New Zealand's $60b Super Fund will be just one of the beneficiaries of a new exemption for Kiwi investors wishing to put money into the United States – a change the Government is hoping to make permanent.
New Zealanders will now jump through fewer hoops to invest in American businesses and real estate, after the Government secured a temporary exemption to the country’s foreign investment screening rules.
The US decision represents another step towards more tightly binding together Five Eyes nations, with New Zealand’s intelligence-sharing relationship and defence cooperation cited as key factors for the decision.
However, the clock is now ticking for the Government to show it can meet the criteria necessary for New Zealand to secure a permanent exception by February next year.
The Committee on Foreign Investment in the United States, an interagency organisation which scrutinises the national security implications of investments into the country, announced earlier this month that New Zealand had been added to its list of “excepted foreign states”.
In 2020, the committee’s remit expanded beyond ‘control’ transactions, where a foreign investor would take controlling interest in a US business, to cover investments in more sensitive companies, as well as the purchase of real estate near sensitive US government facilities.
While Australia, Canada and the United Kingdom secured exceptions from those expanded controls at the time, as well as a new requirement for mandatory filing, New Zealand did not, placing an extra burden on Kiwi investors.
Direct New Zealand investment into the US had already increased by over 100 percent between 2019 and 2021, showing an appetite for lower entry barriers into the country.
Intelligence, defence ties key to carve-out
In a fact sheet outlining the rationale for the change of heart, the US Treasury Department cited New Zealand’s “intelligence-sharing relationship with the United States and its collective defense arrangement and cooperation with the United States” as among the factors which earned it an exemption.
It said New Zealand now had until February 13 next year to show it “has established and is effectively utilizing a robust process to analyze foreign investments for national security risks and to facilitate coordination with the United States on matters relating to investment security”.
In an analysis of the decision, international law firm Akin Gump said the decision was unlikely to significant reduce the number of transactions subject to review, given the “onerous eligibility criteria” for investors to secure the carve-outs even if they were in an exempted state.
“Not only must investors be organized under the laws of, and have their principal places of business in, an excepted foreign state (or the United States), but an investor must also be able to demonstrate with respect to itself and its parents that, among other things, a majority of its voting and economic interests are held by nationals or entities of an excepted foreign state (or the United States) and that any individual or entity holding more than a 10 percent voting or economic interest in it is a national or entity of an excepted foreign state (or the United States).”
While the addition of New Zealand showed some willingness to expand the benefits of the carve-outs to new investors, the fact the group remained restricted to Five Eyes members did not provide any clear sense of whether it would offer an exemption to countries outside of the intelligence pact.
One of the biggest beneficiaries will be the $60 billion NZ Super Fund, which has over $21b invested in US equities.
Super Fund spokesman Conor Roberts praised the Government's work in getting New Zealand added to the white-list, which would smooth the way for new investments in the US and mean less onerous requirements when it carried out transactions there.
BusinessNZ chief executive Kirk Hope also welcomed the news, saying Kiwi investors had previously been vulnerable to being left out of US investment deals as they brought the risk of a deal being held up or disrupted by a foreign investment review.
While the foreign investment screening rules hadn't necessarily stopped any of the Super Fund's work, Roberts said they had added a measure of uncertainty, as well as time and cost. The fund was also aware of some infrastructure investment opportunities where entities with an exemption had appeared to receive preferential access.
Most of the Super Fund's American investments came through tracked index funds and active mandates with investment managers, but the changes would mainly affect its direct investing in US companies. The fund’s 2021 annual report lists $818 million of direct investments in the US, including holdings in renewable energy producer Longroad, carbon capture company LanzaTech and waste management company Rubicon, and Roberts said that figure was likely to grow in the coming years.
BusinessNZ chief executive Kirk Hope also welcomed the news, saying Kiwi investors had previously been vulnerable to being left out of US investment deals as they brought the risk of a deal being held up or disrupted by a foreign investment review.
A spokeswoman for the Ministry of Foreign Affairs and Trade told Newsroom the ministry had been working with the Treasury on securing an exemption for New Zealand since the US list was first established in early 2020.
“The US decision to add New Zealand to the excepted states list alongside Australia, Canada, and the UK, is welcomed. We believe that this reflects US confidence in New Zealand’s foreign investment regulatory settings, and the close relationship between New Zealand and the United States.”
The spokeswoman said the decision would help New Zealand entities to invest in the US, particularly in firms developing critical technologies or which dealt with critical infrastructure and sensitive personal data.
Kiwi officials would work closely with their US counterparts on any queries they had about the criteria for New Zealand securing a permanent carve-out.
