As an investor you’re likely familiar with traditional asset classes such as shares and bonds, which make up the bedrock of most KiwiSaver portfolios. However, we believe an opportunity exists to broaden the investment mix to include carefully selected ‘alternative’ assets and have begun adding assets such as venture capital (‘VC’) and private equity (‘PE’) to our KiwiSaver portfolios.
Recently Fisher Funds invested in Movac Growth Fund 6, a VC fund run by New Zealand company Movac Limited. We believe that investing in these types of assets can enhance returns whilst allowing us to access a broader opportunity set.
The venture capital model
VC investing is different to share market investing. VC funds will raise money for a 10-year lifecycle. The fund will have a fixed size (e.g. $200 million) which will be progressively invested over 5 years into a concentrated portfolio (typically 8-15 companies). Investments are then sold down (in full) over the remaining fund life to realise a return. The sale of a fund’s investments is called an ‘exit’, and typically occurs via merger, listing on the share market, or sale to another investor.
The time to realise an investment (years, not days) is a key feature of the risk and return profile for VC. Investors can expect higher returns (15-20% annually) than public share markets as compensation for the time taken to receive their investment back. We like to call this “reward for commitment”. Growth-focused KiwiSaver funds, with long time horizons, can afford to make this commitment and enjoy the associated rewards.
We still apply our robust, time-tested investment approach when we consider alternative assets. We back fund managers with strong track records, who in turn invest in opportunities with talented and aligned management teams, long runways for growth and strong, defensible market positions.
The opportunities we see in investing in venture capital
Alternative assets, particularly VC and PE, are a cornerstone part of portfolio construction for large pension funds globally. In OECD countries, VC and PE allocations range from 5-10%, while in the US allocations are around 11%. These allocations are even larger when looking at the large Superannuation funds in Australia, some of which allocate over 20% to alternative assets. We see some obvious benefits of investing in VC and PE funds.
Potential for higher returns: VC and PE offers illiquidity premiums. This is the ‘reward for commitment’ I mentioned earlier. Fund managers typically target 20% annual returns from their investments. Net of fees this can still provide returns greater than 15% for the overall fund. The industry has a long-term track record of realising this ‘reward for commitment’: global investment company KKR that US PE has realised returns 4% above the S&P500 for three decades. Similar trends are observed across Europe and the Asia Pacific. It’s worth noting that the return also reflects the earlier stage of development of investee companies; they are higher risk but have greater growth potential than companies listed on the stock market (as a general rule).
Long-term horizon: VC and PE funds typically have a longer investment horizon than typical stock market investors. This aligns with KiwiSaver funds which typically have an investment horizon of between 5-10 years. A long horizon gives company management ample runway to deploy capital and realize value creation at the right times. They don’t have to optimise earnings for the next quarter or half to meet investor expectations. They can take more ambitious bets, whilst typically have more skin in the game compared to public market peers, creating strong investor alignment.
Unique opportunities: VC and PE provides institutional investors access to unique investment opportunities not available via traditional asset classes, allowing access to earlier-stage companies and niche sectors. It can often involve more active ownership roles to influence manager decisions and responsible investment practices. An example of a unique opportunity is Movac’s investment in Mint Innovation. Mint has developed the world’s first biorefinery, enabling the sustainable recovery of precious metals from electronic waste.
Starting out around 20 years ago Movac is New Zealand's longest established venture capital company, offering funds for investors like Fisher Funds, and using this money to invest in technology companies with high growth potential. Initially backing Trade Me as a single-asset investment in their Fund 1, Movac has since gone on to raise six funds and broaden their investment team to eight. Fisher Funds has invested in the Movac Growth Fund 6, which is focused on growth stage investments (with projected revenue of $2-50 million).
In the local market, Movac’s tenure, track record, team size and Operating Partner network set them apart. In comparison, most of New Zealand’s other VC managers are relatively immature, with few having raised more than one institutional fund.
Movac has a strong track record, with several exits returning greater than 3 times the capital invested (typically providing an annual return greater than 25%) and multiple funds have delivered strong cash returns (multiple of initial capital invested).
Movac is a hands-on investor. It adopts a partnership approach to investee companies, helping them develop and drive strategy, build-out their teams and with establishing a presence in offshore markets. Movac provide operational support when needed including stepping into interim executive roles in exceptional circumstances. Movac’s experience is typically delivered through Board roles.
We have the scale to make these investments. Major investors in VC funds can get preferential terms on fees, access to co-investment rights and can sit on fund governance committees. Further, with over $15 billion in KiwiSaver assets, we can manage the timing mismatch between KiwiSaver withdrawals (available daily) and VC realisations (available over several years).
Also, we are at an attractive point in the cycle to invest. Venture funds tend to have the best returns when initiated at depressed points in the economic cycle. It has been hard for firms to raise new VC funds recently, lessening competition for new investments. This allows firms such as Movac, who have fresh funds to invest, to achieve better terms and get better access to the best opportunities in the market.
The world of investing is always evolving, and while traditional assets like shares and bonds still have their place, we believe alternative investments such as venture capital provide valuable new opportunities to complement traditional assets.