Venture Capital Fund

Investment Criteria

In conjunction with other investors, NZVIF negotiates key management and investment terms with each VIF venture capital fund manager as part of the appointment process. Standard contracts, developed in line with international best practice for venture capital funds operating at the early stage, are the basis of co-investment arrangements that are agreed with each VIF Venture Capital Fund Manager.

There are also standard investment criteria for each of the VIF Venture Capital Funds:

  • Initial capital investments are to be made 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.
  • Initial capital investments can be made in early stage (seed, startup and early expansion) through to expansion stage (expansion, late expansion) venture capital investments.
  • Total investment in any one company must not be more than 15 per cent of the total capital in the fund.
  • A maximum of $25m of NZVIF capital can be committed to any single fund, with the amount of NZVIF investment commitment being determined by:
    • the investment strategy of the Venture Capital Fund; and
    • the amount of capital committed by private investors.

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Fund Exclusions

Fund investment terms will normally exclude investment in the following classes of businesses:

  • property development;
  • retailing;
  • mining;
  • hospitality-industry businesses;
  • re-investing and re-lending; and
  • businesses associated directly with other investors in the fund or directly with the fund managers.1

NZVIF Mandate

The NZVIF Board is expected to exercise judgement with respect to implementation of the Venture Capital Investment Programme and establishment of contractual agreements with VIF Venture Capital Fund Managers in line with venture capital industry best practice.

Investor Buy-Out Option

An attractive incentive for investors in the VIF Venture Capital Funds is the buy-out option that allows investors to share with NZVIF the risks of investing in early stage companies whilst providing the opportunity to receive a greater share in the future profits of the VIF Venture Capital Fund.

Investors have the option to exercise the buy out up to the end of the fifth year in the life of the Fund, at a price that returns NZVIF its capital invested plus a rate of return on that capital equal to the yield on the five year Government bond rate.

If the buy out right is not exercised NZVIF will take a pro-rata share of the net proceeds of the funds (including losses, if these have occurred), in the same manner as all other investors, when the fund terminates.

Structure of Funds

The VIF Venture Capital Funds which have been established to date have typically been unincorporated and do not involve the establishment of any legal entity which is separate from the individual investors. However with the advent of the Limited Partnership Act 2008, it is anticipated that a limited partnership will become the industry standard.

As a limited partnership, funds can generally be taxed on a flow through/look-through basis for New Zealand Investors. Offshore investors into limited partnerships are exempt from paying New Zealand tax on any investment gains. In addition, offshore investors into VIF Venture Capital Funds (whether they are limited partnerships or not) are exempt from paying New Zealand tax on any investment gains.

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NZVIF Investment Terms

NZVIF’s investment commitment is conditional on the successful Fund Manager(s) raising a minimum fund of $30 million for investment in early stage high growth New Zealand companies. Funds established under the NZVIF Venture Capital Programme are fixed in duration (generally 10 years) private equity investment vehicles that are managed in line with internationally accepted commercial terms. VIF Venture Capital Funds focus on New Zealand investment opportunities, but could be part of an existing or new Fund that has a wider investment mandate.

NZVIF invests into venture capital funds on a predetermined investment ratio, alongside private investors. NZVIF’s expected investment commitment to each VIF Venture Capital Fund is pre-agreed taking into account the investment stage of the fund and the level of matching private capital committed for investment.

The highest potential investment ratio of NZVIF to matching private capital is 1:1 where a Venture Capital Fund intends to invest entirely in seed and start-up investment opportunities. The lowest possible investment ratio of NZVIF to matching private capital is 1:5 for Venture Capital Funds that intend to invest only in late expansion stage investment opportunities. For Venture Capital Funds which intend investing in a portfolio of companies at different stages, a blended ratio will be determined.

Fund Manager Attributes

Prospective Fund Managers are required to demonstrate their skills and experience in venture capital investment and fund management together with how they will contribute to the goals of the NZVIF Venture Capital Programme. Attributes we look for include:

  • relevant investment experience;
  • stable team commitment;
  • a track record of building successful companies;
  • willingness to meet industry standard of investment.

Commercial Terms

NZVIF negotiates investment terms with prospective Fund Managers, as part of the final selection and appointment process. Full guidelines are included with the Expressions of Interest documents. Consideration is given to the overall structure and investment strategy of the VIF Venture Capital Fund in negotiating final terms.

1 In order to manage conflicts of interest. This may not be relevant to all investors but does include those investors that are directly involved in the investment decisions of the fund and therefore may have a conflict of interest.

 

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