Friday 4th October 2019
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The founder of one of New Zealand's most successful venture capital firms believes his firm won't qualify for funding from the government's $300 million Venture Capital Fund and that most of the money is likely to go to overseas firms.
Lance Wiggs, who manages the $50 million Punakaiki Fund, has serious form in the venture capital space and is arguing that the government may be better to do nothing, as the new fund may just get in the way of true New Zealand operators.
"Most of the money is going to end up going to Australian-owned funds … Australia doesn't need our money," Wiggs told parliament's finance and expenditure committee earlier this week at a hearing on the Venture Capital Fund Bill.
As well as establishing Punakaiki in 2012, he advised Trade Me's owners on its 2004 sale to Fairfax for $750 million and has helped more than 200 companies raise funds through New Zealand Trade and Enterprise. He says he has never received any government funding.
He opposes the bill on a number of grounds, not least because the government's New Zealand Venture Investment Fund will be in charge of doling out the money and will be allowed to invest up to $50 million of the fund directly into new ventures.
Wiggs says he doesn't like the idea of an organisation picking winners and is advocating instead for the government to establish a set of criteria under which venture capital managers would be guaranteed funding, so long as they met that criteria.
NZVIF's success to date isn't inspiring. Established in 2002, it has $245 million in funds under management, including $50 million invested directly in ventures
Chief executive Richard Dellabarca told the committee his organisation has invested in nine venture capital funds, most of which have returned less than $1 for every $1 invested.
Dellabarca told BusinessDesk he can't provide information about NZVIF's financial returns, even its aggregate performance, because of "confidentiality agreements between ourselves and the funds – it's just the nature of how it was structured when it was set up."
But Dellabarca objects to NZVIF being compared to commercial funds, saying that its investments all had a cap attached, preventing it from generating the kind of returns one could expect from venture capital.
Also, "this was a market development exercise so financial returns weren't the primary objective."
The government had wanted NZVIF to encourage development of an angel fund eco-system and "arguably has been quite successful" at achieving that, Dellabarca says.
The $300 million is coming from the Guardians of the New Zealand Superannuation Fund. Chief executive Matt Whineray made it clear to the committee that the Super Fund insisted on a clear separation of the VC activities and that they operated under a separate mandate from the main fund.
Punakaiki has more than 830 shareholders, all either New Zealand residents or New Zealanders living overseas.
Its investee companies had revenue of more than $120 million in the past 12 months and employed more than 700 people. Punakaiki's equity share was $20.7 million and investee company revenue has increased by an average 6.6 times since the fund's initial investment.
Punakaiki's overall returns have been 20.6 percent a year through to the year ended June and that includes five investments that haven't performed well, including one complete write-off and four that were extensively written down.
Wiggs is calling for the same level of transparency for the new government fund.
"We see that reporting of the investments made, performance by fund overall and general openness are crucial to building trust and confidence," Wiggs says in his submission on the bill.
He criticises the bill's "surprisingly loose definition" of a fund with a New Zealand connection.
"Offshore funds setting up a local subsidiary but using offshore decision-makers and offshore investors would be treated exactly the same as New Zealand managers backed by 100 percent New Zealand investors."
Wiggs is also calling for it to be compulsory that funds the government provides are invested in New Zealand ventures – all Punakaiki's investments are in New Zealand ventures.
If the government doesn't accept the idea of remaining neutral and funding those who meet a defined criteria, it could consider the Australian approach of providing tax benefits to venture capital investors.
"While giving high net worth investors extra benefits may not be palatable, we note that the Australian approach, complex as it is, appears to be vastly more successful than a fund approach as proposed here," Wiggs says.
If the government doesn't accept either of these alternatives, he thinks it should do nothing.
"We see a case for the market forces working without government intervention and a high possibility of the intervention having unintended consequences."
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