My Ping Pong Pang series predicted a United States led resurgence supported by German led Europe. I retain that view.
What of the Pang in this economic triumvirate - China? There has been some less than encouraging news out of China. Predictions of a "looming credit crisis" & "60-70% chance that the Chinese government will need to bail out the banks in three years" (Australian Financial Review March 20th) do not make for confidence in capital markets.
Such uncertainty can have major impacts on the business plans of Australian and international entrepreneurs. There is a conference shortly in Sydney which seeks to capture inward Chinese investment. In the short run, we may see a flood of it, especially into higher end real estate. In the longer term (should these predictions be correct), it could stop. Capital flows from China are likely to be increasingly volatile as a result.
Nonetheless, there is a growing consumer market, even though the Chinese population is forecast to peak around 2015.
My view if we want to tap it is to find cashed up US and German companies which have the infrastructure and capital to implement and the patience to build a business over the long haul. The piggyback strategy. Australian bulk commodities and volume wine merchants already have this infrastructure but based on large international companies. Its very risky for a small entrepreneurial company with limited capital. There are safer fish to catch.
Sunday, 24 March 2013
Sunday, 17 March 2013
VENTURE CAPITAL IN AUSTRALIA
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.
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.
Friday, 8 March 2013
SOLUTIONS TO VOLATILE TIMES
My readers will have seen that I am not expecting a return to some pre-GFC Golden Age. The Hawker-Keating-Howard-Costelly years may well in hindsight be viewed with a Menzian 1960's glow.
There is no doubt we are in for volatile times with a recessionary flavour, and especially when the truth about the Federal Governments real fiscal position finally drips out. If Andy Xie's forecast for iron ore prices becomes reality, it will be hugely worse. Xie is a very respected Chinese economist.
Strategy needs to be developed for times which are going to be more like the 1970's, a previous period where government interventions caused volatility. Wealth creation strategies need to recognise this.
Those that achieve Prosperity and Financial Security in this environment are those who Negotiate and Survive. The preconditions are a preparedness to change. You can see this in retail and financial services TODAY.
Some of the solutions to these times are to be found at www.corpbuilders.com.au which is a link to four specialist webinars. These will shortly be available online but in the meantime are delivered personally in the Brisbane, Sydney & Melbourne CBD's.
There is a small charge for this, but if you are interested please call Rikk Millhouse on( 61) 7 3733 1588 to make a reservation.
Financial knowlege is financial empowerment, and these webinars are designed to maximise your negotiating power with banks, investors, and in strategy implementation.
There is no doubt we are in for volatile times with a recessionary flavour, and especially when the truth about the Federal Governments real fiscal position finally drips out. If Andy Xie's forecast for iron ore prices becomes reality, it will be hugely worse. Xie is a very respected Chinese economist.
Strategy needs to be developed for times which are going to be more like the 1970's, a previous period where government interventions caused volatility. Wealth creation strategies need to recognise this.
Those that achieve Prosperity and Financial Security in this environment are those who Negotiate and Survive. The preconditions are a preparedness to change. You can see this in retail and financial services TODAY.
Some of the solutions to these times are to be found at www.corpbuilders.com.au which is a link to four specialist webinars. These will shortly be available online but in the meantime are delivered personally in the Brisbane, Sydney & Melbourne CBD's.
There is a small charge for this, but if you are interested please call Rikk Millhouse on( 61) 7 3733 1588 to make a reservation.
Financial knowlege is financial empowerment, and these webinars are designed to maximise your negotiating power with banks, investors, and in strategy implementation.
Tuesday, 5 March 2013
HENRY THORNTON
I recommend my readers to read Henry Thorntons' column in the Australian today (5th March). HT is a nom de plume for one of the most eminent economists in Australia. For those SME's who are struggling, this is essential reading. For those that aren't struggling, it provides an insight into what the future might hold for you.
Sunday, 24 February 2013
AUSTRALIA'S MARGARET THATCHER MOMENT
Margaret Thatcher came to power in the UK on the 28th March 1979. It did so on the back of a decade of dysfunctional government policies driven by militant trade unions which, bit by bit, destroyed British industry. I know. My family was there and ultimately emigrated as a result. My father was a chief plannng engineer with Rolls Royce aero engines and played an important role in the development of the RB211 engine which powered the Boeing 747. My uncle (his twin) ran the foundry which manufactured the blades you see inside the cowling at the front of the engine.
Rolls Royce became bankrupt or close to, and a generation of skilled engineers, including my family, were asked to take (very) early retirement. Skills lost for ever.
I recall clearly the tales of their frustration with the destruction of their workplace by union organisers. The impact destroyed their careers and the company as it then was. This was an era where British steelmakers were forced to buy British coking coal even though it was more expensive and British car manufactures had to buy British steel, even though it was more expensive.
Not only were inputs more costly, but productivity was low. These industries, and the jobs and families they supported were forced out of business, and ultimately only were revived by foreign capital, foreign management, and the passage of the 1980 Employment Act which commenced the process of trade union reform.
This destruction of skills and a generation of families is happening here in Australia TODAY. Instead of Rolls Royce, take a look at what is happening at some of Australia's technological and manufacturing icons: Cochlear, Resmed and others. These companies run the risk of being exiled or destroyed by the abuse of trade union power. That abuse has and is being facilitated by the Rudd, Gillard, Swan, Shorten government.
Their crocodile tear response to placate those "workers" who are switching to Abbott in droves is a Manufacturing and Innovation Statement which plans to use centralised government planning and the Canberra bureaucracy to drive innovation. I don't think so. What it will do is to further drive the innovators and the much vilified entrepreneurs offshore.
There will be more of this from a government desperate for revenue as a result of four years of ill conceived spending and who believe that good policy is to hobble initiative and business as part of their class warfare strategy. There is not a dollar in the bank to encourage either innovation, entrepreneurship, or the venture capital industry to finance such admirable objectives.
The forthcoming Federal election needs to be Australia's Margaret Thatcher moment. The new government needs to emulate Singapore which is a beacon in how to turn pro-business policy into tangible benefits for the whole of the country.
These old school socialists presently in charge will have a lot to contemplate in their voter forced and well funded retirement as they try to avoid responsibility for ruining the modern progressive Labour Party which did so much to improve Australian business under the Hawke-Keating governments.
Rolls Royce became bankrupt or close to, and a generation of skilled engineers, including my family, were asked to take (very) early retirement. Skills lost for ever.
I recall clearly the tales of their frustration with the destruction of their workplace by union organisers. The impact destroyed their careers and the company as it then was. This was an era where British steelmakers were forced to buy British coking coal even though it was more expensive and British car manufactures had to buy British steel, even though it was more expensive.
Not only were inputs more costly, but productivity was low. These industries, and the jobs and families they supported were forced out of business, and ultimately only were revived by foreign capital, foreign management, and the passage of the 1980 Employment Act which commenced the process of trade union reform.
This destruction of skills and a generation of families is happening here in Australia TODAY. Instead of Rolls Royce, take a look at what is happening at some of Australia's technological and manufacturing icons: Cochlear, Resmed and others. These companies run the risk of being exiled or destroyed by the abuse of trade union power. That abuse has and is being facilitated by the Rudd, Gillard, Swan, Shorten government.
Their crocodile tear response to placate those "workers" who are switching to Abbott in droves is a Manufacturing and Innovation Statement which plans to use centralised government planning and the Canberra bureaucracy to drive innovation. I don't think so. What it will do is to further drive the innovators and the much vilified entrepreneurs offshore.
There will be more of this from a government desperate for revenue as a result of four years of ill conceived spending and who believe that good policy is to hobble initiative and business as part of their class warfare strategy. There is not a dollar in the bank to encourage either innovation, entrepreneurship, or the venture capital industry to finance such admirable objectives.
The forthcoming Federal election needs to be Australia's Margaret Thatcher moment. The new government needs to emulate Singapore which is a beacon in how to turn pro-business policy into tangible benefits for the whole of the country.
These old school socialists presently in charge will have a lot to contemplate in their voter forced and well funded retirement as they try to avoid responsibility for ruining the modern progressive Labour Party which did so much to improve Australian business under the Hawke-Keating governments.
Monday, 18 February 2013
LIONS LED BY DONKEYS
When mainstream economists like Tim Hughes (Brisbane Courier Mail 18th February) start to talk about the "fiscal mess", we know there is a problem which can only be fixed by increased taxation or massive reductions in government spending.
Australians are acknowledged worldwide for our entrepreneurial attributes. A big pity then that we don't have the Swedish Treasurer, Andreas Borg, running the Australian Government. Judith Sloan (Australian 16-17th February) quotes him as saying "entrepreneurs are the source of job creation" and he reduced taxes and charges in response to the GFC. So did the Singapore Government amidst earlier economic volatility.
What does our mob do? Slams "rich entrepreneurs and mining billinaires even if they do create jobs" according to Judith.
It is not just the high profile end of town which has been slammed.
It was this government of course, presumably because they do not like poorer but hardworking people become wealthier -the so-called aspirational class - who killed off employee share schemes -which internationally are well recognised as key drivers of any entrepreneurial economy. The fact that such employee share schemes benefit employee and employer alike didn't seem to matter.
So it shouldn't be much of a surprise that, as the government created "fiscal mess" demands money to fix it, the business sector, and SME's in particular are not going to provide it. Even if they wanted to.
In short, everyone loses. Except for those sacked and retiring Federal politicians who are paid for life by the taxpayer and never have to work again.
Australians are acknowledged worldwide for our entrepreneurial attributes. A big pity then that we don't have the Swedish Treasurer, Andreas Borg, running the Australian Government. Judith Sloan (Australian 16-17th February) quotes him as saying "entrepreneurs are the source of job creation" and he reduced taxes and charges in response to the GFC. So did the Singapore Government amidst earlier economic volatility.
What does our mob do? Slams "rich entrepreneurs and mining billinaires even if they do create jobs" according to Judith.
It is not just the high profile end of town which has been slammed.
It was this government of course, presumably because they do not like poorer but hardworking people become wealthier -the so-called aspirational class - who killed off employee share schemes -which internationally are well recognised as key drivers of any entrepreneurial economy. The fact that such employee share schemes benefit employee and employer alike didn't seem to matter.
So it shouldn't be much of a surprise that, as the government created "fiscal mess" demands money to fix it, the business sector, and SME's in particular are not going to provide it. Even if they wanted to.
In short, everyone loses. Except for those sacked and retiring Federal politicians who are paid for life by the taxpayer and never have to work again.
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