On Wednesday 19 July the New Zealand Government made a bold move in departing from a very successful policy that over the last 10 years has attracted over $12 billion to New Zealand. We take a look at the change in direction and summarise our thoughts here, but it is fair to say that we are entering new territory with such a focused investment product and with that, it is very difficult to predict the end outcome.
The question to be answered when considering the new policy is whether a sound investment decision has been made, or whether what we have is, in essence, a big gamble that may not pay off.
The rationale for change – was the existing policy broken?
It is easy to cite the big numbers that have flowed into New Zealand under the two investor policies to justify an argument not to change. After all, with billions of dollars coming into the country, surely that would support a position that what we had was working? Minister Nash cited the departure position largely on the basis that 50% of the funds flowing in under the policies entered New Zealand bonds, and was therefore deemed to be of less benefit to the country. Conversely, there is a desire to harness the funds coming in to stimulate direct company growth and leverage the skills and international networks of the applicants for the benefit of those businesses. In essence, we’d be getting more bang for our buck in setting a policy that reflects the true value and privilege of being able to invest and reside in our country. From an ideological perspective, the message here is that we can no longer be ‘bought’ for bonds. On the face of it, this is a sound intent and, if it can be achieved, would be great for encouraging internationally connected entrepreneurs and investors to contribute (both financially and ideally, intellectually) to New Zealand businesses.
The flaw with this ‘limited value’ justification is, ironically in an investment sense, a failure to undertake sufficient due diligence on the existing programme outside the limited window the Government can view (i.e. their bond rationale). This is in terms of (i) what the initial immigration investment is based on, and (ii) the limited line of sight on that visa-based investment activity in an investment timeframe sense (only three years for Investor Plus and four years for Investor 2). No survey was undertaken (as in the past) to establish what investments outside the programme are taking place, either during the term of the visa or, crucially, after that term to determine the extent of diversification and increased fund flow/value being extracted by New Zealand from the investors under the old settings in the process to create this new visa.
As the largest current market share holder of Investor Plus applicants, we have assisted our high net worth and ultra-high net worth clients in transacting far more value both during the investment term and post that term than the Government can see. In addition, based on our experience with a significant number of our investor clients, the money stays here, diversifies and grows over time. The failure to appreciate this reality undermines the rationale to depart and puts at risk some of the very outcomes the Government is looking to secure with the change, being greater value-add to New Zealand.
The previous visa programme secured initial investment commitment that suited everyone, from the most conservative to the most active. However, the inherent will of many of the investors led them to move into far more valuable investments over an extended timeframe that suited their individual timing preferences and risk appetite. It makes sense that an astute investor might wish to take an initial timeframe (in our experience some or all of the three or four year investment timeframe) to fully understand the financial, legal and commercial landscape in New Zealand before diving into higher risk investment opportunities. The key value of the previous programme was securing the commitment and over time extracting greater value, rather than rushing them and putting them off before they even start an investment commitment, which is a potential outcome of the new settings.
Without surveying your investors, how can you assess the true value of what is being received? You can’t. In addition, this change process started around 18 months ago – how difficult would it have been to start with a survey before getting down to business? The answer is, not difficult. INZ ran a similar survey a few years ago. We were contacted as well as other larger stakeholders. We had no shortage of Investor Migrant applicants happy to share their thoughts and their positions, as did all the main trading banks at the time on the value and types of investments being made out of sight. We recall the data that flowed out of that research was very insightful for the tweaks in the policy that followed. Unfortunately, the value of such insight has either not been appreciated or ignored by the Ministers with a set agenda in mind. Making the decision to depart from the programme without undertaking sufficient due diligence, leads to a negative conclusion that assumption-based decision-making has crept in and taken the place of facts. That’s a nervous position to be in and some would argue quite reckless when we are talking about billions of dollars at stake.
Many in the industry can cite examples of investors advancing more funds (some in excess of $100 million) during the visa term into the active investments the Government is seeking, and increasingly so beyond the limited timeframe of the visa term as those investors become more knowledgeable and comfortable with the New Zealand market over time.
Many industry commentators state that rather than tweaking and introducing greater regulatory incentives to lead to the net positive result the Government is pursuing, a new policy that demands more active and riskier investments in an accelerated timeframe will have the opposite effect as we won’t get the number of starters required to achieve that outcome. This is a multi-billion-dollar question: will we be better off in the long run?
That said, rather than lament what could have been or dwell on being overly critical, we have a new policy and a decision has been made to try to extract greater value at a faster rate. Let’s unpack that and see where that takes us, beyond the distraction of what we once had.
The new policy
New Active Investor Plus (AIP) visa applications can be made from 19 September 2022. Here are the main takeaways:
- ‘Investment recognition’ of $15 million, over a four-year term, with the actual investment amount varying between $5 million – $15 million, depending on the composition of the investments. Certain more active/risky investments are recognised at two and three times their actual dollar value, to encourage these investments. The exact investment amount is dictated by the investor’s combination of investment using the following weightings:
- NZX listed (NZ domiciled) equities at 1x (to a maximum of 50% – $7.5 million);
- Philanthropy at 1x – same criteria as the existing policy (to a maximum of 50% – $7.5 million);
- Managed Funds (venture capital and private equity) at 2x; and
- Direct investments into NZ companies at 3x (must be approved by New Zealand Trade & Enterprise (NZTE)).
- Physical presence requirement of 117 days over the four-year investment term.
- English language requirement of IELTS 5.0 (outside being able to demonstrate an acceptable English-speaking background).
Investments in bonds, commercial property and residential property development (for example) are no longer acceptable.
To illustrate the weighting position, here are two examples of compliant applications:
- Direct investment of $5 million in a company acceptable to NZTE (weighting of $5million x 3 = $15 million ‘recognition’, but actual investment amount is only $5 million).
- NZX investment of $5 million, philanthropy ‘investment’ of $5 million and venture capital commitment of $2.5 million (weighting of $5 million x 1 + $5 million x 1 + $2.5 million x 2 = $15 million ‘recognition’, but actual investment amount is only $12.5 million).
The addition of a reasonably difficult English language requirement will also create eligibility issues for a number of countries, particularly China who have in the past supplied a large number of applicants under the old programme.
A major positive shift is a move from a combined attractor and regulator to a split approach. NZTE is now the ‘gatekeeping attractor’ to the policy, and Immigration New Zealand (INZ) is the visa processing regulator. While INZ performed the attraction piece very well, it certainly had its limitations and our view is that moving the attraction part over to NZTE is where that belongs. As such, we see that as highly beneficial and a significant improvement considering the key strategists and relationship managers at INZ have moved over to NZTE too. That will maintain the institutional knowledge (value) created and held by those key strategists and in-market experts, but at the same time invigorate them with a specialist investment attractor that will add value to that sound foundation. Smart.
In addition, having clearer criteria for acceptable investments will give greater certainty and far more efficiency to a process that had become very clunky under the old policy. The intention here is to make the policy streamlined, simple and effective without over regulation and complexity.
Over time the market will learn to understand the new investment framework, and the market will move towards that by creating new products fit for purpose that will cater for a range of risk appetites in the AIP investment classes. In essence, NZTE is the front of the spear and the private sector will fall in line with that to create diverse products that hopefully will cater for a large portion of the international investor market to offset the initial lack of interest by more conservative investors.
The only downside here is that there will be, in our view, lack of product in certain industries that will take time to ‘fill’ and NZTE will have their hands full with all sorts of companies chasing the magic sign off to get access to this foreign capital. We therefore believe the policy will take a fair while to get going. This is even after the first applicants start applying – and that will also be a trickle to start with (based on the history of introducing new policies, as it takes time for the private sector to understand and market them effectively).
Is it really that bad?
We like the net reduced investment amount for direct investments of $5 million (as compared to $10 million under the previous Investor Plus) as that creates a policy value alignment and therefore the product is marketable against the Australian product that is our main international competitor. This is in addition to a physical presence requirement lower than the Australian equivalent, which is another superior attractor in the marketing toolbox.
In addition, it’s easy to lose focus on the value of retaining the NZX listed equities position as everyone seems to be focusing on the higher risk categories. Take for example an investor who invests $7.5 million in NZX listed equities and then commits $3.75 million to a mix of Government approved and supported private equity funds; is that too difficult? We don’t think so, for many of the highly sophisticated investors we have acted for and currently act for under the old programme.
In this sense, we believe the AIP is a marketable product based on New Zealand’s inherent pull factors, making us a preferred destination over our competitors for many high-net-worth individuals weighing up their international investment-based visa options before they commit.
Note for completeness: our focus here is a comparison to Investor Plus as that is what the AIP is replacing. The closure of the Investor 2 will not be liked by many in the industry, but it is harder to argue true value to New Zealand here at the lower investment amount of $2.5 million that the policy allows if $1.5 million is invested in ‘growth’ assets (commonly NZX equities at $1.5 million and bonds at $1.0 million gets the nod).
It is important to note that there are some very valuable Investor 2 applicants living here and in the mix under the old settings, so the closure leaves a gap that the unworkable (last resort option) Entrepreneur Work Visa cannot fill. We see an opportunity to add further visa products that are complementary to the new direction that has been set to fill that gap and secure value to New Zealand outside the large investment commit required for the new AIP. Potential applicants that now cannot qualify under the new AIP category should keep an eye out for future updates on new policies in this space over the next 1-2 years.
Where does this take us?
What has been undertaken is a big gamble. While there is an element of ideology-driven intent, in the round we think we at least have something to work with. The numbers coming through the system will drop off a cliff and may never recover to the volume that we witnessed under the previous programme, but we may be able to achieve material benefit here as the policy is amended and improved over time. It’s also clear that the new approach is quality over quantity and if that can be achieved the programme will be successful.
We believe the lack of sufficient due diligence on the existing programme was a mistake and ultimately could lead to an initial hard landing. However, there is a built in 12-month review of the AIP that will allow for an opportunity to unpack what is and what is not working, to gradually tweak and focus in on the sweet spot for this product over time. In addition, let’s not forget the record number of highly sophisticated investors now pouring into New Zealand under the old programme. We have that fallback foundation of a huge amount of money (c. $5 billion) being committed to our economy over the next three/four years, as we look to improve the new AIP in parallel to extracting greater returns for NZ Inc.
It’s now up to the private sector to avoid folding the hand dealt and instead up the stakes and commit to the AIP as the cards are dealt over the next few months. If we are smart and innovative, we can eventually make this work, and who knows, the big gamble could eventually lead to an upside. It’s just too difficult at this time to predict how the cards will fall in the long term, until they start to be revealed in September when we will discover how the offshore market reacts to this new visa product. It’s a high-stakes gamble, time will tell if we have the cards to collect the pot or when called, we reveal a bluff.