KiwiSaver providers have hit back at criticism from the country's biggest venture capital investor over their reluctance to invest in start-up Kiwi businesses saying it's too risky and expensive to put retail investors money into.
Movac chief executive Phil McCaw welcomed the government's Budget announcement of $300 million in venture capital funding but said the big challenge was building the confidence of other investors to allocate capital into the space.
"There is a massive issue with very lazy KiwiSaver managers."
He said KiwiSaver was broken in terms of investing into the sector.
Despite investment in the sector being proven he said KiwiSaver managers preferred to invest in easier areas.
But Simon O'Grady, chief investment officer at KiwiWealth, said the reason it didn't invest in that area was because venture capital investment was one of the highest risk sectors to be investing in.
"We have looked at it quite extensively."
He said the level of risk versus return did not stack up well compared to investing in publicly listed companies.
"There is not a lot of evidence that as a class venture capital is worth the risk."
He said it was not just the sector that presented challenges but it was also about finding the right manager to invest the money through and finding a fund with the right vintage to ensure valuations were not too high on the companies they were investing into.
He said venture capital funds which launched prior to the global financial crisis had had terrible returns whereas those launched after 2009 did really well because they bought into companies at low valuations.
O'Grady said at the moment there was plenty of private equity money looking to invest which meant valuations were again high.
He also ruled out investing directly into companies as he said the general rule on venture capital was that out of 10 companies - five would go bust, three would be able to give the investor the money back and only two would shoot the lights out.
"The statistics mean you need 30 plus deals to be certain you will get those shoot the lights out investments."
He said the pipeline of direct investments in New Zealand was too small, the quality too low and valuations too high.
"We are dealing with mum and dad investors' money so naturally we have to be careful."
He isn't ruling it out in the future but said the pipeline would need to be better and valuations more attractive.
Fisher Funds chief executive Bruce McLachlan said what most new businesses with great ideas needed was not just capital.
"The capital is the easy part. They need a strategic business partner that can help them grow and add value way beyond just providing cash. Commercialising ideas, distribution, company structuring."
He said KiwiSaver providers generally did not come with anything more than capital.
"They do not have the ability to contribute strategically beyond that at the scale required in a meaningful way that is what the new businesses really need, but also that is in the interests of KiwiSaver investors.
"It has to make commercial sense all around."
However, McLachlan also did not rule it out in the future.
"Fisher Funds is not closed to playing an active role with a great business proposition – the fact is though that great businesses' ideas already have vast sources of capital they can access."
But there are some KiwiSaver providers which have got involved in direct investment.
Brooke Bone, Milford Asset Management's investment director and co-manager of its private equity fund II, said it had been investing directly in privately held growth companies for around six years including via its KiwiSaver funds.
The companies were not start-ups but growth companies.
But he said to make it possible Milford had to employ someone specifically to find and make the investments and to closely monitor them.
"It has been a successful strategy and it provides additional diversification," he said.
Bone said it had invested into the likes of Orion Healthcare, AFT Pharmaceuticals, Volpara and Straker Translations, all of which had since gone on to list on the sharemarket.
"We have been pretty active and have made good returns out of it."
At times it has had as much as 4 per cent of the portfolio invested directly in private growth companies but at the moment it was lower.
"What we are trying to do is invest in medium-sized companies which are a driver of economic growth."
He said other KiwiSaver providers had talked about being put off the sector because they did not have the in-house expertise or were concerned that if they used a venture capital manager it would add to the fee cost on investors.
Others were concerned about how valuation changes on private assets could impact daily unit pricing of the funds and the potential to fall foul of the regulator.
Bone said it had invested heavily to manage the process and while that came at a cost it gave it the confidence to do so.
"Part of the ethos around Milford as well it's not just about growing wealth for our clients but the growth of New Zealand as well."
Milford is not alone. Booster also invests directly into private companies.
Its Tahi fund is invested in horticulture, wine and soon, high-end manufacturing.
Investors can contribute to these unlisted assets, either directly or through Booster's KiwiSaver funds.
While Simplicity has also recently committed to investing in a fund to help start-ups.
It has committed to investing up to $100m of KiwiSaver funds over the next 10 years into funds managed by Icehouse Ventures that go into high growth businesses looking for expansion capital beyond early seed funding.
Simplicity managing director Sam Stubbs said it was first example of a KiwiSaver fund manager investing in a business dedicated to high growth New Zealand businesses.
He saw it as the beginning of significant investments by KiwiSaver managers into the fast-growing entrepreneurial sector.
