Whitney Haring-Smith: US changes to foreign investments impact on NZ

New Zealanders were among investors in Peter Thiel's Palantir Technologies but changes to US policy could be an impediment to similar opportunities in the future. Photo / Supplied

COMMENT

Along with Australia, Canada and the UK, New Zealand has been one of our closest English-speaking allies since the mid-1950s. In World War II, Kiwis and Americans fought on the same side – with over 12,000 Kiwis dying – roughly 1 in 150 of the population at the time – the highest casualty rate in the Commonwealth.

This deep relationship and shared sacrifice formed the basis of the Five Eyes, started in the wake of World War II as an intelligence sharing partnership between five Anglophone nations (US, UK, Canada, Australia, New Zealand). Still, New Zealand was the only member of the Five Eyes alliance not fast-tracked through new foreign investment restrictions by the United States announced on January 13, 2020. The new rules took effect on February 13, 2020.

The new US regulations expand the power of the Committee on Foreign Investment in the United States (CFIUS) to review venture capital deals – among other types of investments – to ensure they will not compromise US national security. New Zealand was left off the short list of "excepted states" that will have a fast-track around the new requirements. Inbound investments to the United States from New Zealand now have the same process as other states – from Japan and Germany to China and Russia – while Australia, Canada and the UK are explicitly exempted.

New Zealand's exclusion should be a wake-up call for diplomats, politicians and business leaders in Wellington and Washington. Consider that New Zealand investors have participated in nearly US$5 billion in important deals over the last five years, according to data gathered by PitchBook.

That one of the US' closest allies could not be exempted demonstrates that Wellington can take nothing for granted and must press its diplomacy further with the United States.

Whitney Haring-Smith

Prior to new CFIUS rules being announced – Kiwis joined deals including a US$1 billion investment round in online consumer lender SoFi in 2015, a US$880 million investment round in Big Data analysis platform Palantir in 2016, and a US$657 million investment round in cellular tower and telecom infrastructure company Tillman Infrastructure in 2018. Each of these rounds could now require a CFIUS review if they included a New Zealand investor, which means that firms will frequently simply opt to leave Kiwis out so that deals can close without risk or disruption.

In disclosure, my own firm (Anzu Partners) has benefited from this rising level of investment activity. Our principals were investors in Mariana Tek, which was acquired by Transaction Services Group (TSG). The Auckland-based company makes payment software for business in the health fitness sector. (And a decade ago, Kiwis also formed part of the security group that protected me while I worked in Afghanistan).

New Zealand's efforts to chart a path between China and the US are beginning to have real consequences. The Financial Times, for example, quoted an unnamed senior intelligence official earlier this month as saying that New Zealand's status in Five Eyes was "on the edge of viability" due to its approach towards Beijing. New Zealand joined China's Belt-and-Road initiative – the only member of the Five Eyes to do so.

Regardless of these concerns, Republican legislative leaders called for New Zealand to be exempted from new CFIUS rules. That one of the US' closest allies could not be exempted demonstrates that Wellington can take nothing for granted and must press its diplomacy further with the United States.

In the United States, the theory is that leaving countries out of key groups – like the CFIUS-exempted states – will prompt action to change behavior – such as regarding which new 5G technology should be implemented. This may be possible, but an equal possibility is that without strong cross-border investment between the US and New Zealand – including in key technologies – that New Zealand will simply find other trade partners. For example, New Zealand already has a free trade agreement with China, while the trade agreement with the US continues to be a work-in-progress.

Nonetheless, US venture capital investments in New Zealand have increased steadily over the past decade from less than US$50 million in 2010 to over US$900 million in 2019. (New Zealand had more recorded venture deals including US investors in 2019 than the US state of Alabama, despite comparable populations). And New Zealand firms have helped enable parts of the startup ecosystem in the US, as many US startups use Xero, a Wellington-based accounting software provider.

New Zealanders had good reason to think they would have been among the countries excepted from the restrictions. It was a reasonable to do so. But these are not reasonable times. Still, the US Treasury Department, which has jurisdiction over CFIUS, said the US government will review the excepted nations list in two years with a view towards adding new countries. Now is the time business and government leaders in New Zealand to take the steps needed to ensure it gets excepted state status with CFIUS in 2022. Too much could be lost otherwise.

• Dr Whitney Haring-Smith is a managing partner at Anzu Partners, a US venture capital and private equity firm, and he is a CFR International Affairs Fellow.