Australia: Market introduction

Author: | Published: 4 Jan 2001
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After a period of extensive tax reform in Australia, the country's venture capital community has emerged in a stronger position to support new ventures and encourage a new generation of entrepreneurs.

Australian venture capital funds drew A$1.5 billion ($790 million) in committed capital during 1999, according to Venture Economics, a research company that regularly surveys the Australian venture sector. That figure is about three times the amount of committed capital funds raised in 1998 illustrating not only very solid growth, but a wealth of new opportunities for private companies seeking capital.

It's unlikely that committed capital will triple again in the near future. But the venture community expects its robust growth to continue. Many of our venture partnerships are raising funds, and there are several new incubators and other venture groups being formed, with capital to invest. Venture Economics found 23 venture funds formed in Australia in 1999, compared with 13 in 1998 and 12 in 1997.

Jesse Reyes, vice president of Venture Economics, forecasts growth for the Australian venture capital sector. On a visit to Australia in August 2000, he released figures showing that Australian funds posted a 19.5% average annual return to investors over the past five years, and a return of 30% during 1999.

"For an industry that only really emerged on its own during the past decade, it shows remarkable progress comparable to similar industry growth in the US and Europe in their early days," he said. "Putting this figure in perspective, institutional investors in the US are looking for returns north of 20% from venture capital. So you are just about at the stage where you can go to the US market and realistically seek funding from US institutions."

Our positive outlook

The Australian Venture Capital Association Limited, or AVCAL, is the industry hub for members including investor groups, banks, incubators, angels, corporate advisers, technology companies, accountants, lawyers, government agencies and service providers which helps support venture funds and private companies.

Our venture members provide capital for early-stage companies, later-stage expansion, and finance for management buy-outs and buy-ins of established companies. The 36 investor members have A$5 billion either invested, or available for investment.

AVCAL sees the venture sector gaining even more momentum over the coming years. Our confidence is based not only on the rapid growth of the past, but on recent developments that we think will help build a very productive environment for risk capital and private equity.



Tax reform

One reason for our positive outlook is the recent change in tax policy brought about by the Federal Government. In April 1999, AVCAL put forward a series of recommendations to the Ralph Review of Business Taxation, seeking tax changes which would make it easier for overseas pension funds to direct some of their capital towards Australian venture capital funds. We asked the Ralph Review to consider three changes:

a) Waive Australian tax on the income and gains made by non-resident investors in local funds;

b) Maintain the flow-through tax status of venture capital funds, so that tax obligations be passed on to each investor in a fund, and

c) Provide roll-over relief on the capital gains tax due in scrip-based mergers, so improving the way young companies can grow through mergers and acquisitions.

The Federal Government's historic tax reform of 1999 clears the way for new capital to enter the Australian venture sector. It removed some of the principal obstacles to new investment in the sector, and AVCAL has welcomed these changes as a very positive development for the Australian investment community and for the country's entrepreneurs.

Overseas funds, for instance, can now invest in Australia with similar tax conditions to those in their home markets. Pension funds from the US are spared paying tax on their gains in Australia, just as they are when they invest in venture capital funds within the US.

Because Australia has maintained the flow-through status, our funds will be able to pass on their rewards directly to the investors.

Finally, the Federal Government proceeded with a comprehensive change to roll-over relief on the capital gains tax due in scrip-based mergers. We expect this to have a very beneficial effect on companies, helping them grow faster not only in Australia but also overseas.



Success stories

Another reason for optimism is the success of Australian companies that have been backed by venture capital. As more companies achieve lasting success, the profiles of the Australian venture capital community and the entrepreneurs who lead fast-growing companies are raised.

One example is ResMed, a developer of medical devices formed to commercialize research from the University of New South Wales. The company raised venture capital in 1993 and was recognized with an AVCAL award in 1997 for Best Expansion Stage company. It listed on the New York Stock Exchange in 1995, followed by a listing on the Australian Stock Exchange in 1999.

Only a proportion of venture-backed companies ever go public, and there are many local, private companies that have achieved their success through trade sales within Australia or overseas. These success stories are now recognized by others. One effect is to encourage new entrepreneurs to come up with ideas for young start-ups. Another effect is to convince institutional investors to dedicate more of their capital to venture funds.

Growing international links

The Australian venture capital community has steadily increased its activities overseas, resulting in more transactions with global potential. Although Australian entrepreneurs have often used local venture capital to help them expand offshore, the trend has become especially strong over the past few years. These successes have helped create productive relationships between Australian venture capitalists and their peers in North America, Europe and Asia.

For many private companies, Australian venture capital is the first building block in a long-term plan to build an international business. Intellisol, a Sydney software company, has raised funds from Macquarie Bank in order to expand in the US, Canada, the UK and Singapore. RedSheriff, an internet company in Melbourne, has used funds from Equity Partners and the Australasian Media and Communications Fund in order to open its New York office.

Venture capitalists are also increasing their presence offshore. Some Australian venture capital funds have opened offices in the US and have formed close links with American venture capital partners, investment advisory firms and prominent entrepreneurs. Some Australian funds have invested in private companies in the US, usually with the aim of helping them expand into the Asia-Pacific market.

As these networks grow, it is likely to become easier for venture capital firms and their portfolio companies to grow quickly in overseas markets. This kind of overseas expansion is rarely smooth. Still, we expect the venture community's growing international activity to pay dividends in the years ahead.

Volatility

At a time when public markets are in a state of flux, the immediate outlook is challenging for private companies and their venture investors. Sharemarket investors are less welcoming towards initial public offerings, making it even more important for young companies to call on the experience of venture capital funds and their managers.

In order to ride out any uncertainty in the public markets, some private companies will need greater support from the venture capital sector.

Stronger role

This means the Australian venture capital community will play a stronger role in the formation and growth of new companies in Australia. The venture members of AVCAL are likely to become even more active as they find a large number of private companies with good ideas and ambitious goals.

The past few years have witnessed very solid expansion among private companies and their supporters in the venture community. Despite volatile public markets, we expect the growth to continue.




Australian Venture Capital Association Limited

Level 7, 167 Macquarie Street
Sydney NSW 2000
Australia

Tel: 61 2 9232 1055
Fax: 61 2 9232 1065
www.avcal.com.au