Minister warned about Thiel deal
Joyce informed that controversial buyout clause that netted US billionaire $ 30m presented ‘ difficult optics’
Finance Minister Steven Joyce was warned three years ago an investment deal with surprise Kiwi Peter Thiel was problematic, documents show.
A 2014 report commissioned by state agencies said the inclusion of a controversial buy- out option — allowing Thiel’s Valar Ventures to risk millions of taxpayer dollars making investments but claim all profits — “creates some difficult optics”.
“In the Valar Ventures example, the taxpayer is offering an American billionaire a loan at less- than- market rates,” the report said.
The deal between Thiel and the Government- backed New Zealand Venture Investment Fund has come under scrutiny after an investigation by the Weekend Herald revealed it had been quietly wound up last year.
The NZVIF’s investment of $ 9 million was returned in October when Thiel activated the buyout clause to claim all profits from the venture — mainly made up of a large stake in NZX- listed Xero shares — netting him more than $ 30m from his initial contribution of only $ 6.8m.
Joyce, Minister of Business, Innovation and Employment when the deal was struck in late 2011 and wound up last year, defended his handling of the affair.
He said that while he directed NZVIF to stop using the contentious buyout clause in deals in 2015, the earlier report had prompted a pause in its use as wider reviews were undertaken.
“It was discussed prior to that point [ 2015] and it was not used in the interim.”
The minister said the buyout option had been intended to encourage growth in New Zealand capital markets and it had not presented obvious problems earlier.
“It’s a little bit — and I’m not defending the buyout — disingenuous that this was a guaranteed slam dunk. Not every investment is a Xero.”
The NZVIF said it was satisfied with the outcome and its handling of the deal.
“Valar Ventures’ entry into the local market had a number of benefits and was very beneficial for the companies in which the fund did invest. It was a highly credible group,” the spokesman said.
Questions sent to Thiel’s representatives in the United States went unanswered, an identical response to five previous requests for comment in the past two months by the Weekend Herald.
The critical report was contained in a cache of documents released by NZVIF under the Official Information Act
NZVIF declined to release any correspondence with Valar, citing confidentiality obligations and claiming releasing the information would prejudice their and Valar’s commercial position.
A report in March 2014 by Wellington capital advisory group Woodward Partners, which was tasked with assessing the NZVIF, criticised the buyout clause generally and its inclusion in the Valar deal specifically.
Woodward Partners calculated use of the buyout would see NZVIF exchange $ 30m of Xero shares for just $ 6.2m. ( Shares in the accounting software company in early 2014 were at a historic high, but had fallen by the time the buyout was exercised.)
“Our view i s that the only loser from a buyout option is the taxpayer, who stands to incur all losses but lose many of the profits,” the report concluded.
NZVIF flagged to shareholding Ministers Joyce and Bill English last August that Valar had triggered the buyout, noting the fund’s primary asset was Xero shares.
“Significant value will transfer from NZVIF to Valar Ventures as a consequence of this option,” the fund said in a monthly update to the ministry.
An update issued the next month confirmed the buyout had taken place, but said it would be kept quiet. “Valar have asked it not be announced publicly, but we expect it to become known through the market.” The spokesman said NZVIF’s confidentiality arrangements with Valar were similar to those it had with other public- private funds.
The buyout was only made public last month after a Weekend Herald investigation into the circumstances surrounding the “exceptional circumstances” behind then- Internal Affairs Minister Nathan Guy’s decision to grant Thiel citizenship in June 2011.
The documents show Thiel approached the NZVIF in early 2011 about getting state support for his venture capital activity.
The timeframes show he was applying for citizenship at the same time he was negotiating the lucrative terms of the public- private joint venture.
NZVIF said it was unaware of the citizenship application at the time the deal was struck, but it would have made no difference.
The deal was made solely on investment criteria.