A Business Growth Fund (BGF), with the Government and New Zealand's major banks as investors, was proposed in Budget 2022 as a way to help source equity investment for capital starved small businesses.
The Government earmarked as much as $100 million to invest alongside banks in the private equity-style BGF, which is modelled on funds already up and running in the United Kingdom, Canada and Australia. The BGF proposal follows a recommendation from the Small Business Council's New Zealand Small Business Strategy in 2019 to establish a BGF.
The Reserve Bank has agreed to allow banks investing via the proposed BGF to reduce the amount of capital they typically have to hold against equity investments.
However, with the election looming, the Labour Government is running out of time to get a BGF up and running before voters go to the polls.
Asked about this, a spokesman for Finance Minister Grant Robertson told interest.co.nz: "Discussions about the BGF, including with banks, are on-going. As soon as there is anything to announce we will do so. The Labour Party will set out its policy for small and medium sized businesses [SMEs] before the election."
What about the banks?
The major banks haven't been jumping out of their skins to get aboard a BGF, even though their Aussie parents have invested a combined A$400 million in the Australian Business Growth Fund (ABGF). It was launched in 2021 in partnership with A$100 million from the Scott Morrison-led Liberal-National Coalition government and continues under the Labor government.
HSBC and Macquarie Group also stumped up A$20 million each to invest in the ABGF. Banks that could be expected to participate in a NZ BGF include ANZ NZ, ASB, BNZ, Westpac NZ and Kiwibank.
Speaking to interest.co.nz last week, ASB CEO Vittoria Shortt said the BGF was "a hard one" because everyone's trying to work out how to help solve some of the challenges of supporting early stage businesses.
"We've had a good look, as has the Government, at these models in other countries. The progress has been quite slow. So I think one of the challenges for the New Zealand market is; why has that progress been so slow, if we did it differently would that improve it? I still think there's a little bit of research, if you like to flow to get a better handle on it," Shortt said.
Asked who needs to undertake the research Shortt said this needs to be a collective effort.
"That's the government, each bank needs to do their own research and due diligence. I think everyone needs to understand what are the issues, what are the opportunities, how do you solve them, how you best solve them."
"I guess all I'm trying to say is it's not immediately obvious this is an easy thing to solve. And it's not immediately obvious to me that the other models that exist actually made impact at scale," Shortt said.
Asked what ASB would need to see to decide to invest in a BGF, Shortt said there were lots of factors.
"And I think rather than kind of get held up on this now ...there's a lot in that one question, a lot of different factors. Have you got the skills to administer it, what's the right target market, do you think about industries, there's a list of considerations to make, sure," she said.
Speaking to interest.co.nz in May, ANZ NZ CEO Antonia Watson said a BGF was "not going to be a panacea."
"If it goes ahead it will be another tool in the toolbox," Watson said.
"We're really conscious of our social licence and potentially this is one of the tools in the toolbox," she added.
In a submission to the Reserve Bank on capital treatment for bank's potential investments via a BGF late last year, ANZ said there were other participants in the NZ financial system who are more natural providers of equity capital to a BGF. The provision of equity capital to SMEs sits outside ANZ’s core business, which is lending money to NZ consumers and businesses, the bank said.
BNZ's submission to the Reserve Bank noted that although direct lending would be secured, the risk in a BGF investment is offset by the pooling of the investment with other BGF participants’ investments, the arms-length nature of the fund and the limited size of each underlying investment in any one investee company as a proportion of the total fund size.
Thus BNZ said it considers there's "a similar level of risk in investing in this fund and lending to an unrated customer [borrower without a credit rating]."
And Kiwibank's submission suggested there are other ways banks could achieve a diversified exposure to SMEs, with similar benefit to the economy, such as investments in venture capital or accelerator funds.
'Tens of thousands of SMEs would fit the investment profile'
Former BNZ boss Anthony Healy is CEO and Managing Director of the ABGF. Healy spoke on interest.co.nz's Of Interest podcast in March in detail about the ABGF, and why he believes a similar BGF would be a good idea for NZ.
"There are no differences that I could identify that would suggest the Fund wouldn't work [in NZ]. And I think the banks in New Zealand, their parent banks obviously supported the concept here, so it's not unknown to them," says Healy. "...the economies, the market, the business environment, they're very similar. The banking system's pretty similar," Healy said.
"There are tens of thousands of SMEs that would fit the [investment] profile in New Zealand. They could be in every sector of the economy," said Healy.
The ABGF says it will invest A$5 million to A$15million of capital into a growth-ready business for a minority stake of up to 49%. It has invested almost A$130 million so far, across eight businesses including follow-on investments.
The UK's BGF was launched in 2011 and says it has a balance sheet of more than £2.5 billion supporting early stage and established private businesses, and smaller listed companies, across the UK and Ireland. The UK BGF says it has backed more than 500 businesses, and now delivers more than one investment a week, on average, of between £1 million and £15 million, plus significant follow-on funding for investee companies.
The UK BGF typically takes an equity share in the companies it invests in of between 10% and 40%. It also says it has exited more than 150 companies, and claims to have; "backed more businesses that are seeking investment for growth and expansion than any other equity investor in the world."
The Canadian BGF launched in 2018. As of the end of 2022, it had committed C$350 million of investment to 29 companies.
'No concerns have been raised by external parties on the BGF concept'
The Ministry of Business, Innovation & Employment (MBIE) commissioned Deloitte to do an independent analysis of a potential BGF in late 2022. MBIE says there's a critical gap in access to growth capital for SMEs earning between $3 million to $30 million in annual revenue.
"They are typically too small to access public markets, non-collateralised debt is very expensive and there are few capital providers who are willing and able to undertake due diligence on businesses at this scale. Overseas, major banks have been the primary shareholders of similar solutions to the proposed BGF," MBIE said.
In comments attributed to its Investment Policy Manager George Whitworth, MBIE told interest.co.nz it's continuing to work with potential participants in a BGF to reach a decision on the design of, and their potential involvement in, a BGF.
"The independent analysis completed by Deloitte is still under active consideration by potential participants and will continue to be until a decision on commitment can be reached. Prior to a decision by potential participants on their involvement, we are unable to comment on those discussions. No concerns have been raised by external parties on the BGF concept that we are aware of," Whitworth said.
The Commerce Commission is also taking an interest in the proposed BGF. A spokeswoman for the competition watchdog told interest.co.nz in April it understands the rationale of supporting a competitive SME business sector in NZ, that can drive innovation and growth.
"Details of the proposed Business Growth Fund have not been released so we do not have any comment on the proposal. We know that the banking sector is aware of its obligations under competition rules and expect they would continue to consider the appropriate boundaries between pro-competitive collaboration and anti-competitive conduct in this work also," the Commerce Commission spokeswoman said in April.
*This article was first published in our email for paying subscribers early on Tuesday morning. See here for more details and how to subscribe.
6 Comments
Exactly KH. Just seen that the proposed Otara Spinal Unit that was promised by the Government and to be built by Te Whatu Ora has now been axed by Ministerial consent due to its escalating costs. Yet another example of this Labour government being big on promises (especially in the lead-up to an election) but woefully short on delivery, just like this small business programme.
Given the banks likely see business lending as unpleasantly high risk in comparison to property, and that the government and much of the public service, imprisoned as they are in process-driven bureaucracies, don't seem to understand SMEs who need quick results without too much reference to how they are achieved.
And we wonder why our productivity is so poor.
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