Thursday, October 14, 2004

A use for the Cullen fund

One of the longstanding problems with the New Zealand economy has been a shortage of capital. Because we have no "old money" here - no aristocratic families with vast wealth accumulated from centuries of squeezing every last groat out of the peasantry - we are forced to look offshore when we need to borrow for capital expenditure or infrastructure development - or when we need to find a purchaser for any sizable business. Which is why we persistantly run large trade deficits: money borrowed from overseas results in interest being paid overseas, while the foreign owners of our large businesses naturally want to take their profits back home with them.

The Cullen Fund has some capacity to fix this, simply by virtue of being a large pot of money controlled by New Zealanders. While we can't invest very much of it in New Zealand (it is simply too big for our sharemarket), the income from the profits it is supposed to make will be returned to us, helping to offset the flow of foreign investment.

But there's also another problem, which the Cullen Fund can help with: venture capital. We see the story in the news all the time: a kiwi entrepreneur comes up with a brilliant idea, but is unable to fund it properly. Either they lack the capital to turn it into a successful business, or having turned it into a business, they find themselves unable to expand it to meet market demand. In both cases, the result is usually the same: they sell out to foreign investors (assuming the IRD doesn't bankrupt them first).

This is a particularly New Zealand problem. In the US, where they have old money (though slightly newer, and made from slaves and corruption rather than peasants), they have venture capital companies, which provide funds and investment in these sort of situations. The entrepreneur gets the money they need to make a go of it, and the venture capital company gets equity, which (they hope) will eventually pay off. While the venture capital firms do their best to "pick winners", they are effectively gambling: some (most?) of the companies they fund will fail or only be marginally profitable, but enough are successful for it to be profitable, and there's always the hope of getting in on the ground floor of the new Microsoft.

There isn't much in the way of venture capital in New Zealand (due to not having enough capital in the first place), which is where the Cullen Fund comes in. Part of it could easily be spun off into a wholly-owned venture capital firm with the purpose of making a return for the fund by helping to establish New Zealand companies. This would not only provide something not currently provided by the market, but it would also help keep New Zealand companies in New Zealand, and in New Zealand hands, thus helping to fulfil the government's economic development goals.

Obviously a business case would have to be made, but if the key problem is that there's not enough money to fund startups, rather than there not being enough decent startups to fund, then it would seem to be a worthwhile venture.