As we have been reporting recently, the revamped Active Investor Plus Residence Visa has been a hit. Well over 200 applications have been made since the scheme opened on 1 April, representing well over NZ$1 billion in potential capital. Some of that has already landed in New Zealand businesses, and there will be more to come.
Going for Growth
What has really surprised everyone who watches these things, is that the vast majority of visa candidates have opted for the Growth Category, which requires only $5 million to be invested for 3 years. You and your family get a Resident Visa, and so long as you maintain the investment for that period, and spend just 21 days over 3 years on NZ soil (a week a year), you are home and free.
Why is this surprising? It is because the Growth Category is higher risk than the $10 million Balanced Category. People opting for Balanced can put their money in fairly safe places including equities traded on the share market, commercial property and so on. By contrast, Growth investors must either sink their money directly into companies which need capital for their projects, or sign up with an authorised Managed Fund which will invest in these startups or expanding businesses on their behalf. These ventures may fail – in fact, many of them do.
Now, some experienced international investors will be fine with that level of risk, because they have plenty of other assets and they would be prepared to take a hit in return for the chance to have NZ Residence. What I have been seeing and hearing, however, is that some Growth applicants actually don’t have a great deal to spare. They are pulling life savings, inheritances, and the value of their properties, together in order to get over the $5 million hurdle (equivalent to about US$3 million right now). Only time will tell if this will all end in tears for these people. If they have entrusted their money to a Managed Fund, there is a better chance to spread risk across multiple ventures.
A Gap in the Narrative?
In a few conversations I have had recently, I have realised that there may still be something missing from people’s understanding of how these Growth investments will work. Again, the final destination of the investments in this category are in companies who have an ambitious plan to come to market, either for the first time or as a step up to bigger and better things. The investment is not like shares bought on the Stock Exchange. You can’t just pull it out at the end of your 3 years when you feel like it.
This is because the businesses are using your money to drive their plans to fruition. Imagine a company currently worth $5 million who has called upon $2 million of your funds to power up their R&D toward the launch of an innovative product or service, plus sums from other migrant investors. They may not be able to simply give it all back, not for a long time. What this means is that Growth investors, in particular, may find that their $5 million – or even some of it – will be locked up for much longer than the 3 years they had in mind at the outset.
Now, from my discussions with reputable fund managers, it is clear that they will be telling their clients about this when it comes to signing a contract with them. I hope that this is true across the board; but, again, only time will tell how this plays out.
Get Some Balance
New Zealand really can’t afford to get this scheme wrong. It has been advertised as a success story as part of the agenda to kick-start the sluggish economy out of recession. By the numbers, it is all good news. But if investors get burnt and lose money that they could not afford to throw away, if they realise too late that they are locked in for 5 years, or 10 years, and not just 3 years, then we are looking at reputational damage.
I am saying this because I want AIP to succeed too. If someone reads this and does a double-take about the programme before rushing in, then that is a good thing. The more expensive, but safer, option is to settle down for a 5-year investment of $10 million, and it is more likely that they will get their money back at the end of the day if that is what they want.
What would be even better is if they then talk to us about planning how to get underway, and who else they should be talking to in order to invest in a way that is not too far out of their comfort zone.