Milford Senior Investment Manager Tom Monti discusses the evolving role of private assets in KiwiSaver portfolios, as the government seeks consultation on proposed regulatory changes to facilitate more KiwiSaver funds investing in private assets.

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Bridge talks Business: 28 January 2025
Episode Transcript

Ryan Bridge
Kia ora, I’m Ryan Bridge. Welcome to Episode 18 of Bridge talks Business with Milford. This week we continue our chat to Tom Monti from Milford. Last week we spoke about investing in Private Assets. Those are the ones that aren’t listed on the stock market. They can be lucrative, rewarding assets to own and they can help grow Kiwi companies who might not have access to the stock exchange. This week we ask, can you invest your KiwiSaver cash into a Private Asset? That’s shortly, right now, your top 5 Business Bits.

1. Share markets recovered last week as it appeared Trump didn’t go full tariff on day 1. Given his unpredictability though, it would be unwise to bank on that remaining the case. Policy uncertainty reigns.
2. Global manufacturing sentiment is up but from very low levels. Surveys of industry released last week showed an improvement but still depressed.
3. New Zealand inflation data remained stable in the fourth quarter at 2.2%, but domestic inflation was softer, including core measures which should give the RBNZ cover to continue their cutting cycle. Markets are expecting another half point cut at their upcoming meeting.
4. DeepSeek rattles tech stocks. The Chinese AI solution DeepSeek appeared to be able to outperform the US solutions for a fraction of the cost. Investors panicked about the prospects for semiconductor demand and the dominance of US companies in this space.
5. This week is a very busy one for investors with the large US tech companies reporting results alongside the US Federal Reserve decision on interest rates.

Alright, it’s time for our sit down and today’s chat is a good one because the government is looking at making changes to allow KiwiSaver funds in New Zealand more freedom to be able to invest in Private Equities, in Private Assets. That’s what we spoke about last week and we did that with Tom Monti who is with Milford’s Private Markets team. Before we get into a chat with Tom, just to note that this segment is informational only and should not be considered financial advice. Tom, welcome back.

Tom Monti
Thank you for having me. Good to see you again.

Ryan Bridge
Now, let’s talk about the opportunities for investors and particularly for KiwiSavers. At the moment, can a KiwiSaver fund invest in Private Assets?

Tom Monti
Yes, there aren’t restrictions per se around KiwiSaver funds investing in Private Assets. Milford has been investing in Private Assets, as we discussed last week, for about 15 years – and over that time period we’ve had two of our KiwiSaver funds have exposure to some of our Private Asset investments, and those investments in aggregate have delivered a really good return to those funds. So, no restrictions but there is a bit of nuance to consider within the guidelines and regulatory framework of KiwiSaver and indeed the founding principles of the scheme.

There are a few things to consider, liquidity being perhaps the most important one. KiwiSaver requires portability which means the investor can access their money for various reasons. That might be for a transfer which needs to be done within 10 business days, first home withdrawal, hardship withdrawal or a retirement drawdown. We discussed Private Assets last week – they’re illiquid assets, so it’s not easy to realise that asset for cash in a quick timeframe. So, a portfolio built too heavily towards Private Assets for KiwiSaver, they can’t realistically give their investors the portability that they require. So, they need to manage that well. And that risk becomes very acute in times of market stress, like the GFC for example, whereby with investors there might be more demand to access their money for whatever reason – to transfer into a lower risk or to withdraw.

And actually the underlying liquidity of those assets gets worse. The unit pricing of listed markets, they move live with the market. So, if you have a GFC for example, if there’s a sell off, shares drop down the price 10%, I’d say.

Private Assets lag because they don’t have a listed market, they’re not trading in and out. They require a fund manager to make an estimation on fair value. So they’ll lag, they’ll naturally lag the public market shares. And what that means is you get a re-proportioning of private versus public assets that a fund manager needs to consider very carefully.

So the next one is pricing, the unit pricing of KiwiSaver. An investor needs to be able to transact, so withdraw or contribute at fair market price. Now, last week we established there is no market price for Private Assets and therefore the fund manager must make an estimate of fair value. And there’s an agreed framework to do that. But the frequency of those revaluations and the timeliness of that revaluation to get into unit pricing, will differ from fund manager to fund manager, and will differ depending on the model that fund manager runs. So, one example of a model is a direct investor into Private Assets, similar to what Milford’s doing. So, we’re watching in live time the Private Assets and how they’re performing and can make adjustments to valuations as and when we need to.

The more common approach for a KiwiSaver fund manager to get an allocation to Private Assets would be to use a third party expert manager that just does Private Assets. But in that case, the KiwiSaver manager is relying on quarterly reporting to see how the assets are performing. And so naturally that’s a lag and that’s backwards looking. So, their pricing might lag the actual market itself.

Ryan Bridge
Why does it matter knowing what something is worth every second of the day kind?

Tom Monti
Because if you want to withdraw your KiwiSaver, you want to know that you’re getting fair market value. Fair market value we can observe in the listed market space because there’s a share price and you can look at that.

Ryan Bridge
Because on the stock market it’s all live, you can see it as transparent.

Tom Monti
But let’s say in the GFC, share prices markets crashed, house prices even crashed. Unlisted property therefore you’d think is probably worth less than it was six months ago. But if you’re not seeing that price movement come through, your unit pricing is arguably over exaggerated. And so the person coming in, any contributions to KiwiSaver are transacting at too high valuation above fair value. Fine if you’re actually withdrawing, because you’re withdrawing at a higher price than probably what’s fair.

Ryan Bridge
Right, okay. So you need the accuracy in order to know what your investment’s worth, but also if you’re buying into something, what it’s worth.

Tom Monti
That’s correct.

Ryan Bridge
Probably more importantly.

Tom Monti
Yeah.

Ryan Bridge
Okay, so these are obviously issues, quite complicated issues for KiwiSaver funds trying to invest in Private Assets. The government is looking at loosening this whole area, right? So, what are some of the safeguards or some training wheels, to try and free this up to make it happen – because we know it’s good for business and we know it’s good for growth, all that sort of stuff – and Kiwis want to do it with their savings. So, what are some of the things that you think the government should be looking at or thinking about? They’ve obviously got a discussion document out about this, right?

Tom Monti
Yeah. KiwiSaver is a long-term pool of capital and that aligns well with investing in Private Assets. So in theory you’d like to see more allocation to Private Assets, but it just needs to be managed well. And we need to keep front of mind investor fairness and confidence in the scheme. So to do that, investors need to know where their money is and that they can access it when they want, and what the valuations of those are and that they can actually receive that money. An example of what’s been discussed at the moment with this government request for submissions, is this concept of a sidecar, meaning accepting that Private Asset can’t be sold in the moment, the asset manager keeps that in a sidecar and then can transfer the liquid assets, which is a solution. The devil’s in the detail as to actually how that works, but it could be a solution and it certainly would make life easier from the manager’s perspective. But are we sure that the investor is very clear that going in, that that proportion of their funds is in private, they know that actually if they want to be able to get their money out, well they can’t because the manager has decided that this is going to be side-carred. Who decides the correct time to then exit that? There’s a lot of subjective questions, and can be managed well, but these all go to confidence, which is super important.

Ryan Bridge
That’s really interesting. And so I guess those issues are to be determined, as in when, how much you get, who decides the sidecar business. But basically, you would get all of your liquid assets, all of your public assets out within 10 working days or whatever it is, and the rest could potentially be put somewhere else until such time as that is possible.

Tom Monti
That’s right.

Ryan Bridge
So if you’re an investor and you’re presented with this option, let’s say this comes to fruition, why would you want to go with a Private Asset? Is it because the returns are potentially much higher?

Tom Monti
Yeah. So, KiwiSaver is by and large long-term. We’ve established that Private Assets don’t trade easily in and out, and therefore you need to be a long-term investor. But to compensate the investor for that, they have the ability to generate above-average returns over the long-term, and they have done so.

There’s also, especially when we think about the New Zealand market, a great sector diversification benefit of being able to invest in Private Assets because the NZX is limited in the sectors it has. So, if you think about this pool of capital and aggregate KiwiSaver, that money is going to be invested and largely inaccessible for 10, 20, 30 years. So, it would make sense to have an allocation to a higher return generating, diversifying slice of your portfolio.

Ryan Bridge
Yeah, right.

Tom Monti
So we’ve been, as I said, investing for 15 years in Private Assets with exposure to KiwiSaver funds, and over that time we’ve always been able to give investors liquidity and at fair prices. So, how we think about it is it’s a small enough percentage of the overall portfolio in private, such that the liquidity can be managed well. And we’re also managing these assets directly. So my team, the investment team sitting on the boards of these assets are monitoring in real time how they’re performing, and we have very good pricing discipline. So, we’re looking once a month whether we need to change the valuation of these assets based on what’s happening in the markets, what’s happening with their competitors in the listed bucket, or anything specific to those companies. And then we’re feeding those changes through to the unit pricing as quickly as we can. So from our perspective, our pricing is very fair and it’s very timely. And so those are the two key considerations that I think we manage very well. Another kind of concern that commentators have around including Private Assets in KiwiSaver is around fees. KiwiSaver fees need to be fair and transparent. One model, which we talked about using the external manager to allocate for Private Assets can create a layering of fees, so fees on fees model. So the external manager, they charge their management fee, then the KiwiSaver manager charges their fee. And so the end investor is getting kind of two sets of fees.

Ryan Bridge
But it is a lot more hands on.

Tom Monti
There’s a lot more hands on for sure. But fees on fees is making more fees for the investor when they could just invest with the external manager for a slightly lower fee. So that needs to be fair. They need to be delivering value for that. But also it needs to be very transparent because if it’s only a 5% or 10% allocation of a big portfolio, it’s really easy for that fee structure on that pool of capital to get distorted and lost in the much bigger portfolio. So, can investors really see if they’re transparent? Are they clear on what they’re paying for?

Ryan Bridge
Right. So these are some of the concerns that have been raised, and concerns that will be addressed, no doubt when the government comes to look at the law changes. Which they’re submitting on at the moment.

Tom Monti
Yeah.

Ryan Bridge
Fascinating stuff. Yeah. A great opportunity for New Zealand, a great opportunity for investors, but especially for New Zealand. I mean, there’s a whole pool of capital there. And who knows what happens with KiwiSaver in the future and contributions might ramp up even more.

Tom Monti
That’s right. KiwiSaver is growing and we’re seeing more KiwiSaver managers being able to allocate more and more money to private just as they get bigger whilst keeping that percentage small enough to manage from a liquidity perspective and seeing those funds ramp up their internal expertise and capabilities so that they manage these investments in-house as they get bigger. So, I’m confident we’ll continue to see more KiwiSaver dollars invested in Private Assets. And that has huge benefits across the economy, right? Because companies that can’t access public market capital or debt markets for various reasons such as early stage ventures, they’re too small or they don’t have the systems and processes in place, or it might just be too much of a cost burden for them to list. They can access private capital and that’s generating innovation for the economy. Slightly more mature businesses that are now established, but also could benefit from capital to grow faster. They can use private capital and that’s growing jobs and wages in the economy.

Infrastructure projects with weird cash flow and risk profiles. So, something that requires a big capital investment upfront, limited to no cash flow in the early years before maturing and starting to produce really nice stable cash flows. Those projects can access private capital and that’s growing the infrastructure and utilities of our country. So, there’s a really good benefit to the investor, we discussed that, but also the country on the whole, if we can keep some more of these KiwiSaver funds onshore.

Ryan Bridge
Brilliant. Tom, thanks so much for running us through it.

Tom Monti
Thank you.

Ryan Bridge
I appreciate your time. That was Tom Monti from Milford’s Private Markets team. We had two episodes with Tom. The first one looking at what are Private Assets and how can you use them in your portfolio. And then today looking at KiwiSaver and how KiwiSaver interacts with them and there are some potential government changes coming in that space. You can watch both episodes on the Milford site, also on all of your streaming sites, wherever you listen to your podcasts or get your video on demand, go and check it out. Bridge talks Business with Milford. See you next week.

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