118: National Reconstruction Fund's Mary Manning – Supporting Australian Manufacturing, Quantum Diamonds and Cyber Security

In this episode of the [i3] podcast, "Conversations with Institutional Investors", we speak with Mary Manning, Chief Investment Officer of the National Reconstruction Fund Corporation, a recently established $15 billion fund that has been set up to promote the manufacturing industry in Australia. We speak with Mary about the investment objectives and how to balance investing in innovative new technologies, such as the fund's investment in quantum diamonds, that is industrial diamonds, not the fancy ones, with the risk profile of the fund, Mary reveals that they have over 900 applications for funding and are now looking for the best opportunities to invest, but also how to balance the strategic asset allocation and avoid being exposed to too much equity holdings. We also discuss what sets the NRFC apart from other government funding and investment vehicles such as the Clean Energy Financing Corporation and the Future Fund.

Follow the Investment Innovation Institute [i3] on Linkedin Subscribe to our Newsletter Explore our library of insights from leading institutional investors at [i3] Insights

Overview of the interview with Mary Manning:

02:00 What is the National Reconstruction Fund Corporation?

08:00 Focusing on the seven sectors of priority: red tram

13:00 One of the risk of having a broad mandate is that you are trying to do everything all at once and not achieve much at all

15:00 We need to be a self-sustaining organisation, so we need to have some sort of dividend income stream

17:30 We have made 10 investments to date; the largest is a $200 million investment commitment in Arafura Rare Earths Limited to help finance the Nolans Project in the Northern Territory

19:30 Investing in quantum diamonds

21:30 The point of the NRF is to manufacture things

23:30 We get a lot of dual-use technologies that overlap between defence and enabling technologies

26:00 We do have certain funding targets for the seven sectors, but you might also notice that they don't add up to $15 billion

28:30 We do have some restrictions, but they are not necessarily old economy. We have a focus on manufacturing and some of that includes old economy type businesses

34:30 A great problem to have is that we've had over 900 proposals (for funding)

36:30 The Act does not allow us to have control positions

40:00 There is some confusion about what the NRF does and what the Clean Energy Finance Corporation does.

44:00 When I started it was a bit like drinking out of a fire hose for quite some time.

Full Transcript of Episode 118:

Wouter Klijn 00:00 In this episode of the [i3] podcast, "Conversations with Institutional Investors", we speak with Mary Manning, Chief Investment Officer of the National Reconstruction Fund Corporation, a recently established $15 billion fund that has been set up to promote the manufacturing industry in Australia. We speak with Mary about the investment objectives and how to balance investing in innovative new technologies, such as the fund's investment in quantum diamonds, that is industrial diamonds, not the fancy ones, with the risk profile of the fund, Mary reveals that they have over 900 applications for funding and are now looking for the best opportunities to invest, but also how to balance the strategic asset allocation and avoid being exposed to too much equity holdings. We also discuss what sets the NRFC apart from other government funding and investment vehicles such as the Clean Energy Financing Corporation and the Future Fund. Let's get started. Mary, welcome to the show.

Mary Manning 02:18 Thank you so much for having me. It's a pleasure to be here,

Wouter Klijn 02:21 No problem. So can you tell us about what actually the National Reconstruction Fund Corporation is? Because I understand it's created to help diversify and transform Australia's industry and economy, but it also has a return objective. You've been asked to take a commercial mindset to the organisation. Is it as a sovereign wealth fund, a government corporation, a subsidisation vehicle? What is it?

Mary Manning 02:47 Great, great place to start. So the National Reconstruction Fund, or the NRF, as we call it, is a sovereign fund. It was set up by the government about 18 months to two years ago, and the purpose is to device diversify and transform the Australian economy. But maybe we can dig a little into what, what that means and and why the NRF was was set up. So the impetus for the National Reconstruction Fund and similar funds around the world, there are a number, that have have been established, was perhaps in the wake of some geopolitical events, and then certainly in the wake of COVID that governments realise that countries need to have some sovereign capabilities. So globalisation meant that, you know, there was a lot of changes in the world, but it also meant that a lot of countries lost sovereign capabilities in in certain areas. And one area where Australia's sovereign capability had been on the decline for some time was manufacturing. And so the Australian economy as as you're well aware, and your listeners will be well aware, you know, lots of very impressive sectors in terms of mining and commodities and digging stuff up, and, you know, putting it on on ships and sending it elsewhere, but not a lot of processing or value add or the manufacturing of those types of minerals, and similarly, a very vibrant services economy, But manufacturing in terms of actually making things in Australia had been on the decline, and, you know, an economy that's structured this way carries certain risks. So covid is probably the best example in terms of, if there's a shock to the global economy and supply chains get disrupted, it's a very uncomfortable and vulnerable place for a country to be to not be able to make certain things. So I guess medical sciences is a great example. During the pandemic, Australia could manufacture hand sanitizers or certain vaccines or, you know, let alone semiconductors and aspects like this. So part of the reason the NRF was was set up, was to make sure that we have these sovereign capabilities. And those are some of the companies that that we're investing in. The next part that I'll add is those are some of the push factors about why the NRF was set up. But in terms of pull factors, as you may know, Australia has amazing research and innovation inside our our universities and world class startups and scale ups, but a lot of these, I. Sort of companies or ideas that are in universities are not making the jump to commercialization, and then a lot of startups and scale ups are actually going offshore because they can't find the financing in Australia. And so another aspect of the NRF is to make sure that these domestic companies or Australian born companies or Australian born ideas stay in Australia and benefit Australia and Australians going forward. So that's a brief intro to the NRF, and I'm sure we'll get into some more of the specific factors in the rest of the podcast.

Wouter Klijn 05:31 Now it's interesting that you mentioned that, that it sort of came out, that COVID realisation, that a lot of manufacturing had disappeared overseas, and we've seen a lot of discussions around reshoring, friend-shoring, but it seems to be more about supporting industry from the ground up.

Mary Manning 05:49 Yes, that's exactly true, supporting industry from the ground up and also helping to create new industries. So you know, one of the areas which is a focus for the National reconstruction fund is quantum and you may be aware, but Australia is a global leader in quantum computing and in the supply chain that goes around quantum computing, it's a Centre for Excellence in terms of people who work in the quantum industry. And so this is not sort of a industry that used to be great and then got offshore. This is an emerging industry which is really exciting for Australia, and so that's part of our job also, is to make sure that those new industries emerge and become as important and as powerful as they can be.

Wouter Klijn 06:30 Yeah, so we delve straight into some of the thematics in your portfolio there, quantum computing. How did you identify that? Is that something that the team came up with as a thematic or is that part of sort of a policy push into this sector? How does the opportunity get identified?

Mary Manning 06:50 Maybe I will take a step back and just outline, sort of the the investable universe of the national reconstruction fund, and then I can go on to where quantum fits inside that. So the NRF has seven priority sectors across the economy in which we can invest. And seven is a lot. So we made up an acronym to to remember the the seven, and it spells red tram. So if you can't remember what the remember red tram. So the R, the first R is renewables and low emissions technologies. The E is enabling. Capabilities. So this is kind of a broad brush term for a lot of aspects of technology. It's AI, machine learning, robotics, space, biotechnology, etc. The D is defence, the T is transport, the second R is resources. The a is agriculture, fisheries and forest trees, and the M is medical science. So if you add up all those seven red tram sectors, it is a huge part of the economy. And one of the things that I did when I started was back to your very first question about sort of sovereign capability and why the NRF was was set up. If you look at those red tram sectors, some of them are sectors or industries where Australia already has a very strong competitive advantage globally. So resources, AG, renewables would would definitely be in that category. And the idea is just to value add more i