Government mulls use of $400m fund to buy stakes in firms hurt by Covid 19

Phil Twyford says work on the Cabinet paper is at an early stage. Photo / Mark Tantrum

The Government is mulling the use of "sector or asset specific" funds to buy stakes in businesses struggling as a consequence of the Covid-19 pandemic and the policy response to it.

According to a recently released Cabinet paper, government officials are especially concerned about investment gaps in two areas: small but mature companies in sectors like food and beverage and other specialised manufacturing, and medium to large-sized companies in distress that are not listed on public exchanges. The latter is an expected gap, but it is not confirmed.

Current policy aimed at helping business respond to the pandemic is largely centred on subsidised lending provisions, tax relief and a wage subsidy programme.

However, the Government is increasingly funnelling cash directly to businesses of its choosing. A $400 million tourism recovery fund has been used to make grants to "strategic" private sector tourism operators chosen by the Ministry of Business Innovation and Employment (MBIE). A Ministry spokesperson said a total of grants approved could not be quickly tallied.

Phil Twyford, Minister for Economic Development, characterised work in the Cabinet paper produced by officials in his office, as "early stage". He said he has not received any further advice or "considered any changes to the fund structure of Growth Capital Partners [the crown entity known as NZGCP]".

The Cabinet paper, produced in July, provided an update on the Government's existing venture capital funds' progress. The funds were recently revised and relaunched and are intended to fill gaps in New Zealand's historically shallow capital markets. The paper, however, outlined two remaining significant gaps.

The existing NZGCP funds represent a pot of money of roughly $400m. This public money is invested in tandem with money from the private sector in high-growth start-ups and early-stage companies over a five-year timeframe.

NZGCP falls under the purview of the Minister for Economic Development and oversight controls within it vary significantly.

It invests in private sector funds, which in turn invest in early-stage, high-growth companies through the Elevate NZ Venture Fund. The NZGCP also invests in start-ups through its Aspire NZ Seed Fund.

The Elevate Fund is overseen by the NZ Superannuation Fund, which stipulates considerable independent direction. The Aspire Fund, however, has much looser controls, especially since the Government adjusted policy settings in June as part of its Covid-19 response (the changes remain in place until June 2021). Since the changes, for example, the fund's managers can "co-lead deals" with private sector partners and choose target companies "proactively".

"While the Elevate NZ Venture Fund should support New Zealand's early-stage, high-growth firms ... other 'gaps' warrant further support," the paper suggests. It proposes other "sector or asset specific funds" among the possible solutions.

One potential gap it identifies is for struggling "mid-tier and non-listed larger companies" that typically rely on foreign investment "for buyers or deal brokers with specific skills, industry expertise, connections or scale".

"In the post-Covid-19 world we would also expect a number of distressed companies that need to restructure their balance sheets (for example to reduce the amount of debt leverage). Historically, the capital gap has been at the smaller end, but given the likely scale of the impact on particular industries and the relatively small size of New Zealand's private capital markets, there could also be a gap for medium to large companies," the paper said.

Twyford cautioned that this gap is not yet confirmed, and officials are still working to better understand the situation.

Economist Cameron Bagrie said he would be very wary of additional Government efforts to invest directly in business. "It's difficult to assess anything without the details of a specific plan, but I would say that we need to be very careful because the risk that we move into the world of corporate welfare is large. And I think we've already seen corporate welfare in the tourism sector ... millions of dollars for a bungy outfit for example [in July AJ Hackett Bungy received $10m split evenly between a grant and a loan through MBIE's Strategic Tourism Assets Protection Programme]."

The second gap the paper points to is for specialised manufacturers, with revenue of between $3m and $30m annually. These companies, the paper said, are too small to list on public markets and too small to attract investment from established private equity firms. It also notes that many already carry large debt-loads which they would struggle to increase.

The Government is especially interested in the plight of such firms as it has promoted them as a key means by which it will achieve an ambitious target it set last month, to achieve an additional $44 billion in annual primary sector exports in the coming decade.

The paper also notes that border settings are hampering New Zealand firms' ability to raise money.

"Our delivery agencies, including NZTE, report that foreign investment is already becoming difficult with increased uncertainty affecting large projects, and tighter cross-border movements making due diligence and execution difficult. This has the potential to significantly affect access to capital for a broad range of companies over the coming months," the paper said.