NZVIF: Briefing for the Incoming Minister for Economic Development

Purpose

This report provides background information on CCMAU, NZVIF, and current issues of relevance for NZVIF’s shareholders.

CCMAU support for the Minister for Economic Development

The current Output Plan between the Minister for Crown Research Institutes (CRIs) and the Executive Director of CCMAU for 2007/08 sets out the outputs that CCMAU will produce for Ministers under Vote CRIs. This includes providing advice to the Minister for Economic Development with regard to NZVIF. If you require, we will provide a copy of the Output Plan.

We propose providing written advice to you on an as-required basis and will also provide updates on relevant NZVIF activities and governance issues in advance of meetings with NZVIF representatives. On some occasions, it may be necessary to meet with CCMAU to discuss issues.

In your interaction with CCMAU, you are likely to have contact with the following CCMAU staff members.

Table 1. Key CCMAU contacts

CCMAU person	Role	Contact numbers
Murray Wright	Executive Director	04 474 8260
David Ryan	Acting Manager - Science & Innovation	[withheld under OIA section 9(2)(a)]
Steve Rich	Manager - Appointments & Governance	04 474 8268

NZVIF background information

Corporate information

NZVIF has a staff of six, based in Auckland. NZVIF is responsible for the implementation of two programmes: the Venture Investment Fund (VIF) programme and the Seed Co-investment Fund (SCIF) programme.

NZVIF is funded by an appropriation through Vote Economic, Industry and Regional Development and receives some interest income. Besides its own administrative costs, its other expenditure includes due diligence costs (for new VIF programme funds and SCIF programme co-investment partners) and management fees paid to VIF programme fund managers. To date, NZVIF has generally broken even on its operations. NZVIF has previously noted, however, that the increased appropriation that it received when it was given responsibility for the SCIF programme in 2005 was possibly under-calculated and there may be a need for an increased appropriation at a future date.

VIF (‘venture capital’) programme

Since 2001, NZVIF has been responsible for managing the VIF programme. This is a fund of funds which aims to invest $160 million of Crown funding, alongside funding from private sector co-investors, in a series of privately managed venture capital (VC) investment funds run by selected, experienced fund managers. The VIF programme is designed to increase the supply of capital to New Zealand-based innovative young companies and over time, to accelerate the development of the VC market in New Zealand.

NZVIF does not make direct investments but invests through funds managed by fund managers appointed by NZVIF. Thus, the Crown is insulated from investment decisions. [withheld under OIA sections 9(2)(b)(ii), 9(2)(i) and 9(2)(j)] NZVIF managers meet quarterly with fund managers to discuss fund performance and the pipeline of future investments. These meetings do not discuss strategies around individual investments.

VIF programme progress to date

As at 30 June 2007, 37 companies had received investment through the VIF programme, representing a total investment from NZVIF and private investors of $136 million. Of this amount, $43 million had come from NZVIF, while the remainder was matching finance from private sector investors.

Investments to date have been made predominantly in the high-tech, software, telecommunications and information technology sectors (about 55%). Existing fund managers generally invest in opportunities in any field, although the BioPacificVentures Fund has a specific focus on agribiotechnology.

In the past there has been some criticism of the rate of investment of NZVIF funds, ie that, despite the fact that the VIF programme has $160 million available, only $43 million has been drawn down. The rate of investment responds, however, firstly to the ability of fund managers to raise matching private sector capital and, secondly, to the quality of investment proposals. These factors are principally outside NZVIF’s control.

SCIF (‘seed’) programme

Since July 2005, NZVIF has also been responsible for the implementation and management of the SCIF programme. Alongside funding from approved partners, NZVIF will invest $40 million of Crown funding in small- and medium-sized businesses which, because of their size and maturity, find it hard to attract VC funding.

NZVIF co-invests with approved partners in investments at an earlier stage than the VIF programme. The maximum initial investment is $250,000 in any one company or group of companies, although there is also the opportunity for follow-on investments in investee companies.

[withheld under OIA sections 9(2)(b)(ii), 9(2)(i) and 9(2)(j)]

To date, NZVIF has signed up six co-investment partners and expects that, by the end of October 2007, it would have invested in 13 companies (which may equate to total investment of approximately $3 million). According to its 2007/10 Statement of Intent, NZVIF aims to have eight co-investment partners and 26-30 investments by the end of 2007/08. Therefore, the company appears to be on track toward meeting these targets.

Market education activities

A major challenge for NZVIF is attracting sufficient capital into the VC industry. Consequently, NZVIF’s industry engagement and market education activities are important and align with NZVIF’s goal to accelerate the development of the local VC industry. Market education activities to date have included sponsorship of the annual New Zealand Private Equity and Venture Capital Association’s annual conferences, workshops for potential angel investors, publication of The Business of Angel Investing in New Zealand guide, and the recent launch of the NZ Young Company Finance quarterly.

Current issues

Proposed fund of funds (FoF) product

Earlier in 2007, NZVIF indicated that its research and market consultation (both in New Zealand and Australia) had revealed interest from a range of institutional and retail investors in an investment product that would pool New Zealand private investment capital into a FoF for investing in privately owned New Zealand companies. NZVIF considered that it would be well placed to establish and offer such a product in the New Zealand market.

NZVIF’s proposal has its origins in concerns over the reluctance of institutional investors to support the local VC market. Institutional investors in New Zealand have generally not shown interest in VC investments for a number of reasons. These include a lack of track record of exits for VIF programme fund managers, the illiquid nature of the asset, limited opportunities for building a diversified portfolio, and institutional investors’ own lack of suitably skilled people to assess (carry out due diligence) and manage such investments. This lack of institutional investment comes at a time when funding for investments in new companies from high net worth individuals and other non-institutional investors is drying up as they await evidence of a return on their current investment.

[withheld under OIA sections 9(2)(b)(ii), 9(2)(i), 9(2)(j) and 9(2)(f)(iv)]

1. [withheld under OIA sections 9(2)(b)(ii), 9(2)(i), 9(2)(j) and 9(2)(f)(iv)] markets.

Rate of new VIF programme investments

For several years NZVIF has raised concerns about difficulties faced by fund managers to raise private investment to match NZVIF funds. This is due principally to relative lack of interest by institutional investors (for the reasons outlined in paragraph 18 above) and the fact that existing investors are now taking a ‘wait and see’ approach as they wait to see successes or failures emerging before they invest again. Funds established recently have found it difficult to reach their first and final closes while prospects are not as positive for future funds that are established. (A fund reaches its first close when it has raised enough funding (NZVIF contribution and matching private sector investment) to make it viable (ie it has enough funding to allow for a spread of investments and to generate sufficient fee income for the managers involved). The final close is the target size of the fund.)

NZVIF launched its third round in August 2005 calling for interest in establishing new funds. This led to approval for two new funds, with one fund (Pioneer) now having reached its first close and [withheld under OIA section 9(2)(b)(ii)]. NZVIF launched the fourth round in June 2007 calling for new fund managers and has invited four interested parties to put in full proposals. [withheld under OIA sections 9(2)(b)(ii), 9(2)(i) and 9(2)(j)].

Existing funds are now at a stage where many are reaching the end of their initial investment stage and are engaging in ‘follow-on’ investments into those investments with greatest potential. Combined with the difficulties that new fund managers have in establishing their funds, this is likely to slow the pace of investments in new companies.

At the same time, it is likely that write-downs (or impairments) by fund managers will increase as failed investments start to materialise. On the other hand, it will take longer for successful investments to be realised. To date, there has been only one successful exit of an investment through the VIF programme – other exits are expected to take time.

Changes to the SCIF programme mandate

[withheld under OIA sections 9(2)(b)(ii), 9(2)(i) and 9(2)(j)]

2006/07 annual report

NZVIF has submitted its 2006/07 Annual Report. We have provided a separate briefing summarising the content of the report and recommending that it be tabled in the House of Representatives by 7 November 2007.

NZVIF Board

The current Board composition is shown below in Table 2.

Table 2. Current VIF Board composition

Director	Term expiry	Skill set
Peter Taylor (Acting Chair)	30 June 2009	Accountancy, business management and restructuring, governance
Dr Grant Ryan	30 June 2008	Innovation, science and technology (a former scientist at IRL)
June McCabe	30 June 2008	Banking, stakeholder relations, Māori perspectives
Brian Mayo-Smith	30 April 2008	Accountancy, capital markets, early-stage technology businesses

Peter Taylor has been Acting Chair since July 2007 when the previous Chair, Chris de Boer, resigned due to a potential conflict of issue. Chris de Boer had been Chair since October 2006.

[withheld under OIA sections 9(2)(a) and 9(2)(f)(iv)]