More KiwiSaver funds are opting to take a direct slice of New Zealand companies – but there is a warning to investors to make sure they understand what their providers are doing.
Booster recently announced it had made a significant capital investment in Awatere River Wine Company.
It was the first wine industry investment by a KiwiSaver provider but not the first time a KiwiSaver fund had invested in a company that was not listed on the stock exchange.
Milford Asset Management has been investing in unlisted and private equity as part of its Active Growth Fund since 2009.
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Head of investments Brian Gaynor said the fund could have a maximum of 10 per cent in private equity and the most it had reached so far was 8 per cent.
He said it was about 3 per cent at present.
The biggest concern was that the investments needed to be long-term because it was hard to get out of them quickly.
He said investing in unlisted companies also required more time and resources because, unlike listed equities that regularly report to the stock exchange, there is less information available about unlisted firms. The fund manager must do all the research itself.
More KiwiSaver funds may have to turn to unlisted investments due to capacity issues – the small size of the local sharemarket limits how much money can be invested locally.
Gaynor said there was a public good aspect to the investing, too. “That’s what KiwiSaver is all about. It’s not just people making money but about relocating capital.”
He said, as well as trying to put people’s money in the best place to get the best return, fund managers should act as conduits to deliver money to companies that needed it to grow. “It’s not just one-sided.”
John Berry, of fund manager Pathfinder, said when KiwiSaver was set up, one of the reasons given was that it would provide capital to New Zealand businesses.
“We haven’t seen that. We’ve seen managers buying securities traded on markets which doesn’t provide any new capital to the company. We need, from a New Zealand perspective, KiwiSaver investing in private equity to provide capital funding to SMEs and growth businesses in New Zealand.”
But he said there could be problems because it was hard for managers to put a value on unlisted investments. Investments in shares are valued daily but often it was not clear what a direct investment was worth until it was sold, he said. That presented a problem for KiwiSaver members who wanted to know their balance, or to move to another fund.
“We need to find a way to make it happen,” Berry said. “Private equity is the perfect diversification, perfect asset to have as part of a growth portfolio.”
He said direct investments in unlisted companies tended to outperform other asset classes.
Chris Douglas, of research house Morningstar, said more fund managers around the world were making investments in companies that were not listed on sharemarkets.
“The longevity of people saving for their retirement, which can be a period of many decades, does suit an allocation to unlisted assets,” he said.
“But, they need to be carefully researched, and any unlisted investment needs to be appropriately sized as they are typically illiquid holdings, and if a KiwiSaver fund suffers a fall in performance or redemptions, then these assets can become a burden.”
Financial adviser Sonnie Bailey of Fairhaven Wealth said he would steer clients away from KiwiSaver funds investing in unlisted companies.
“For one thing, I value liquidity, and one of the first things I look at when I recommend a fund is how liquid the underlying assets are,” he said.
Even those who would not need their money soon might want to be able to switch providers, he said.
He said private equity investments had a different risk and return profile which were best considered as a separate part of a client’s portfolio.
“Another issue is that the standard of governance may not be as high with unlisted companies.
“For a fund manager to replicate these checks and balances would take a lot of time and money. I don’t want my clients to be paying these fees when there are other low-fee options out there,” he said.
“For most clients, this introduces unnecessary complications and risks, and I can’t justify the higher investment management fees they’ll end up paying.
“I can see the importance and value of unlisted companies to the economy and society as a whole. But for most individual investors, I’m not sure it makes sense to introduce the risks associated with unlisted companies into their portfolios – whether in KiwiSaver or elsewhere.”