The proposed $100m Business Growth Fund will be music to the ears of businesses looking for a boost to their operations, but will take time to set in action
Kiwi small and medium-sized business owners may have to wait months or potentially a year or two before they can get their hands on the spoils of a new Business Growth Fund announced in the Budget, at least if the timeline of an Australian equivalent is anything to go by.
The Minister for Economic Development Stuart Nash unveiled plans for New Zealand’s own Business Growth Fund in his Budget 2022 announcement. The Government is earmarking $100 million over the coming year for investment as a minority shareholder in the fund, alongside private banks.
The investment model has already been rolled out in the UK, Ireland, Canada, and, most recently, Australia.
But in Australia it took more than a year from when the fund was set up before the first SME investments started. And here, there are still critical details to be sorted before the fund even gets set up.
Economist Shamubeel Eaqub welcomes the fund, saying small businesses often have trouble accessing outside capital to expand their businesses, instead relying on cash flow, or borrowing against their own home.
And that’s getting harder.
“Fewer people are owning homes, while more people are getting closer to retirement in the SME sector,” he says.
“That’s why we're seeing a lack of investment in bigger and more expensive projects that would actually make the businesses more successful.”
This Business Growth Fund could help. The UK equivalent was set up in 2011 to address funding shortfalls following the Global Financial Crisis, with five banks collectively providing £2.5 billion ($4.9b) to invest in small to medium businesses.
The fund’s latest statistics - from 2020 - show it is dishing out money for more than one investment a week, on average, with each valued between £1m ($1.95m) and £15m ($29m).
The Australian fund was established in 2020, and the government and banks pulled together $A540 million in total.
However it wasn’t until a year after the fund’s formation, when the first investment - $A15m - was handed out to clean energy company, 3ME Technology, which makes lithium-ion batteries for heavy-duty vehicles.
Govt urged to set clear path for fund
Meanwhile, the specifics of the NZ fund are yet to be finalised, with a spokesperson for Nash saying the details are still being worked through by officials and bank representatives.
No date has yet been set for getting the fund running nor have decisions been made on what type of companies could be eligible for investment.
This means small business owners eager for a cash injection into their operation might have to wait a while.
Roy Thompson, co-founder of equity firm New Ground Capital, says Business Growth Fund-type schemes are not easy to set up, requiring coordination between the financial institutions and the Government.
Thompson is familiar with the fund model, following discussions with Nash about a similar scheme in May last year.
The Australian version sees partnerships lasting between three and 10 years before the fund exits from the company. A fund representative also takes a seat on the business’ board, meaning it has full visibility of the operations.
Our Government’s plan is to have an independently managed, private investment company, with a board responsible for overall strategic and investment guidelines, and independent management that would make investment decisions.
Thompson supports this model, saying the Government needs to act as an enabler, while stepping back and letting professional managers run the ship.
“[The Government has] rightly recognised the problem and it’s good they’re committing some capital, but then they need to make sure that they don’t blow it up.”
He says the fund should only be investing in well managed businesses with a clear strategy for growth, and should have a clear exit pathway.
According to the minister's office, the budget also includes funding of $500,000 to cover any of the Crown’s own costs in the potential establishment of the fund.
“This will include investigating implementation questions and technical matters to give effect to the Crown’s potential investment as a minority shareholder in a Business Growth Fund,” the spokesperson says.
“It is anticipated that participating banks would contribute investment funding alongside the Government, but the banks’ involvement and the detail of what those contributions could be is something that officials are still working through with the banks.”
The Government would not tell Newsroom which banks it is in discussions with, saying it would wait until the banks confirm their involvement and level of investment in the fund.
