percent of the human resources technology firm after two rounds of funding.
It often makes headlines when fund managers feather their nests at the expense of their investors – look no further than Vital Healthcare Property Trust from which manager NorthWest has collected more than $125 million in gross fees after paying $11.5 million for the management rights in 2011.
In Vital's case, as is usual for such trusts, at least 75 percent of investors need to vote in favour for the manager to be removed.
In Punakaiki's case, there are no such nearly insurmountable obstacles to removing the manager.
All it would take is either a majority vote or a decision by the board that the manager has given cause to be removed.
Wiggs and his partner Chris Humphreys' management company, LWCM, wouldn't receive any golden handshake in that event either, although it would be due any earned performance fees.
“We deliberately put that in place when we founded the fund six years ago to give our investors genuine protection,” he says, adding that any golden handshake agreement would have been “toxic.”
He sees four reasons why investors might want to sack him and Humphreys: years of under-performance, fraud, death or disablement and if somebody else coveted the management contract.
Another notable aspect of Punakaiki's latest capital raising is that the company is doing everything itself and isn't relying on underwriting.
The amount it is seeking is open-ended and that will be followed immediately by a 1-for-7 non-renounceable rights issue. Any rights not taken up will be auctioned.
New shares in the open offer will be sold at $23 per share with a minimum investment of 100 shares required. The rights issue is priced at $16 per share.
Wiggs says even if no new shareholders participate in the open offer, the rights issue should raise $4.6 million in new capital if all rights are exercised and Punakaiki will invest the proceeds in both existing and new investee companies.
The complete history of Punakaiki's capital raisings is included in the offer document.
Wiggs says Punakaiki did use external advisers in its early days, as well as consulting with the Financial Markets Authority, but now has the formula down pat.
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