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Driving KiwiSaver risk and return

Truly democratising investing would let all Kiwis have the opportunity to invest. We can, through KiwiSaver, says John Berry.

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Wealthy investors can access investment opportunities that are very difficult, if not impossible, for most Kiwis to invest in. These can be longer term, higher returning and great for diversifying investment risk.

This is the world of private equity. While not listed on a stock exchange, these investments are often innovative, high growth and in need of investment capital.

Generally, these opportunities are only offered to wholesale investors who are required, for example, to have net assets of $5 million or to commit at least $750,000 to the investment. That’s a very high threshold.

Truly democratising investing would let all Kiwis have the opportunity to invest. We can, through KiwiSaver.

Private equity transactions can involve companies from risky and early stage to more established and mature. Several KiwiSaver funds have done transactions here including Pathfinder, Booster, Milford, Simplicity and Kiwi Wealth. Pathfinder for example has invested in fast-growing Sharesies and in WoolAid, an innovative merino wool bandage company.

You’ll notice that the large bank KiwiSaver providers are missing from the list of KiwiSavers investing in private assets.

Returns from venture capital and private equity are potentially exciting, as is the opportunity to invest in jobs and prosperity in New Zealand. This is, of course, not without risk, which needs to be well understood.

As well as conventional investment risks, private assets have higher liquidity and valuation risk.

Liquidity is your ability to buy or sell an asset. If your investment is in a large stock exchange listed company then it’s probably highly liquid, meaning it can be bought or sold at any time. Private assets are not listed on a stock exchange so to sell you will need to find a buyer. That may be near impossible at short notice or in times of economic stress.

It’s possible to reduce but not eliminate this liquidity risk by diversifying and keeping individual exposures relatively small within a portfolio.

The second risk, valuation, also presents a challenge. With listed shares valuation is relatively easy because you have a market price to base it on. But with unlisted assets like a house or shares in a business, there is no transparent market price. Valuation tools are needed for example using the known sale price of comparable assets or expected future cashflows.

How is this relevant to KiwiSaver investors? Do some reading on whether you agree that private equity enhances the combination of risk and return in your KiwiSaver fund. Ask your manager what their thinking is around private asset investment and examples of what they have done. If it’s important to you and they are not delivering, give them your feedback. Or switch provider.

All investors can access listed shares, listed bonds and bank deposits. If you question whether you should also have access to private equity investments, KiwiSaver could be your answer.

-John Berry is chief executive of ethical fund manager and KiwiSaver provider Pathfinder Asset Management, the first B Corp certified fund manager in New Zealand which is part of Alvarium Wealth. Disclosure of interest: Pathfinder’s KiwiSaver includes investments in private equity.

(This article was originally published by Stuff  December 16, 2021) (Picture Source - Fabian Blank)

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