KiwiSaver and Private Assets: The Debate Over Higher Returns
Even some KiwiSaver fund managers are uncertain about a plan to reduce barriers for the schemes to invest in private assets, while others argue the higher returns make it a viable option for investors.
Currently, the government is consulting on the proposal that would allow more KiwiSaver schemes to invest in private assets. According to Commerce and Consumer Affairs Minister Andrew Bayley, this move could bring substantial benefits to New Zealand.
Government’s Vision for KiwiSaver Investment
Minister Bayley believes the expansion will provide additional private capital to businesses and the economy. It would introduce another asset class to KiwiSaver investors, potentially offering higher returns.
Such investments could include road and rail projects, renewable energy ventures, or backing private New Zealand businesses.
Industry Concerns and Criticisms
Despite these benefits, some industry experts have raised concerns. AUT professor Aaron Gilbert points out issues like costs, fees, and liquidity. Selling assets when required could prove challenging.
Kernel Wealth founder Dean Anderson also questions the benefits. He argues that encouraging individual KiwiSaver providers to invest in specific projects without a centralized authority might raise concerns about transparency and fees.
Anderson highlights that venture capital funds, while potentially offering high returns, may not consistently deliver the expected results. Additionally, the market environment has changed, significantly affecting how private assets are priced.
He believes private equity investments have become more attractive due to historically low interest rates, leading to increased valuations of unlisted assets. However, the environment has since changed.
Alternative Solutions
Anderson suggests Singapore’s infrastructure funding method as an alternative. This approach involves a central fund that ACC and the Super Fund invest in, with a central body overseeing it.
This strategy could diversify KiwiSaver investments across multiple infrastructure projects, managed by experienced bodies, rather than individual providers assessing each project on their own.
Anderson also highlights the importance of maintaining a diversified portfolio. He stresses that making a significant portion of KiwiSaver investments New Zealand-based increases vulnerability to local economic downturns or disasters.
Industry Support and Solutions
KiwiSaver provider Simplicity is optimistic about the proposed changes. The company has already invested in New Zealand property, private equity, venture capital, and mortgages.
Simplicity’s founder, Sam Stubbs, argues that allowing side pockets for investments could solve the liquidity challenge. This mechanism would enable investors to receive 95%-96% of their investment upfront, with the remaining amount paid later.
Stubbs says this solution takes advantage of the KiwiSaver system’s unique feature where Inland Revenue holds all the funds. This system ensures departed investors receive their money efficiently and promptly.
Koura Wealth’s Perspective
Koura Wealth founder Rupert Carlyon agrees that KiwiSaver should embrace private assets more broadly. In Australia, many KiwiSaver equivalents invest 15%-30% in private assets, including venture capital, private equity, infrastructure, and property.
Carlyon contends that the risk return trade-off for private assets is often better than public markets. Furthermore, private assets can reduce portfolio volatility.
However, he recognizes that managing private assets requires more expertise and could lead to higher fees. Carlyon believes that the benefits of investing in private assets outweigh the costs, especially in the context of increased investment options.
The Role of Regulation
Carlyon points out that the Australian model has indeed led to higher fees, but also broader investment options. He argues that Australia’s KiwiSaver equivalents are better positioned to manage liquidity issues due to their experience.
However, such an approach would require a new mindset from New Zealand’s regulators and supervisors, who may currently be unfamiliar with private asset investments.
Regulators must balance the benefits for New Zealand’s economy against the need to protect individual investors’ interests.
Conclusion
The debate over allowing KiwiSaver schemes to invest in private assets revolves around potential benefits and risks. Proponents argue for higher returns and greater investment options, potentially boosting New Zealand’s infrastructure.
Opponents, however, highlight concerns related to costs, fees, liquidity, and the potential for inefficient asset valuations. Alternative approaches such as centralized funding mechanisms could provide a balanced solution.
In the end, any decision should prioritize the interests of individual KiwiSaver investors while supporting New Zealand’s economic goals.
What do you think about this proposal? How do you envision the role of private investments in KiwiSaver’s future?
Join the conversation below and share your thoughts. We’d love to hear from you!
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