Big super funds get behind venture

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by Greg Bright

Venture capital used to be the “red-headed step child” of the investment industry, an annual private equity and venture industry conference was told last week. Sheridan Lee, a long-time third-party marketer for both mainstream and alternative managers, said the times had changed. Super funds were coming on board with venture.

“Ten years ago, this session [at the Australian Venture Capital Journal conference held in Sydney]would not have happened,” she said. “It used to be all about high-net-worth individuals and family offices. Now, more recently, it’s also about big super funds, too.”

There weren’t many big super funds represented at the conference, though, and one suspects the venture industry has some way to go to attract more of their interest.

If venture capital struggles for attention in the $3 trillion Australian super landscape, it has an understandably much tougher time in the NZ market, where the $60 billion KiwiSaver sector and government-owned funds dominate. In an attempt to jumpstart the NZ venture capital market, last week the government formally launched the $300 million fund-of-funds targeting local growth companies.

The newly named Elevate NZ Venture Fund is expected to allocate to both Australian and local managers in a program overseen by the NZ Superannuation Fund.

To be managed by New Zealand Growth Capital Partners (the brand refresh for the government entity formerly known as the New Zealand Venture Investment Fund), Elevate “will capitalise on the foundation set by R&D and Seed investments, to support building an early stage investment environment”, Commerce Minister Grant Robertson said in a statement.

“Our aim is that, over time, private sector funds will take over the role, as we develop deeper capital markets in New Zealand,” Robertson said.

There are structural problems inhibiting ventures attractiveness for big super funds. One important issue is that, as Rick Baker, a founding partner of Blackbird said, it was still “damn hard” to find the capital to get ventures off the ground, especially the first $3-5 million. Big super funds, of course, cannot invest $3-5 million in anything. It is up to the venture industry to come up with structures that may allow them to do so. And the venture managers can start by not whinging about how big super funds work. Big super funds actually work well (look at their numbers) and venture managers need to understand and better adapt to that.

Blackbird, for instance, has raised $110 million from First State Super, $35 million from HostPlus and about another $90 million from the Future Fund and 100-or-so private investors, for various venture investments. Blackbird got lucky. Let’s hope their big initial super fund investors – First State Super and Host – agree. Returns to date have been very good.

Big super funds are not easy to deal with. They may take a year or more to say ‘no’ to a proposition that is put to them. But they at least look at all proposals and are open to new ideas. The issue of taking a long time to deal with them, which is mainly to do with size, is only going to get worse as the big funds merge and merge and merge again. APRA’s active encouragement of these mergers, which is changing the structure of the industry that has so far worked so well, should be critically examined. But that’s another story.

The other venture managers on the Sheridan Lee panel were: David Kirk, of Baildor Technology Investments and a former All Blacks captain and a former managing director of Fairfax newspapers (now Nine); Michelle Deaker, a co-founder of OneVentures; and, Tony Holt, a co-founder of venture manager Square Peg.

Their funds are quite substantial by Australian venture standards. Square Peg, which operates in Australia, Israel and Asia, has more than $1 billion under management. OneVentures manages about $400 million, Baildor about $160 million and Blackbird, with offices in Sydney, Melbourne and Auckland, also has about $400 million under management.

Michelle Deaker said that one of the things which had changed for venture over the past 10 years was that Australian managers and investee companies were now more highly regarded on the world stage. Back then, you would have to consider making your domicile offshore, she said. Today, this was not necessary.

Sheridan Lee said: “With the big super funds, now you seem to have their attention.” Rick Baker said: “The relationship with them has changed a lot, but there is still only a small group of funds that are investing in Australian venture.” He added that it was still difficult to fund the initial $3-5 million in seed funding for businesses. Tony Holt said that the good thing was that venture managers had not lost any of their original high-net-worth and family office backers, while gaining super fund investors.

Asked about the culture of venture managers – something which has become controversial in Silicon Valley firms due to a lack of gender and ethnic diversity – David Kirk said he thought that, while a potential problem, it was not as bad in Australia and New Zealand as it seemed to be in the US.

As a former All Blacks captain, Kirk should know the importance of culture better than most. Journalist James Kerr, brother of George Kerr, who is the majority shareholder in New Zealand’s oldest listed company, Pyne Gould Corporation, studied the All Blacks’ culture in his book “Legacy, What The All Blacks Can Teach Us About The Business Of Life”.

James Kerr talks about the team’s cultural mantra of “sweeping the shed”, a tradition that says that no individual is bigger than the team and its ancestors. Everyone is responsible for the smallest details – including cleaning out the locker room after training or a match. “Sweeping the shed” is your job, no matter who you are. At the conference last week Rick Baker said that his firm has developed a code of practice and had put “a lot of effort” into how it approached diversity within its own business and its investment processes.

– Greg Bright and David Chaplin

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