Simplicity and The Icehouse - What does it mean?
If you are a Simplicity investor you will have received an email this week where they announced: “We’re now investing in high growth Kiwi companies”.
I read the subject line and my initial gut reaction was “uh-oh, what are they mucking around with”. My second was “oh god no, I hope the band Icehouse is not reforming”.
So, I did a bit of reading to get an understanding of what they are trying to achieve here because it’s not enough to just contribute to my KiwiSaver, it is important that I understand and feel comfortable with the choices they are making on my behalf.
I’m in the Simplicity KiwiSaver Growth fund and the changes are for this fund and also for the Investment Growth fund that they have outside of KiwiSaver i.e. the one you can access. It does not relate to their other funds.
We know that New Zealand is full of creative people with entrepreneurial ideas and we rave about our “number 8 wire” way of cobbling things together to get a business going. That’s all well and good, but just how much better could we be if these people didn’t have to forever be doing things on a shoestring, but instead could apply for funding and support to develop these ideas to an international standard - without having to take their idea overseas to make it happen.
The Icehouse was founded in 2001 with support from the government and also business partners to specifically support startup and SME’s (small and medium-sized enterprises) to help create businesses that stay in New Zealand, yet work globally and help grow the New Zealand economy. To read a little more about The Icehouse and Simplicity you can go here: The Launch of Icehouse Ventures
Simplicity has teamed up with K1W1 (which is Sir Stephen Tindall’s investment company), FNZC (which is investment bank and stockbroker First New Zealand Capital) to create and invest in Icehouse Ventures, an offshoot and an investment arm of The Icehouse.
A little confusing yes? But don’t worry about getting bogged down the company structure.
The Icehouse will retain majority control of Icehouse Ventures, Simplicity is buying an 11% stake. Its purpose is to provide funding from Simplicity KiwiSaver and Investment members to support emerging and high growth entrepreneurial New Zealand companies. So, they will be using MY KiwiSaver funds to invest in these companies who are in a real growth phase and have progressed from the ‘start-up’ phase to the next level.
Initially, Simplicity, K1W1 and FNZC are stumping up with $3 million to get Icehouse Ventures up and running and then from what I read Simplicity is expecting to invest up to $100 million over the next 5 years into high growth NZ start-ups who are looking to expand. The other partners in this venture will also be investing as the years go on.
There is more complexity as to the ownership structure that you can read about here:
Icehouse Ventures a huge leap forward for New Zealand entrepreneurs
But I’m more interested in the bigger picture of why they are doing this.
My first concern was that this was going to be investing in risky start-ups because I keep seeing that word, but it’s not. It's going to be supporting those who have made it past the very treacherous start-up phase and now actually have a business behind them but they need capital (money) to help it grow. Simplicity wants to be involved in lending them that capital and they expect Icehouse Ventures to be involved in over 50% of New Zealand’s startup companies. That’s a high percentage, but when you think about the size of NZ, probably not surprising.
Next, as a person who prefers an index fund over an individual company I was worried about overexposure to this riskier sector, but from what I can work out The Icehouse works with over 50% of these new high growth companies and Icehouse Ventures won’t be cherry picking from this diverse group, they will be investing in everyone.
Plus, the Simplicity literature says that the total value of investments in this fund will never be “more than 5% of the total size of our growth funds”. The growth fund I’m in (see below) is made up of a broad mix of investments and being involved with Icehouse Ventures will form part of the NZ Share allocation within this fund.
I love New Zealand and I want to see our companies grow, that’s why I buy the NZ Top 50 (FNZ) Index Fund after all; I want to support New Zealand companies. But this move by Simplicity is capturing those that don’t make it onto the NZX, but are in high growth phases and are in need of coaching and capital to help that growth. Often they look overseas to make that happen. In turn, this will hopefully increase the success they are having which will create jobs for Kiwi’s and keep contributing strongly to our economy. And because I’m an investor, I get to share in some of that growth and profit. I want to be a part of that but equally important to me is seeing those with the intellectual nous and passion to create cool things, get the backing and support to do it from home.
But don’t get me wrong, there is of course risk involved. They are after all putting my money into high growth startups (there’s that word again) and without much of a track record to prove their worth, there are risks involved. I’m sure a quick google search could show me a graveyard of up and coming companies who never made it past their first office Christmas party and into year two. But I read a quote a while back, I think by JL Collins that said something along the lines of “a company can fail and their share price can sink to $0. But there is no upside to their success, they can grow by 50%, by 200%, by 1000% or more”. So, I’m willing to shoulder a bit of risk to help an entrepreneur find that upside and take me along for the ride with them.
A quote at the bottom of the Simplicity press release (15 April) says of The Icehouse:
“Since 2001 it’s customers have created 27,285 new jobs and generated $15.5 billion of new revenue of which $3.7 billion is from international markets”.
Too often we hear of a great New Zealand idea taken offshore so they can reach the next level, too often we hear that we are a country of SME’s, how cool is it to think that those up and coming stars of business can get the support to bring their HUGE ideas to fruition HERE to perhaps create the next mega business right here in Aotearoa. Very cool indeed.
As an investor I don’t have it in me to focus on the minutiae of the decisions, both strategic and financial, that my KiwiSaver provider is making on my behalf, I just have to have a level of trust in the team at Simplicity to be making the right moves that will ensure me a happy retirement. So far so good. So, I’m going to leave it up to them (and let’s face it, they never asked my opinion anyway) and instead when I hear a New Zealand company mentioned I’m going to think to myself “Oooo, I own a little slice of them”! And for me, as an investor, I’m going to also get a buzz when I hear about a brand new company, poised on the brink of creating awesome things, that I have helped support their growth and their investment in the New Zealand economy in some small financial way.
So, BIG UPS to Simplicity, it’s going to be interesting to watch what happens.