TOM PULLAR-STRECKER Last updated 05:00 28/03/2012
Article from stuff.co.nz
OPINION: Trial by media is not a real prosecution, no-one gets to defend themselves and the verdict can't be enforced. But judgment is swift.
The Charges: The New Zealand Venture Investment Fund stands accused in the court of public opinion of:
Ignoring its mandate in partnering with United States billionaire Peter Thiel to set up a $40 million venture capital fund.
Wasting taxpayer dollars by co-funding Thiel's multimillion-dollar investment in Xero.
Misrepresenting the deal in a media statement.
Doing a deal that was generally a bit rubbish.
The Facts: The Crown-owned New Zealand Venture Investment Fund (NZVIF) is contributing $20m to a venture capital fund, Valar Ventures LP, that will be run by Peter Thiel's company Valar Ventures.
Other New Zealand private investors are chipping in $5m.
Thiel's $15m commitment comprises about $6m of investments he has made in software firms Xero and BookTrack and in subsea cable company Pacific Fibre, and about $9m of uninvested cash.
The fund's private investors can exercise an option to buy out NZVIF's original investment in five years, paying a low interest rate that is equivalent to the five-year government bond rate. If the buy-out clause isn't exercised, for example because the fund's investments tank, NZVIF retains its half share of the fund.
Case For The Prosecution:NZVIF was set up in 2002 to help develop New Zealand's venture capital industry and provide easier access to capital for high-growth firms, such as young technology companies, not to develop overseas fund managers and help rich foreign investors buy stakes in Kiwi firms.
The buy-out clause means private investors, such as billionaire Thiel, can effectively get a subsidy from New Zealand taxpayers for doing that, if their investments do well.
Prosecution witness Jenny Morel, managing director of Kiwi venture capital company No8 Ventures, said NZVIF was set up "to make sure we had experienced operators here who could grow our markets". "You would have to ask how does [the Thiel deal] help the development of a New Zealand venture capital industry and are we for some reason subsidising a foreign investor?"
Moreover, when NZVIF was first set up, it only provided $1 for every $2 invested by venture capitalists. It has a separate Seed Co-Investment Fund that does provide dollar-for-dollar funding, but that has only been for funds investing in very early stage companies.
It has quietly changed the rules and is investing "dollar-for dollar" alongside Thiel in at least one quite mature firm.
NZVIF has retrospectively provided matching funding for Thiel's multimillion-dollar investment in Xero, which has been listed on the NZX for nearly five years, on terms that are favourable to Thiel, when there are no possible advantages for the taxpayer.
If Xero's shares shoot up, they will probably only get a low interest rate as a return, but if the shares go down, taxpayers may well carry their full share of that loss.
He had already made the investments in Xero, Pacific Fibre and BookTrack, so there was no reason for the Crown to offer an incentive for those investments to occur.
NZVIF initially disguised that some of Thiel's contribution to the fund was in form of existing investments by saying NZVIF was contributing $20m, $5m would come from other New Zealand investors "and the balance from Thiel".
Case For The Defence: There is a shortage of venture capital for young technology firms and while NZVIF would help New Zealand venture capitalists if they could get their act together, unlike Valar, they are having difficulty raising the matching co-investment they need to get new funds off the ground.
This deal keeps things moving.
Valar will bring more than just investment capital to Kiwi firms. Thiel was a founder of PayPal and an early backer of Facebook and has networks in the United States.
Defence witness Economic Development Minister Steven Joyce, says investors like Thiel bring "considerable expertise building companies from start-ups to world-leading companies". NZVIF has received more congratulatory messages over the deal with Thiel than over any other.
NZVIF's new rules allow it to invest dollar-for-dollar in venture capital funds where they "intend to invest entirely in seed and start-up investment opportunities".
When Thiel originally invested in Xero, it had made limited progress and had yet to expand overseas, so the investment was an "early stage one", and it's fair to characterise it as one that qualifies, retrospectively, for dollar-for-dollar co-funding.
It is not reasonable to characterise the NZVIF transaction as a selling-down by Thiel of his stakes in Xero, Pacific Fibre and BookTrack to taxpayers, as Thiel has shown his confidence in Xero by investing in its last share placement. Valar is already scouting for additional investments in New Zealand and is likely to find lots of open doors.
While NZVIF's original statement may have glossed over important aspects of the deal and the rules changes that allowed it to happen, there has has been no attempt to hide the details of the transaction.
NZVIF has been unable to disclose the exact value of Valar Ventures' existing investments and the proportion of uninvested cash, for genuine reasons of commercial confidentially.
The Verdict:Guilty as charged on the first three counts. Not proven on the fourth and most serious charge of doing a deal that was generally a bit rubbish.
NZVIF is sentenced to reflect on its original 2002 mandate, write-out the definition of seed capital 10 times, and to expect greater scrutiny of all public announcements.
A restraining order is placed on anyone using the terms "US technology billionaire", "generosity" and "investment", and they are reminded that when such folk engage in philanthropy they generally do so by giving to charities.
- © Fairfax NZ News
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