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LWCM Submission on the Venture Capital Bill

The New Zealand Government has previously announced its intent to create a $300 million venture capital fund of funds – dubbed the Venture Capital Fund (VCF).

Over the last few weeks and months Treasury, NZ Super Fund, Ministry for Business, Innovation and Employment (MBIE), NZ Venture Investment Fund (NZVIF) and the government have been working on three key pieces of work:

The first piece of work is the legislation – the Venture Capital Bill. This allocates $300 million to the Guardians of the NZ Super Fund (the Guardians), who will manage and administer the VCF, and also requires the Guardians to contract with NZVIF to run the VCF.

The bill is at the Select Committee stage, and LWCM completed our own Venture Capital Bill Submission last week, and I (Lance) appeared in front of the Committee yesterday (Tuesday 1 October).

Note that submission and my appearance were on behalf of LWCM, not Punakaiki Fund. We did not consult the Punakaiki Fund Board for our submission.

The second is the Policy Statement on the Venture Capital Fund Act 2019. A draft of this Policy was shared with industry, and submissions were made to that draft by last Friday. LWCM’s submission for the draft Policy document is attached to our submission to the Venture Capital Bill. Chris and I also attended a workshop in Auckland facilitated by the players above.

The third piece of work has not been made public, and that’s the draft Contract between the Guardians and NZVIF to manage the investment of the VCF’s capital. We would like to see the contract made public for comment, and certainly once it is in effect. Our understanding is that the Guardians, Treasury, MBIE and NZVIF have been allocating substantial resources to negotiating this document.

As part of the third piece of work the Guardians will review the suitability of NZVIF to run the VCF, and perhaps NZVIF will make internal changes to be ready to run the new fund. 

This matters to Punakaiki Fund as some of the VCF funds could potentially be placed with Punakaiki Fund, and VCF funds will obviously be placed with venture capital funds that both compete and collaborate with us.

The timeline shown to the industry workshop shows the $300 million capital is planned to be available to NZVIF, as the VCF manager, at the earliest in February 2020. I imagine that there will then be some sort of process to select the first fund managers to work with, but there has been no formal feedback on what the selection process will look like. There would then be investigation, legal and due diligence processes before any VCF capital could be committed to a manager. It would then take more time before any new venture capital fund would invest in their first investment.

So we suspect, with what we know, that we will not see VCF funds hitting high growth companies before at least mid-2020, but more likely towards the end of 2020 – after the next election.

Our Responses
While we like the idea of a $300 million fund to address the series A and B gap (defined as investment rounds between $2 and $20 million ), LWCM’s submission did not, in the end, support the legislation.

As we were researching and drafting our submissions we saw a number of issues. We became concerned that, despite a lot of work done and yet to do by some very capable and diligent people, the structure is that the New Zealand government will still be picking winners. We’ve been down this road before with NZVIF from 2002, and Australia has too, and the results were very poor for investors in the funds and for the fund managers. The market told the story, as very few government-funded fund managers managed to attract investors for follow-on funds. The structure also sets the Guardians up for poor results from venture capital investing – which would justifiably cause the NZ Super Fund to shy even further away from the asset class.

What did work, in Australia, was a subsequent system that provided tax benefits to investors in the funds, so that is one alternative we suggested. We also suggested a fixed-rule system where funds meeting certain criteria were provided with investment. The final suggestion was to do nothing.

We are the only industry submitter against the bill (see all the submissions here), and we were brave in doing so. After the submissions were made public I heard privately from more than one fund manager (existing or prospective) that they almost entirely supported our submission.

However, given the amount of work done to date we don’t believe our submission will change the overall approach.

So we also focused on providing detailed feedback to improve the legislation and policy. This included adding objectives around growing the number and size of the New Zealand based fund investors and fund managers, setting objectives for investments in Maori and woman owned businesses, transparent reporting of investments and results and more.

We suggested that the minimum share of the $300 million VCF fund being directed by New Zealand fund managers into Series A and B investments in New Zealand companies be lifted from 42% to 80%, and that all investment should be made through externally managed funds, rather than allocating $60 million to a Government owned fund of funds manager and seed capital investor NZVIF.

Please read LWCM’s Venture Capital Bill Submission (with policy submission attached) for more.

What we are doing now
While there are a good number of plans for new venture capital  funds floating around, the managers are generally waiting for the results of the government process. We are confident that we will achieve our growth goals for Punakaiki Fund whether or not we receive support from the VCF program, but obviously we will need to get involved in the process as we can.

But the companies we have invested into, along with hundreds of other companies in the ecosystem, are not waiting. They are all evolving, and many will present attractive investment opportunities for Punakaiki Fund.

So of course we will keep raising and deploying funds, looking to get the best investment opportunities before other funds get going next year. Meanwhile the longer it takes for any VCF investment to land at Punakaiki Fund, the more likely the share price will be higher  for that new investment. We are, however, not counting on any funding from the VCF.

The submissions did take a lot of time to prepare, but we see this as a once in 10-15 year process and saw that it is important to have thoughtful inputs and results. The questions from the Finance and Expenditure Select Committee members were thoughtful, and our submission was referred to several times later in the Committee process.  We hope that the law-making process will take our submission into account and improve the Bill, or even change the approach to helping the sector.