As the KiwiSaver scheme is outgrowing the domestic New Zealand market, Mercer sees a role for private markets to diversify these portfolios, Florence Chong writes
New Zealanders’ contributions to their retirement savings, known as KiwiSaver, are set to rise in two tranches –by half a per cent each time starting next April taking personal contributions to 4 per cent. Coupled with matching employer contributions, this will lift the total to 8 per cent.
With the country’s retirement savings now standing at NZ$125 billion and expected to exceed NZ$300 billion over the next 10 to 12 years, fund managers face a growing challenge: how to keep delivering returns as the pool of capital outpaces local investment opportunities.
“New Zealand’s KiwiSaver scheme is already as big as the market capitalisation of the New Zealand stock market,” says Padraig Brown, Chief Investment Officer, Mercer New Zealand. “As it grows, it will likely become many times larger than the New Zealand listed market, which means KiwiSaver managers have no choice but to look offshore or beyond public markets to private markets.”
New Zealand’s KiwiSaver scheme is already as big as the market capitalisation of the New Zealand stock market. As it grows, it will likely become many times larger than the New Zealand listed market, which means KiwiSaver managers have no choice but to look offshore or beyond public markets to private markets
Unlike Australian super funds, which have diversified aggressively, KiwiSaver funds—managed mainly by the four large Australian banks along with domestic firms such as Fisher Funds, and Milford Asset Management—have largely stuck to a vanilla formula: 60 per cent equities and 40 per cent fixed income. In growth funds, the allocation shifts to 80 per cent equities and 20 per cent fixed income.
Until recently, that approach served investors well. But with equity valuations appearing stretched, some managers are beginning to broaden their horizons.
“As these KiwiSaver funds grow larger, they are becoming more sophisticated and are starting to explore private market investments,” Brown says. “They’ve also looked across the Tasman at Australian super funds and seen that blending private with public markets delivers less volatility and, over the long term, stronger performance.”
Still, he acknowledges that embracing private markets will require “a step change in thinking and an investment in specialist resources.”
Mercer Models Kiwisaver Products on Australian Super Funds
Mercer, which is among the leading KiwiSaver managers, is ahead of the pack. Its KiwiSaver Funds and other clients, including community trusts, already have about 8 per cent allocated to private markets, spanning property, infrastructure, and private credit.
“It’s something we’re actively growing. We have very successful private market investments in our Australian super portfolios, and we can co-invest with those funds through our New Zealand portfolios— often into the same underlying property, infrastructure, and private credit vehicles,” Brown explains.
Starting from this year, Mercer super fund and the funds that it manages have begun to allocate to private credit. Brown told [i3] Insights: “We’ve allocated 2 per cent of our Balanced and Growth KiwiSaver funds to private credit. Standalone clients, including a large community trust, are also investing into the private credit fund.”
Besides Kiwisaver, New Zealand has another large pool of institutional capital: community trusts and foundations. These funds manage endowments gifted to various regions, often from the sale of large public assets like regional banks or power companies. The largest, Foundation North, had more than NZ$1.76 billion under management as of March 31, 2024.
Brown says: “We invested Mercer’s Global Private Debt Fund managed out of Australia. Established more than 10 years ago, the fund invests in a pool of private debt investments, including funds secondaries and co-investments. We like it because it is highly diversified and invested into a broad range of private debt including corporate structured and asset-backed credit.
“Private credit tends to be more of a defensive asset class. It’s been a lower risk, lower return than real estate or private infrastructure, which has been more of a growth asset class,” he says.
Private Markets Benefit from Shifting Sentiments
While the private credit is the latest flavour of the month, the sentiment among some fund managers towards other private market assets is also changing.
Several factors are converging to drive this gradual, but inevitable, shift.
New Zealand’s listed market is simply not keeping pace. Brown notes that the number of listings on the NZX has remained subdued over the past five years, with many quality companies choosing to stay private or opting for private equity ownership.
“Managers of KiwiSaver funds and other institutional capital have increasingly needed to look globally or to private market opportunities, as New Zealand’s listed markets have stagnated.”
Brown, who led real estate at Mercer Australia for more than a decade before becoming Mercer New Zealand’s CIO in 2022, has had a front-row seat to how Australian super funds build portfolios.
You’ve seen sophisticated institutional investors in Australia and elsewhere deriving strong risk-adjusted returns from unlisted asset classes. The Australian experience has shown that many unlisted assets can have strong returns and less volatility through the cycle
“You’ve seen sophisticated institutional investors in Australia and elsewhere deriving strong risk-adjusted returns from unlisted asset classes. The Australian experience has shown that many unlisted assets can have strong returns and less volatility through the cycle,” he says.
Among private market opportunities, private credit stands out. Brown says many New Zealand companies are now tapping this market, partly because major banks are pulling back from certain types of lending. Property development, for instance, increasingly relies on loans from non-bank lenders.
In other cases, private equity-backed borrowers prefer non-bank credit for the ability to deal with a single lender, rather than a syndication, and secure greater certainty.
“That demand is driving the growth of private credit,” Brown says.
Private credit is already well-established in the United States and Europe, and is maturing in Australia, where it is estimated to be an almost $190 billion market. While there are no official statistics for New Zealand, some forecasts suggest it could grow from a small base today to between NZ$3 billion and NZ$10 billion over the next five years.
“There were private credit deals done here during the global financial crisis and again around COVID. Many were led by Australian private credit firms with a presence or relationships in New Zealand. These lenders have worked closely with banks and have also lent directly to local borrowers – so there’s already meaningful New Zealand origination.”
Government Supportive of PPP and Private Market Infrastructure Deals
Meanwhile, the current National-led government under Chris Luxon is actively courting private capital for infrastructure, which could open more doors.
“The government is very supportive of public-private partnerships and looking at private market solutions for New Zealand’s infrastructure deficit,” Brown says. “There’s a lot of discussion within government and with industry about making it easier for KiwiSaver funds to invest in private markets and in less liquid assets.”
While there are no regulatory barriers to KiwiSaver funds participating in PPPs, Brown notes liquidity constraints remain an issue, given members can switch funds at short notice or withdraw savings to buy their first home.
“I’ve been back in New Zealand for seven years, looking at opportunities to invest in private markets on behalf of local capital. Until recently, there hasn’t been much appetite. But in the last couple of years, that’s changed quite significantly.”
Looking ahead, Brown expects KiwiSaver will increasingly resemble Australia’s super system.
“As KiwiSaver continues to grow and mature over the next decade, we’ll likely follow a similar path to Australia, where private market investment is an integral part of a diversified portfolio.”
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.