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Budget 2006 Q&A: Venture Investment Fund

Budget 2006 Questions and Answers: Venture Investment Fund

What is the New Zealand Venture Investment Fund?
The New Zealand Venture Investment Fund (VIF), established in 2001, is a programme of equity investment designed to accelerate the development of the venture capital market in New Zealand. VIF invests alongside private sector co-investors, in a series of privately managed venture capital investment funds (VIF Venture Capital Funds). VIF’s initial investment of $100 million is expected to be fully committed by mid 2006.

The goals of the VIF programme are:
• to accelerate development of the New Zealand venture-capital industry by increasing the level of early stage investment activity in the New Zealand market
• to develop a larger pool of people in New Zealand's venture capital market with skills and expertise in early stage investment
• to facilitate the commercialisation of innovations from Crown Research Institutes, universities and the private sector
• to get more New Zealand businesses on paths to global success by increasing their access to international experts, networks and market knowledge.

Why is the government doing this?
Venture capital is recognised internationally for the key role it plays in the innovation process, especially in commercialising research and development, lifting exports, creating jobs and stimulating economic activity. In New Zealand the government has identified a gap in the provision of capital and expertise for early stage companies with high-growth potential. These are companies that have identified an opportunity to develop an innovative product or service and require capital and/or expertise in order to commercialise the product locally and internationally. It is in response to this gap that the VIF programme has been established.

Do other governments have venture capital investment initiatives?
Many governments play an active and often continuing role in nurturing the establishment and successful development of a strong local venture capital industry to capture the widely reported public benefits. Some specific examples of these are:
United States - Small Business Investment Companies (SBIC) Programme, United Kingdom - Regional Venture Capital Programme, Australia - Innovative Investment Fund (IIF), Israel - Yozma Fund, Singapore - Technopreneurship Investment Fund (TIF) .
A recent OECD statement referred to New Zealand’s VIF and Seed Co-Investment Fund (SCIF) schemes as a good example of an integrated approach to bolstering early stage finance to innovative small and medium size enterprises.

What are venture capital fund managers?
Venture capital fund managers are professionals that manage pools of capital raised from investors and then seek investment opportunities in companies with high-growth potential, typically taking an equity position, in the company. The manager will look to add value to the investment through active participation, however will seek to exit the investment in the portfolio company within five to seven years of the initial investment. Typical exit strategies used by venture capital managers include:
• initial public offering (IPO) - listing the company on the stock market
• merger or acquisition of the company by another company
• buy back of the company by the initial owners and/or management of the company.
The expertise of the venture capital manager in growing and adding value to the business before successfully exiting its investment will dictate the success of the exit for their investors, themselves and the owner of the company.

Who invests in venture capital funds and why?
Venture capital investments are not very liquid compared to investments in other asset classes, as there is no immediate market to trade these investments. Because of this characteristic, venture capital is better suited for patient, long-term investors such as pension funds, who are willing to wait 10 years or longer to maximize investment returns. Historically venture capital investments have produced superior performance when compared to public equities. For example, for the 10 years ending 31 December 2002 US venture capital investments returned 23.6 percent per annum whereas the NASDAQ over the same period returned 7 percent p.a. (source: Thomson Venture Economics/ National Venture Capital Association).

What are the VIF Venture Capital Funds?
The VIF Venture Capital Funds are fixed duration, private equity, investment vehicles in which VIF is a foundation investor. The VIF will normally invest up to one third of the total capital for each VIF Venture Capital Fund. The VIF Venture Capital Fund manager must raise the required matching capital from private sector investors.

Each VIF Venture Capital Fund will typically be between $30-60 million in size and will operate for 10 years before the fund terminates and the profits are distributed among investors.

What type of venture capital investments do the VIF Venture Capital Funds make?
The VIF Venture Capital Funds invests in innovative New Zealand businesses. A New Zealand business is defined as having the majority of assets and employees in New Zealand at the time that initial investments are made. The initial investments must be made in businesses at the early stage of their development early stage. The VIF Venture Capital Fund manager may make further investments into these companies (follow on investment) however the investment limit for any portfolio company is 15 percent of the fund.

What is the maximum amount VIF can invest in a VIF Venture Capital Fund?
The VIF will normally invest no more than $25 million in any individual VIF Venture Capital Fund.

How many companies will the VIF Venture Capital Funds invest in?
VC Fund Managers, will typically invest in and manage a portfolio of 10-15 investments in high growth New Zealand companies.

Who are the VIF Venture Capital Fund managers?
To date VIF has selected and established contracts with five Venture Capital Fund managers, assessed as "investment grade" through a rigorous due diligence process.
The VIF Venture Capital Fund managers are BioPacific Ventures, TMT Ventures, No 8. Ventures, Endeavour i-cap and iGlobe Treasury.

Are there any investment restrictions on the VIF Venture Capital Funds?
VIF Venture Capital Fund investment terms exclude investment in the following classes of businesses:
Property development, retailing, mining, hospitality industry businesses, re-investing and re-lending, and businesses directly associated with other investors in the VIF Venture Capital Fund or directly with the VIF Venture Capital Fund managers.

How will government get a return on its investment?
An incentive for investors in VIF Venture Capital Funds is the buy-out option that allows co-investors to share with VIF the risks of investing in early stage companies while providing the opportunity to receive a greater share in the future profits of the VIF Venture Capital Funds. Investors have the option to exercise the buy-out up to the end of the fifth year of the fund's life, at a price that returns VIF its capital invested plus a rate of return on that capital equal to the yield on the five-year government bond rate.

If VIF has not been bought out before the mid-point of the term of a fund, it will take a pro-rata share of the net proceeds of the individual funds (including losses if these have occurred), in the same manner as all other investors, when the fund terminates.

I think my business may meet the criteria for investment by a VIF Venture Capital Fund, what should I do?
Contact any of the VIF Venture Capital Fund Managers. You can also check the investment terms listed on the VIF website http://www.nzvif.com/

What other government assistance targets innovative and early-stage New Zealand firms?
In Budget 2005 the government announced a Seed-Co-investment Fund (SCIF), also run by VIF, which is expected to be operational on 1 July 2006. Under the SCIF the Crown will co-invest up to 50 percent of the early stage and start-up investments. Crown investment is limited to $250,000 in any single proposal by pre-qualified investment partners. The programme will commit up to $40 million capital over the next five to six years.

ENDS

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