Aid plan aims to use super millions

ANZ National's Graham Hodges

Superannuation funds, which could include the Cullen Fund, will play a major role in the multibillion-dollar equity investment pool proposed at last week's Jobs Summit as a salve to recession-hit firms' balance sheets, says the country's top banker.

Graham Hodges, chief executive of New Zealand's biggest bank ANZ National Bank, attended last week's summit where bankers proposed a joint fund with the Government to inject capital into firms that were temporarily stressed but essentially sound.

Given Prime Minister John Key's previous comments hinting that a Government bailout of "iconic" or strategic local companies was a possibility, much of the coverage of the proposal has focused on its potential to aid larger companies.

However Hodges yesterday told the Herald that while planning was still at a very early stage, a two-tier strategy was likely. With an "interventionist" Government and bank-funded model for equity stakes in large companies, a mechanism to allow super funds to invest more easily in small and medium sized enterprises (SMEs) was also part of the plan.

Hodges said that at last week's summit it was made clear that a number of superannuation fund investors including KiwiSaver providers and potentially even the New Zealand Superannuation or Cullen Fund "would dearly love to be able to invest into part of the SME sector but there aren't easy mechanisms for them to find partner businesses in which to invest".

"Those that have investable dollars need to meet those who need it.

"The trouble is I'm not sure how realistic those who need it are going to be when it comes to dilution or what price the equity will come in at. A few things [will need] to be road tested."

The Government/banking sector group - to which both sides have been reported as likely contributing around $1 billion each - would focus on assisting a relatively small group of larger companies and would take a "more interventionist approach on a case-by-case basis".

"At a moment in time some companies will be in the middle of a transition or they've been caught out by the severity of the slowdown and their capital structure is not as robust as it should be and they're not in a position to take on a lot more debt just because of their financial ratios and the way the market would look at them.

"Those firms might need transitional support particularly if they were otherwise good businesses with viable brands, good management and were likely to survive normal market circumstances."

The proposal to set up a fund which would probably operate at arms length from its Government and banking industry supporters, was a recognition that New Zealand was more likely to have a capital issue than a debt funding issue.

Overseas, where most capital markets were deeper and more developed, companies found it much easier to repair their capital positions with rights issues like those being reported on an almost daily basis.

New Zealand, Hodges pointed out, has "a very narrow and small equity capability".

Hodges recognised there was potential for conflicts between banks' normal role as a provider of credit to businesses and the additional proposed role as shareholders.

"If there is some sort of fund like this it has to be done independently of the bank business and it would obviously be subordinated to the senior debt in these enterprises and would very much be transitional funding."

Hodges said a likely investment horizon was 18 months to two years compared with a typical private equity investment of three to five years.

There had been no decisions around the returns banks and the Government would expect on their investment.

FUNDING PLAN
* Will probably take a two-tier approach with the Government and banks aiding larger businesses and superannuation funds taking stakes in SMEs.
* The fund is required to fill a gap left by the shallow undeveloped character of our capital markets.
* Government and the banks will likely have to accept "discounted" rates of return for their investment.
* SMEs may need to be "realistic" about the dilution of ownership that will occur.