Written by Justine Sefton, Impact Investing Network Deputy Chair.
It’s been a big month for mobilising New Zealand institutional capital into positive impact and private markets (such as VC, private equity/debt and unlisted infrastructure).
Currently, KiwiSaver and other FMCA-regulated fund managers allocate very little capital to private markets generally, let alone to sustainability-themed or impact investment strategies in private markets. They invest mostly in listed assets (and mostly offshore).
This means their customers have limited access to investment options that could potentially deliver a higher risk-adjusted return (after fees) or other benefits, such as the generation of positive social and environmental outcomes, or both.
It also means that there is a large untapped pool of capital that could be deployed towards financing local innovation and infrastructure, and ideally supporting New Zealand’s transition to a net-zero emissions, sustainable and inclusive economy. Spurring a groundswell of initiatives across industry and government to tackle this.
Today, the Centre for Sustainable Finance published a joint legal opinion commissioned
from Chapman Tripp and MinterEllisonRuddWatts on this topic.
Jo Kelly, Centre for Sustainable Finance Chief Executive
The opinion concludes there is no explicit legal barrier to KiwiSaver providers investing in private assets. However, it identifies three main areas that may discourage them and proposes measures to address:
The need for sufficient fund liquidity to meet member account transfer and withdrawal entitlements – creating a bias for more liquid investments such as listed equities and bonds and (they conclude) limiting the tools Scheme managers can use - such as sidepockets and redemption gates/suspensions - to manage illiquidity risks and respond to illiquidity events.
Linked to this, the need for daily pricing of assets and the challenges of providing for alternative (long-term) or less frequent asset valuations in Scheme documents.
A lack of clarity around the requirement for KiwiSaver fees not to be “unreasonable” – noting the typically higher costs of private market investing yet potentially higher financial returns net of fees – including in FMA ‘value for money’ guidance.
The opinion builds on the findings and recommendations of a report last year by the Centre for Sustainable Finance on enabling KiwiSaver investment into private assets.
Complementing this, Mindful Money reported the outcomes of an initiative on mainstreaming sustainability-themed and impact investing by KiwiSaver and other Managed Investment Scheme managers, particularly in private markets.
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These initiatives considered a wide range of barriers and potential solutions, in addition to the issues above, including: product labelling; fund manager capability; access to investible product; customer education and access to information and advice; and common frameworks for measuring and evidencing positive impact.
They coincide with the Government’s announcement of proposed regulatory reforms for the financial services sector, signalling openness to a review of KiwiSaver settings including impediments to investment in private assets - possibly influenced by the UK Mansion House reforms.
Also related, FMA consultations on liquidity risk management guidance and fair outcomes for consumers and markets.
Justine Sefton, IIN Deputy Chair.
Reaction to the momentum in the space, from the Impact Investing Network Board:
The Impact Investing Network welcomes these developments.
We’re pleased to see such strong momentum building to enable greater participation of KiwiSaver and other Managed Investment Scheme (MIS) managers in private markets (should they choose) – including in an impact investing context.
Private markets are where capital is needed the most, and arguably where the biggest positive impact can be made too. Deployment of capital
at scale, especially in New Zealand, would be a game-changer. The potential customer, market and societal benefits are compelling.
This is a timely juncture for review of KiwiSaver settings to ensure they are fit-for-purpose as that sector matures and evolves – including enabling investment in private assets. The proposed financial sector reforms also present an opportunity to place impact at the heart of purpose.
As a longer-term goal, we hope to see sustainability impact applied systematically - as an independent lens, alongside financial returns – to product design and portfolio construction by MIS managers, including through allocation to ‘impact investments’. Recent developments take an important step in that direction.
In the meantime, let’s not delay taking action that is possible and learn from those who have already begun blazing the trail.
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