NZ Private Equity – NZSF Perspective Charles Hyde Senior Investment Strategist New Zealand Capital Markets Symposium, 10 August 2017

NZSF Investment Approach Over half of all NZSF capital is invested passively Active investments in NZ private equity account for ~10% of Fund NAV Direct investments Kaingaroa, Kiwibank, dairy farms, Hobsonville Indirect investments NZ expansion capital, real estate We distinguish between the investment idea (‘opportunity’) from its implementation (‘access point’) If we can only access a median manager to implement a great investment idea, it may still be worth doing

NZSF Investment Approach An opportunity is attractive if It has an attractive risk/return profile – exceeds its risk-adj. COE It is consistent with our TOM Leverages endowments; scalable; aligns with RI principles; retain control Preference is to invest directly if possible We will hire external managers if we lack capability, capacity, or proximity to the opportunity Or direct access is not cost effective E.g., requires building an internal team that is not scalable We can identify good, flexible managers at reasonable cost

NZ Private Equity Market There are many small private companies in NZ But most are very small Partly reflects the small size of the NZ listed market Investing at the smaller end has no impact on a $35b fund Investing in a small company requires at least as much effort as a large company

NZ Private Equity Market We segment the NZ private equity market as follows Angel/VC is subscale and risky; returns not convincing Buyout offers scale; but is well served in terms of capital Expansion capital segment is where we see greatest opportunity

Expansion Capital NZ expansion capital space is characterised by EV of $15-50m Revenue of $10-50m; CAGR > 20% Positive EBITDA (or close) Low or no debt – CF too risky Attractive firms in this space have Clear and credible high growth plan Proprietary/defendable IP Operating below potential, but not in distress Resolved any start-up issues; sound governance Genuine investment opportunities over 3-7 year timeframe

Returns Investment returns have been strong Average net return is well above any reasonable cost of equity NZX Small Cap Index returned only 9% over the same period We’ve been pleased with our portfolio performance to date

Current state of market The listed market looks expensive But recent PE transaction prices are close to average And below the EV/EBITDA of the listed market

NZSF View NZ expansion capital is attractive due to a structural deficit of equity capital funding Strong demand for capital Aging demographic means SMEs looking for exit options Weak supply of capital SMEs can’t access debt funding; too small to list Few local sources of PE funding Local PE managers; LPs; Trade buyers Limited presence of offshore PE managers Little access to retail investor capital Informational asymmetries also create opportunities due to the small, opaque, closely-held nature of the space

NZSF View NZ expansion capital leverages our endowments Long term horizon Tolerance for illiquidity – certainty of liquidity profile Sovereign status Expect returns in high teens, assume volatility ~30% Demand liquidity and NZ concentration premiums Potential access points Public market: very few listed SMEs in NZ Direct investment: requires large, experienced team; costly to build External managers: local managers exist with good track records

NZSF Commitments Over the past 10 years we have committed $480m to NZ expansion capital managers Pre-2016 vintages in harvest mode We will invest up to $260m in NZ SMEs over next 5-10 yrs Direct Capital V - $90m Pioneer Capital III - $120m Movac IV - $50m NZSF also has an internal NZ direct investment team Larger transactions: Kaingaroa, Kiwibank, Z Energy, Datacom Leverage endowments: sovereign, long horizon with low liquidity needs Hub focuses on specific sectors; co-investing with Iwi Swim lanes being used for three managers. The pre-2016 vintage funds are Waterman II, Pencarrow IV, Pioneer II, Direct Capital III & IV

Recent Developments Some issues we think about Capital commitments 2016 was a very large year for capital raisings (~$1b) Are our managers competing for the same deals? Discipline on origination critical Now have ‘swim lanes’ in place Competition We are seeing more foreign PE funds targeting NZ Monitoring situation closely Control Our opportunistic approach gives us the flexibility to respond to a changing environment Our 2016 vintage funds give us flexibility