5 January Dear Michaela, Proposed policy changes to the Investor Visa programmes

Transcription

1 5 January 2015 Ms Michaela Browning Deputy Head and Assistant General Manager Investment Division Austrade Aon Tower, Level Kent Street Sydney NSW 2000 Dear Michaela, Proposed policy changes to the Investor Visa programmes The Australian Private Equity and Venture Capital Association (AVCAL) welcomes the opportunity to put forward this submission as part of Austrade s consultation process in relation to proposed changes to the Significant Investor Visa (SIV) and the development of the new Premium Investor Visa (PIV) programmes as part of the Government s broader competitiveness agenda. As Austrade is aware, AVCAL has for some time been advocating for targeted changes to be made to the investor visa regimes to boost the flow of much-needed capital into key high growth sectors within the Australian economy. We are therefore very supportive of the direction that the Government is planning to take in relation to these reforms, because we believe that there is considerable scope to improve the effectiveness and impact of the investor visa regimes in the marketplace. The Government s desire to expand the range of complying investments under the SIV and PIV regimes to allow for investment to be directed into funds managed by members of our industry is an important and appropriate decision which AVCAL is entirely supportive of. AVCAL represents the venture capital (VC) and private equity (PE) industry in Australia, which has a combined total of over $24 billion in funds under management for domestic and offshore investors. VC and PE firms invest billions of dollars in early stage and established businesses spanning right across almost every corner of our national economy. These investments help to support around half a million jobs and contribute over four percent every year to our national economic output. In this submission, we have set out our initial views on the key policy architecture considerations that we believe are relevant to the implementation of the proposed reforms to the investor visa regimes. It is our expectation that further consideration will need to be applied to specific policy design issues, and AVCAL will continue to work collaboratively with Austrade and the Government over the coming months to address those points. In the meantime, if you would like to discuss any aspect of this submission further please do not hesitate to contact me or Deborah Young on Yours sincerely Yasser El-Ansary Chief Executive AVCAL

2 AVCAL SUBMISSION: COMPLYING INVESTMENT FRAMEWORK FOR THE SIGNIFICANT INVESTOR VISA (SIV) AND PREMIUM INVESTOR VISA (PIV) PROGRAMMES AVCAL is very supportive of the Government s announcement of plans to improve the policy design of the investor visa regimes. The Government s desire to encourage more investment under the regimes to be directed towards innovation and commercialisation of Australian research and development is something which we believe will pay significant economy-wide dividends over the medium and longer-term. In bringing about changes to the investor visa regimes, the design framework will need to properly balance the attractiveness of investments available to applicants and the channelling of those funds into parts of the capital market that can be the future drivers of economic growth. This submission canvasses several key issues that we believe Austrade should consider as part of developing the detailed policy changes that will need to be made over coming months. Some of the key issues include: - The breadth of the expanded list of complying investments into venture capital, and potentially beyond - Our industry s capacity to absorb the potential inflow of significant new investment capital - The integrity rules relevant to the new investor visa frameworks - Market-relevant implications for fund managers in relation to investment time horizons, and - Need for specific differentiation of policy design as between the existing SIV, and new PIV, frameworks. Given the importance of these policy changes to the flow of investment capital into the Australian economy, and the fact that these reforms represent new and untested features of the investor visa regime, it will be important to work through these key issues in a collaborative manner over coming months. 1. Expanding the list of complying investments Venture capital and private equity firms invest in high-growth early stage and established businesses spanning across almost every corner of Australia s economy. Independent economic analysis undertaken in 2013 confirmed that investments made by VC and PE fund managers are responsible for supporting up to half a million Australian jobs, and contributing over four percent every year to our national economic output. 1 Separate analysis also confirms that a deeper pool of available capital would enable VC and PE fund managers to invest even more into Australian businesses, which would lead to a significant increase in employment opportunities and economic output over time. However, the economic pay-off from VC and PE investment into high growth potential Australian businesses extends well beyond employment and economic output. Companies that have been backed by VC investment currently contribute 10% to total business research and development (R&D) expenditure in Australia. These companies spend, on-average, 200 times more on R&D per employee than other businesses. Successful VC-backed businesses also tend to have strong job creation rates and attract highly-skilled staff. Top VC-backed companies such as SEEK, Cochlear and ResMed are significant employers. Even smaller companies such as Pharmaxis, Finisar Australia and SIRTeX are important job creators in greenfield industries, helping to build our nation s expertise and skill-base in value-adding areas such as advanced manufacturing and R&D. As an example in VC-backed technology investment, SEEK attracted an initial venture capital investment of $2.5m from the AMWIN Fund in Today, SEEK is the largest online job-listings business in the world and has been credited with fundamentally changing the way employers seek suitable candidates, and how people match themselves with employment opportunities. Now, SEEK is the 49 th largest listed Australian company by market capitalisation. 2 1 Deloitte Access Economics 2 as of 25 November

3 It should be noted that VC and PE funds are both vitally important sources of equity capital in the growing stages of businesses' lifecycles. As early-stage businesses mature, they become less suited to venture investment (which requires a very high rate of return to compensate for the greater risk involved) and more suited to private equity ownership (which requires a rate of return above that of listed equities, but involving lower risks than venture investing). The majority of PE funds in Australia are classified as Growth PE funds. These funds account for 59% of overall PE transaction activity in Australia (based on the number of companies invested in FY2014). These funds invest in small and mid-sized unlisted companies, which are often founder- or family-owned, that are at a key inflexion point in their lifecycle where they need additional capital and expertise to propel them to the next stage of growth. For example, in the next decade 60% of private business owners will be approaching retirement, which will see a transfer of asset ownership of around $607 billion in value. 3 Growth private equity is a key source of funding for small to medium-sized enterprises that make up the majority of private companies. As an example, PE-backed LifeHealthCare, which is a specialised distributor of high-end medical devices, increased their earnings six-fold and grew their employee base by 46% during the (four-year) period of PE investment to The success stories described above represent a small sample of what can be achieved when a pool of investment capital is available to highly skilled and professional VC and PE fund managers. It is for this reason that such a compelling case exists to expand the list of complying investments under the visa regimes to encompass fund managers in our industry. AVCAL s view is that an expanded list of eligible investments should, at a minimum, allow for investment into professionally managed Australian venture capital funds. Austrade, and the Government, should also consider the additional economic benefits that could flow from expanding the list (beyond venture funds only) to growth private equity funds as well. As Austrade will be aware, the international competitiveness of our investor visa regime is critical to our capacity to continue to attract interest from offshore investors with capital to invest. A high level comparative analysis of Australia s position relative to other jurisdictions that either already have a similar SIV and PIV programme in place, or are in the process of implementing one, underscores the need for changes to our regime. Comparable regimes in other countries have already identified, and in many cases acted upon, the need to leverage the investor visa programme to drive investment into high-growth potential industry sectors that can act as catalysts for innovation and entrepreneurship. Existing (or planned) programmes in jurisdictions with similar profiles to Australia include: Singapore (Global Investor Programme (GIP)) Option A: Invest at least S$2.5m in a new business entity or to expand an existing business operation; or Option B: Invest at least S$2.5m in a GIP fund (typically a venture or growth capital fund) that invests in Singapore-based companies. Canada (Immigrant Investor Venture Capital (IIVC) pilot programme) Invest a minimum C$2m into the IIVC fund. Over the last ten years, industry data compiled by AVCAL confirms that offshore investors have played an increasingly prominent role as a source of capital for both VC and PE in Australia. Over the five-year period between FY2010 and FY2014, offshore investors accounted for 18% of all capital raised by Australian VC funds. To illustrate the significance of that, in the previous five-year period almost no capital was sourced from offshore investors into the VC sector. For PE and VC fundraising combined, offshore investors increased their allocations from 42% during the period from FY2005 to FY2009, up to 53% in period FY2010 to FY Monash University Family and Private Business Research Unit 3

4 On our analysis, these trends reinforce three fundamental points about the current environment for fundraising in Australia: 1. The sourcing of capital from domestic investors in Australia is becoming more difficult, largely due to the mis-match in scale as between large institutional investors (such as superannuation funds) and domestic VC and PE fund managers. 2. Offshore investors are increasingly familiar with the comparative advantages of investing capital into Australia, which includes recognition of the high quality nature of many of our home-grown businesses and the existence of a relatively stable and predictable policy and regulatory environment. 3. Wherever possible, targeted government policies should be used to address clear and obvious market failures in order to ensure the long-term survivability of a highly innovative economy that is built around industries where Australia can compete in the global marketplace. In our view, expanding the list of complying investments under the investor visa regimes will go some way towards increasing the pool of investment capital available to professional fund managers in our industry. Ultimately, a larger pool of capital will lead directly to an increase in investment in Australian businesses, which is vitally important to our future economic prosperity. Consideration of how Austrade can play a central role in the marketing of Australia s expanded investor visa regimes is something that should be taken into account as part of planning for the roll-out of these programmes in coming months. Wherever possible, AVCAL would be pleased to assist by providing relevant information about the nature and scale of VC and PE investment in Australia, and case studies of Australian business success stories over recent years. 2. Capacity to absorb capital On current metrics, Australian VC and Growth PE firms manage A$2.2b and A$1.7b, respectively. These firms have on average invested in 111 companies per annum over the last five years. Without question, the number of Australian business that could be supported by VC and PE investment is significantly larger. All fund managers in our industry would increase the number of investments they make if they had access to additional capital; the current average of 111 investments per annum is limited only by the quantum of investable capital within their funds. It is not limited by the number of high quality businesses that could be supported by VC and PE investment. Whilst funds managed by growth PE fund managers have been relatively stable over recent years, VC funds under management have declined markedly from a peak of A$3b in FY2011, to the current level of A$2.2b. This represents a significant fall of around 27%. The number of Australian VC funds under management has reduced from 29 to 26 over that same period of time. The traditional source of capital flowing to VC and PE fund managers has come from domestic superannuation funds. As these superannuation funds have grown significantly over recent years, this has resulted in there being a mis-match in investment scale between those institutional investors and a typical VC and growth PE fund. The minimum dollar investment by some of Australia s large superannuation funds is simply too large for domestic VC and growth PE managers. As the quantum of funds under management within the superannuation industry continues to accelerate, it is reasonable to assume that this mis-match in investment scale will continue. The proposed changes to the SIV and PIV regime therefore represent a vitally important opportunity to bridge the divide that currently exists between those with capital to invest, and those who need access to capital to invest. As described above, there are significant structural challenges confronting the current fundraising environment for Australia s VC sector. In the five-year period between FY2010 to FY2014, VC fundraising fell substantially to A$770m, down from A$1.35b in the preceding five-year period. The decline in VC funding has led to a structural shift in the pattern of VC investment available for many innovative start-ups in Australia. 4

5 Funding for new ventures based around research-driven ideas at the seed and early stage is generally more readily available than at the later stages. A number of funds have been able to raise between $50m and $100m, but it can be observed that there are fewer funds raising more than $100m in recent years. In the last five year period, only one fund in this range has been successfully raised. These larger funds would typically support companies that enter the business growth phase called the valley of death (which can be defined as a point where a business, often a technology based business, has a working prototype for a product or service that has not yet been developed enough to earn money through commercial sales 4 ). An inability to fund businesses through this critical stage of growth exposes our economy to significant challenges, especially in the current macroeconomic and fiscal climate. Evidence from prior years confirms that Australian VC fund managers have traditionally managed larger pools of capital than is currently the case. There is, therefore, a depth of expertise, knowledge and business acumen to manage a much larger aggregate pool of capital than the current A$2.2b. There has also been a decline in the number of companies attracting funding rounds of between A$5m and A$20m in FY2010 to FY2014, compared to FY2005 to FY2009, from 55 to 50. This round size would normally allow a company to transition through the valley of death and grow into a sustainable business with products and services that are going to market. With the growing number of early stage ventures being funded at the nascent seed and startup stages, the drying up of follow-on funding for more mature companies represents, in our view, a serious market failure for early stage funding. The relatively significant amount of offshore VC money invested in Australian ventures in recent years emphasises the fact that Australia is able to produce world-class innovations and build companies with global potential. 57% of all VC dollars invested in Australia in FY2014 were by offshore-based VC firms. However, whilst this channel of capital for Australian early stage companies is important, it underscores the level of missed investment opportunities for Australian VC funds, due to the lack of investable capital available to be deployed by domestic VC funds. While the total dollar amount invested by offshore VC funds has increased in recent years, the majority of that funding is concentrated in only a small number of target companies (around two to three per year) in the information and communications technology sector. Meanwhile, there were an estimated 1,500 technology startups in Australia in 2012, 5 which gives an indication of the number of investable companies that could potentially be seeking some form of VC funding in the next few years. Recent evidence from AVCAL s members across VC and PE funds suggests that of the opportunities presented to them in a single 12 month period, only one to two percent of those companies would typically receive investment funding from our industry. Once again, all fund managers observed that the relatively small number of investments (by number and by value) is constrained by the pool of capital available to them for investment, not by the quality of business opportunities that are presented to them. A larger pool of investable capital would therefore see a much greater level of investment into high quality Australian businesses than is presently the case. In some cases, a larger pool of capital would allow fund managers to invest greater amounts in those businesses that have significant growth potential. The fact that these opportunities exist strongly suggest that the business ecosystem is capable of absorbing a much larger amount of patient risk capital than is currently available. Channelling even a modest part of the capital that is invested through the SIV and PIV programmes into VC, and potentially growth PE, would ensure that the market failures identified above are, in some way at least, mitigated. 4 Bridging the valley of death: improving the commercialisation of research, House of Commons, March The startup economy, PwC, April

6 Of the current A$3b of capital waiting to be invested under the existing SIV regime, the following scenarios (based on a percentage of the total available capital) illustrate the additional potential capital flows to the Australian VC and growth PE sectors: Channelling 20% of current SIV pool could lead to a: A$600m increase in business investment in Australia Channelling 40% of current SIV pool could lead to a: A$1.2b increase in business investment in Australia Channelling 60% of current SIV pool could lead to a: A$1.8b increase in business investment in Australia It will ultimately be a matter for Austrade and the Government to determine the extent to which a mandating of certain allocations into VC and PE is appropriate under the proposed changes to the investor visa regimes. There is a compelling case to say that a mandating of some portion of the investment capital into VC and growth PE is an appropriate policy response to adopt if the Government is seeking to fully realise the objectives of a more innovative economy which better utilises the opportunities emerging from offshore interest in Australia s investor visa programmes. For our industry s part, however, there will be absolutely no limitations on the capacity of Australian VC and PE funds to absorb the sorts of additional capital inflows set out above. To put this into a relative context, the current total amount of capital managed by VC and growth PE managers stands at A$3.9b. So even if a mandated allocation of 60% were directed into our industry, it would still only represent less than half the current size of the VC and growth PE industry. The additional capital would likely give rise to deepening of the existing number of VC and growth PE funds, as well as the establishment of new funds that are managed by industry experts who have previously been responsible for funds that may have wound-down over time as sources of capital became more constrained. The additional capital flowing to VC and PE funds under these proposed changes to the investor visa regimes would make a step-change positive impact on the capacity of our industry to invest in Australian businesses, and lead to the creation of significant new employment opportunities and economic activity. 3. Integrity rules for new investor visa frameworks The success of these proposed changes to the investor visa regimes will, in part, be attributable to there being an appropriate integrity framework in relation to the matching of investment capital with professional managers who are charged with responsibility for acting in the interests of the fund s domestic and offshore investors. As a minimum starting point, AVCAL recommends that eligible VC and PE fund managers under the SIV and PIV programmes should be required to: - Hold a current AFS license issued by the Australian Securities and Investments Commission. - Operate a specific legal investment vehicle such as an Early-Stage Venture Capital Limited Partnership or Venture Capital Limited Partnership approved and registered by the Department of Industry. - Hold a current VC or PE fund manager membership with AVCAL, and be compliant with its rules of membership. An Early-Stage Venture Capital Limited Partnership (ESVCLP) and Venture Capital Limited Partnership (VCLP) are two separate types of legal vehicles that have been created under specific policy programmes designed to increase 6

7 offshore investment into Australian private equity and venture capital. These structures provide for tax concessions for investors as one way to incentivise capital to flow into venture and private equity funds. Each of these structures is issued on the basis that the applicants having at least $10m of committed capital for a period of between five and 15 years. These structures are approved, registered and monitored by the Department of Industry. Registration as an ESVCLP or VCLP requires the VC or PE manager to satisfy of a number of initial and ongoing criteria (such as the types of industries that cannot be invested in under these structures) relevant to maintaining the registration status of the legal vehicle under the regime. Some of the types of investments deemed ineligible under an ESVCLP or VCLP structure are businesses whose predominant activity involves property development, land ownership, finance, insurance or construction. It is also commonplace for fund managers in Australia to put in place a managed investment trust (MIT) structure to ensure that investors are provided with tax certainty in relation to the profits and gains derived from the fund s activities. It may therefore be appropriate to consider whether any changes are required to ensure that MITs investing in Australian businesses are not excluded from constituting an eligible investment vehicle for the purposes of investor visa regimes. In relation to the third of the requirements outlined above membership of AVCAL VC and PE fund managers are generally permitted to apply for membership where they can demonstrate that they have committed capital in a fund that is ready to invest in early or late stage companies primarily in Australia. As a general rule, real estate and infrastructure fund managers and investors are not considered to be eligible to apply for investor membership of AVCAL. Applicants approved for AVCAL membership are required to adhere to the rules set out in our Constitution, as well as our Code of Conduct which governs a broad range of activities encompassing financial resources, conduct and behaviour, investor relationships and compliance with all relevant legal and regulatory obligations. In addition, AVCAL requires that its members comply with guidelines and professional standards prescribed for its members in a range of areas including corporate governance, principles for responsible investing, valuations and reporting. Additional considerations that could be taken into account by Austrade and the Government as part of this consultation process include: whether or not there should be a requirement for the investments by fund managers to be directed into Australian businesses that are deemed to be engaged in genuine research and development activities by virtue of their participation in the R&D tax incentive programme administered by the Australian Taxation Office and the Department of Industry, and whether or not there should be a requirement for the investments by fund managers to be directed into Australian businesses that predominantly employ Australian resident labour. 4. Market-relevant implications of investor visa changes for VC and PE fund managers The proposed changes to the investor visa regime will of course give rise to a range of new considerations for VC and PE fund managers who will look to attract investment from offshore applicants. AVCAL is confident that the market will, as has historically always been the case, respond by adjusting itself to ensure an alignment of interests between investors and fund managers. One of the most obvious areas that will require a market-based solution will be the alignment of granting of permanent residency under the regimes, with the fund and investment life-cycle of VC and PE funds. As Austrade is aware, it is commonplace for many closed-end VC and PE funds to run for a period of around ten years. Typically, the nature of the funds is such that committed amounts are called at different times during the investment period of the fund (usually the first five years), rather than being immediately drawn-down in one lump sum at the commencement time. 7

8 The funds called during the investment period, as and when investment opportunities are identified, are returned gradually after the typical holding period of between three and seven years. By the end of the life of the fund, all capital is returned along with all returns generated from investments held at different points during the term of the fund. VC and PE fund managers will need to work through the appropriate market-based solution to the usual approach adopted to the raising, draw-down and return of capital through the life-cycle of a fund, and how that approach may need to be modified to ensure a close alignment of expectations and interests for investors and fund managers. In our discussions with the fund managers, a number of potential solutions have been identified, including for example, the use of an escrow type facility that would allow SIV and PIV investors to immediately invest all required capital for use by the fund manager in accordance with the fund s mandate during the investment period of the fund s life-cycle. Other solutions that fund managers will be able to explore include the use of: a fund-of-funds investment model for the initial allocation and subsequent spreading of investments across a number of smaller VC or PE funds; bank guarantees, and the use of trust vehicles to hold committed capital. The implementation of the proposed changes to the investor visa regimes will act as a catalyst for VC and PE fund managers to explore new and innovative market responses which serve the purpose of ensuring an alignment of interests for offshore investors and fund managers. To the extent that Austrade and the Government would like to participate in the development of these market responses, AVCAL would be pleased to facilitate further dialogue with all key stakeholder groups (including fund managers and legal advisers proficient in the establishment and structure of fund vehicles) over coming weeks. 5. Need for differentiation between the PIV and SIV programmes The PIV programme is intended to provide for a more expeditious pathway to residency for offshore investors who have significantly more investable capital than those seeking residency under the SIV regime. In the context of the Australian marketplace for VC and PE, it would be reasonable to conclude that a PIV applicant who has at least A$15m of investment capital would be closely aligned in terms of scale with a small institutional domestic investor. Many growth PE fund managers would seek institutional investment allocations of A$15m and above from a variety of sources such as small pension funds, family offices and other high net worth individuals, each of whom would be sophisticated investors with significant experience in identifying investment opportunities and weighing risk and return considerations. The different timeframes involved in the PIV regime may therefore give rise to a closer alignment of interests with growth PE funds, than with VC funds. Ultimately however, it should be left open to the offshore investors to determine where the alignment is closest. The one-year time frame for the PIV applicant would likely give rise to many of the same market considerations outlined in the section above in relation to fund life-cycle and the need for specific solutions to address the challenges of the four-year visa period and how that could be aligned with the obligations of investing in a typical ten-year closed-end fund. AVCAL will continue to explore the merits of there being any differentiation as between SIV and PIV applicants in relation to the policy and regulatory obligations associated with investing into VC and growth PE. 8