The Government expects the major banks to be in a position soon to decide whether they'll cough up to partner with government in a Business Growth Fund (BGF), a kind of private equity fund, making equity investments in small New Zealand businesses.
Last year's Budget proposed the BGF to improve small and medium sized enterprises' access to finance, with up to $100 million earmarked for Crown investment as a minority shareholder in the BGF alongside banks.
Establishing a BGF was a recommendation from the Small Business Council's New Zealand Small Business Strategy in 2019. The Small Business Council was established by Economic Development Minister Stuart Nash, also then Small Business Minister, to provide strategic advice on the small business sector. BGF-type entities are already operating in the United Kingdom, Ireland, Canada, and Australia.
A spokesman for Nash says work is ongoing with several banks to investigate the establishment of a BGF in NZ, which could provide SMEs with access to long-term patient growth capital, and to help bridge the funding gap between bank lending and later-stage equity-based financing options.
"Discussions with banks have considered the nature of market failure that a BGF would address and an assessment of different models that could target this failure. The Reserve Bank of New Zealand’s (RBNZ) decision on the risk treatment of exposures to a BGF, will also be important for banks who are deciding whether to participate. The RBNZ consulted on this last year and a decision is expected soon," Nash's spokesman says.
"We expect the banks will have all the necessary information to make a decision in the near future."
The RBNZ issued a consultation paper last year proposing to reduce the amount of capital banks typically have to hold against equity investments for any banks that financially contribute to the BGF alongside the Government. The RBNZ proposed a 250% risk weight for equity investments into the BGF with each bank’s contribution limited to 2% of its Common Equity Tier 1 capital. Under current regulations equity investments generally receive a 400% risk weight. The higher the risk weight the more capital a bank must have associated with that exposure in order to meet capital requirements.
"The consultation closed at the end of November 2022. We are in the process of reviewing submissions and final details will be announced in due course," an RBNZ spokesman says.
Interest.co.nz also sought comment from ANZ NZ and BNZ, the country's two biggest business lenders.
"ANZ is a strong supporter of Aotearoa’s business community, banking the largest share of local businesses across the country. We remain committed to supporting businesses and helping them grow. We continue to discuss a potential Business Growth Fund with government officials, but we’re not in a position to make further comment about this yet," an ANZ spokeswoman says.
“BNZ is engaging with the process at present and can’t say more at this time,” says a BNZ spokeswoman.
Small business advocate Andy Hamilton, a member of the Small Business Council, last year suggested NZ banks ought to be prepared to stump up $400 million for a first fund from the BGF. Highlighting the challenges SMEs can face securing funding, during the early days of the Covid-19 pandemic Hamilton told interest.co.nz banks' "operating model is not optimal for New Zealand right now."
"if you're part of that SME world that doesn't have an existing facility coming into Covid, they [bank] are just really not set up to take on that sort of risk. So that has been a really big challenge," Hamilton said in 2020.
Against that backdrop the Government launched the Small Business Cashflow Loan Scheme, overseen by Inland Revenue, to help businesses struggling because of Covid-19.
A Ministry of Business, Innovation & Employment (MBIE) paper on the BGF model of bank-led equity participation notes access to finance is a critical component of a firm's growth. It says businesses need finance for the likes of building capability - training, hiring skills and boards - conducting research and development, investing in new equipment and processes, and increasing operating scale and access new markets.
MBIE investigated conditions for SMEs, especially those earning $3 million to $30 million in revenue, typically employing between six and 50 staff. It says there are 37,000 such firms.
"Although broadly markets are capital-flush, there are specific gaps and a mismatches between needs of suppliers of debt/equity and those needing finance," MBIE says.
"These include: a shortage of capital market intermediaries in niche segments (eg growth capital for SMEs); prudential regulation/risk weightings, and the opportunity cost of banks lending/investing equity in SMEs over other assets; SMEs not willing to give up control, financial awareness, investor readiness, and; high transaction costs vs risk adjusted returns."
"The BGF model is a particular type of private equity fund that pools bank capital to create a fund of scale. BGFs operate commercially, and make investment decisions independently of shareholders, to provide a source of long-term patient minority capital, in the form of equity and equity-like investments, to SMEs," says MBIE.
"The model bridges the funding gap between bank loans and mid-market private equity. BGFs provide minority-only, patient growth capital that allows owners and founders to retain control of what they’ve built while leveraging capital and capability support to achieve their growth aspirations."
"Similar models are operating in the UK, Ireland, Canada, and Australia. Typically privately-led, setup and managed on a commercial basis –though the Australian BGF is a unique public-private partnership between the federal government and six major banks," MBIE adds.
Anthony Healy, the ex-BNZ CEO who now heads up the Australian Business Growth Fund (ABGF), spoke to interest.co.nz last year, highlighting a range of reasons why NZ banks may benefit from getting on board the Government's proposed BGF. Alongside A$100 million from Australia's Federal Government, the ABGF has received A$100 million investment from each of the parents of ANZ NZ, ASB, BNZ and Westpac NZ, plus A$20 million each from HSBC and Macquarie Group.
*This article was first published in our email for paying subscribers early on Thursday morning. See here for more details and how to subscribe.
7 Comments
In the meantime, Gates warns that we are getting stuck in a loop, where climate change itself is accelerating our use of greenhouse gas-emitting air conditioning, as temperatures rise.
"It just gets worse and worse slightly every year. But it’s one of the hardest things to fix, because modern economies throughout the globe are based on energy intensity, and over 80% of those energies come from burning hydrocarbons,” Gates said.
Need to keep chewing through all that oil so that by-product plastics can have a lower carbon footprint than wool.
https://www.stuff.co.nz/business/farming/131164490/how-wool-has-come-to…
Thanks for the article.
Key for me is that to certify one product is costing circa $100k, per Terralana.
This is why there is so little traction to gain certification in NZ.
MBIE should provide the pathway and mechanism to make this aspect simper, and more cost effective.
It's a solid idea, but unfortunately government money will come with all sorts of strings attached. The most obvious one will be invasive Treaty of Waitangi, cultural competency, diversity requirements etc etc for anyone to receive funding. We have seen it already with the media slush fund. This will effectively ensure permanent compliance with prevailing political dictates for business owners and staff, lest they lose access to the public money tap.
Government organisations already favour Maori-owned (and that is interpreted very loosely) organisations for procurement/contracting etc, so there's no reason to suggest my comments are scaremongering.
In short, this may seem benign but probably will be just another step on the road to Zimbabwe status for NZ.
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