NZVIF seeks a new direction
Lance Wiggs is right to ask if NZVIF is ‘directionally correct’. NZVIF’s view, which we have been discussing with our shareholding ministers over the past year, is that our structure and direction needs to change.
It is desirable for the early stage investment market to reach a level of capability and scale so that NZVIF’s reliance on direct government support is either no longer required, or is significantly reduced. As Mr Wiggs notes, important elements in our original mandate – such as the buyout clause – are no longer needed. Last year, that was removed.
As we work through this process, it is business as usual over the next two years, and a continuation of the current role as a cornerstone investor in the early stage market, alongside private sector investors. This includes continuation of the existing investment partnerships and those in the pipeline through to completion.
At an institutional level, it is also desirable for NZVIF to shift away from reliance on government investment support, as returns from investments grow and private investor support increases. NZVIF anticipates that increasing levels of capital returns over the next two to three years position us well to make this transition.
The NZVIF board and management have been working closely with ministers and officials and will continue to do so over the coming year to identify the timeframes and viable options for NZVIF to transition to a self-funding approach while supporting continued market development.
On many of the other suggestions Mr Wiggs makes, we either agree with them and are implementing them or disagree but believe that the approach we are taking is important in the context of our market development role. For example, he would like NZVIF to introduce more simplicity and speed into our investment terms and conditions. While we are always looking for ways to improve our investment processes, as our investment partners can confirm, we have to balance that with the need for institutional grade venture capital funds that meet international best practice.
A crucial aspect the article did not fully address was the fact that NZVIF is a market development agency. We are not formally charged with making an investment return – and so to make that the only yardstick by which to measure us is a gross oversimplification. We are tasked with developing market activity, participation, awareness and capability. In this, even our critics concede we have been very successful. Nevertheless, we have always been mindful of managing the Crown’s investment as responsibly as possible, within the mandate.
In critiquing our investment performance and comparing it with his, there are some important points to make. He notes we separate our VC funds into pre- and post-GFC vintages – with the latter performing far better in terms of portfolio valuations. It is also important to understand that when NZVIF began in 2002, there was almost no professionally managed venture capital funds. We invested with managers on potential alone. Now, 14 years later, we are investing with managers based on track records. That makes a difference.
On the SCIF portfolio, the comparison with an investor like Punakaiki is always going to be tough on us. Punakaiki undoubtedly sifts through and very carefully selects the companies (and the stages and sectors) in which it invests. Our role is quite different – our imperative is to widen the early stage pipeline through investing broadly. We go into everything our angel partners ask us to join with them to invest in. That is intrinsic to our market development role – it encourages activity, increases the pool of future companies, enables private investors to broaden their portfolios, and increases the capital available to young companies. Importantly, these are national impacts as well and the angels, in particular, have a critical role to play in regional economic development. Over 50% of NZVIF’s portfolio companies are based outside Auckland.
Many of these investments are at the earliest, extreme risk stages. Many will fail. But from the Crown’s perspective, there is public benefit in terms of developing the market and the entrepreneurial ecosystem. When a fund invests in a company and it fails, out of that failure might emerge other companies.
Ultimately, the valuations which NZVIF, our partners, and funds like Punakaiki place on portfolios is an educated guess until value is actually realised. What matters is cash in-cash out. We do maintain – because we carefully watch and have considerable exposure to our private sector partners – that our valuations are more conservative than private funds. We have different accountability requirements, and, therefore, apply very conservative methodology. The time to judge all of us on investment performance is when we have sufficient cash returns to make valid comparisons.
NZVIF has always held the view that development of a vibrant early stage investment market in New Zealand was likely to take 25 years. (In the US, 60 years after the birth of venture capital, central and state governments are still involved in investing alongside private investors.) We have seen significant development of the market over the past 15 years, and NZVIF has helped catalyse around $1.7 billion of private investment alongside its own investment of $148 million. There has also been around $160 million of PAYE tax returned to the Crown from companies in our portfolio.
Mr Wiggs and Punakaiki are an important part of the broader investment community, and he is an enthusiastic champion for the sector, along with his consulting role with NZ Trade and Enterprise’s Better By Capital programme. Contrary to his comment, we have engaged with him on occasion and welcome his critique – it helps us to perform better. We agree with much of what he says – the fact that the market is still hundreds of millions of dollars short, for example. I hope we all continue to play a role to close that gap, and further develop our early stage markets, great young companies, and New Zealand’s future economic prosperity.
Franceska Banga is the departing chief executive of NZVIF