The Venture Capital industry in Australia in its present form is around 35 years old. It achieved institutional recognition with the advent of the Managed Investment Companies in the early 1980's. These were tax preferred structures which led to Pooled Development Funds in the 1990's, R&D tax concessions, and ultimately to the structures seen today, including Industry Innovation Funds, and limited liability partnerships.
The term Private Equity came into vogue in the early 2000's but in practice, there was no formal definition of what is Venture Capital and what is Private Equity. There has been a lot of crossover between these asset sub-classes in the various funds available to investors. Venture capital is usually cash consuming for a period, whereas private equity may have a cash burn, but there should be the probability of cash generation and positive EBITDA within a reasonable period.
This is very important to understand since this is one of the significant value uplift points for investors in these unlisted investments. I had a major win at precisely this point in the investment life cycle for Berlin Heart AG which was sold for a considerable sum to a private family office in Europe.
In Australia, private equity is usually not equity, and to the extent it has an equity component, this was often sucked back by the private equity fund, the result being a considerable number of very highly leveraged investments which had difficulty sustaining the imposed debt levels. In my view, private equity should be equity with only limited leverage, if any.
The venture capital asset subclass has not performed as well as it should in Australia. There are a number of sources of data (eg Thomson Reuters), but they are consistent in demonstrating a return history which does not reflect the illiquidity premium sought by investors.
Why is this? Why does the US venture and private equity asset sectors perform better?
There are a number of reasons. You will see above that all of the venture fund structures are government mandated with some form of tax concession. All of these structures came with Canberra mandated strings, as you can imagine, which actually prevented many reaching their investment objectives. The only structure which comes close to the US model is the recent availability of limited partnerships, and then only this last year have these partnerships been available to smaller end syndicates of investors (A$5.0 million) which is where the private investor market is.
The reason this is important is that most US venture investing is either from HNWI who, through the partnership structure can transfer tax losses to their estate, or from the US pension funds and Ivy League endowment funds. These funds have to get a return to meet their unfunded liabilities.
In Australia, with that one recent exception, tax losses cannot be transferred to an investors estate. The superannuation industry does not have the same need as US funds, and there isn't the wealth in the University endowment sector. What we do have is government mandated and supported Industry Innovation Funds, support from Commercialisation Australia (which requires 1:1 contributions), and R&D tax credits.
We don't have the two things that matter the most: extensive limited partnerships and employee stock/stock option schemes.
There is much talk about superannuation trustees being required to allocation a proportion of funds under their trusteeship to venture capital and private equity. Some of this talk comes from government sources. It is so much tosh, and cannot happen for many reasons.
Similarly, bringing offshore capital into Australian deals is not likely to achieve much. Capital flows are more likely to be the other way around.
Therefore, the rebuild (for that is what is required) of the Australian venture capital industry requires significant changes in thinking and leadership at political and industry levels. Venture and private equity investing can be hugely profitable, but requires a regulatory and capital markets infrastructure which, unfortunately, is still in its infancy 35 years later.
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