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Equity Crowdfunding investment – why every KiwiSaver investor should have One

Equity Crowdfunding investment – why every KiwiSaver investor should have One

blog

Jul 07, 2017

 By Paul R S Hocking

Reason 1

Happy Birthday KiwiSaver, the incentivised retirement savings scheme operating in New Zealand.  KiwiSaver has just turned 10 and the amassed wealth of members (from your salary, your employer contributions and government incentive payments) has reached just over $41b.  A mere drop in the bucket compared to the compulsory scheme operating in Australia but for us Kiwis it’s not a bad sum.  We shouldn’t forget that the introduction of the highly incentivised scheme (although considerably less now) has been a boon for the funds management industry and for the firms providing services to them such as supervisory, custody, registry and unit pricing.

By comparison, in the period since the first equity crowdfunding licences were issued in July 2014, the aggregate amount invested in the 58 successful public equity crowdfunding offers is $39.5m giving an average investment of $682,619.  7,269 investments have been made in these 58 companies giving and average investment of $5,439 by, on average, 125 investors per offer.

Just to keep things real, the aggregate minimum amount sought was $21.3m and the aggregate maximum target was $59.8m.  Perhaps more important, the market declined to fund 33 offers seeking a minimum of $11.5m.

So the ECF market is truly tiny compared to KiwiSaver balances at just 0.1% of the total.  That said, there is absolutely no KiwiSaver money invested in any ECF company.

And that is the point to be considered; should KiwiSaver members make their own provision for adding potentially high return investments to their investment mix?  It is a truism that ECF investments are risky, indeed high risk.  However consider the risk being taken by KiwiSaver members or more particularly the lack of risk.  First, a number of KiwiSaver members are invested in inappropriate funds, particularly low risk conservative default schemes when the member is well short of retirement age and more risk should be taken to generate the returns necessary to make a proper provision for retirement needs.

Second a large number of funds invest only in assets that are quoted on public securities markets so the investors in those funds never see a true range of investment opportunities.  This has been a long held criticism of KiwiSaver in that the funds now available are of sufficient quantum that a broader range of investments is not unreasonable.

Third, some fund managers are now endeavouring to address the lack of opportunity by investing directly into unlisted companies to add return, albeit by adding more risk.  However the percentage of a fund invested into such alternative assets is still relatively low even when alternative assets are considered at all.  And these investments, often into direct property rather than direct equities, are not really alternative.

Lastly, liquidity is often cited as a constraint to funds investing.  Whilst KiwiSaver funds should have long investment time horizons (given they are for retirement savings) there seems to be some suggestion that churn between funds and fund providers means liquidity is a serious issue.  Really.  A long tail investment fund should be able to overlook illiquidity to a large extent, particularly over a portion of the fund.

However, these four points highlight that KiwiSaver investors will never get exposure to the unlisted growth SME sector and the potential return that goes with them.

The answer therefore is that KiwiSaver investors should take a good look at ECF offers and make investments themselves.

As with all things however, you should seek financial advice on your savings and on any ECF investments you make.  This blog is not advice, it’s just some musings on investment considerations.

Reason 2

Size is always an issue.  As KiwiSaver funds get bigger small investments into ECF offers become somewhat meaningless, which of itself means that either the cap for ECF issues should increase or that someone should develop a fund that invests into a broad range of ECF offers.  That fund may itself then have some measure of size that may then have meaning to KiwiSaver funds, particularly as the ECF market expands.

However, the previous blog and this one highlight that KiwiSaver investors will never get exposure to the unlisted growth SME sector and the potential return that goes with them via their KiwiSaver funds.

The answer therefore is that KiwiSaver investors should take a good look at ECF offers and make investments themselves.  This approach sees, correctly, that KiwiSaver investments are part of an individual’s portfolio of investments, just like your house, your artwork, your coin, stamp or wine collection, or even your dad’s classic HQ Holden and adding direct investment in your own right is perhaps the right thing to do.  Given the minimum investment tends to be between $500 and $1,000 a handy little portfolio of ECF investments can be yours for a minimal amount.

With the average house price in Auckland now around $940,000 and across New Zealand, excluding Auckland, is around $475,000 a small portfolio of ECF investments is both feasible and a good source of diversification away from what KiwiSaver alone can deliver.

For the younger more highly paid professional a range of investments more akin to the average investment into the ECF offers may be more appropriate.

For the high net worth ‘wholesale’ investor, including eligible investors, cornerstone investments are usually available and now with the growth of hybrid offers combining retail ECF and wholesale components even greater positions can be taken.

In Australia individuals can ‘self-manage’ their compulsory retirement funds and that will happen in New Zealand too.

All in all, individuals should be taking a greater degree of interest in ECF investments.  And there is to some extent a virtuous circle here.  As more equity funding becomes available and as ECF offers become a more main stream form of capital for our SME sector the more offers will be forthcoming.  The ECF industry needs more serious issuers with robust business models and highly credible ventures to come to the market.  This in turn will encourage entrepreneurs to back themselves and develop businesses that will eventually be bought to the ECF market.

And when it all gets big enough the professional fund managers will start taking a look.

And then who is to say what the outcome for New Zealand might be.  It wasn’t without reason that ECF regulatory regime in the USA was delivered via Title lll of the Jump Start Our Business Startups (JOBS) Act which was signed into law by President Barack Obama on 5 April 2012.

As with all things however, you should seek financial advice on your savings and on any ECF investments you make.  This blog is not advice, it’s just some musings on investment considerations.