Submission on Significant and Premium Investor Visa Programmes: Second Round of Stakeholder Consultations

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1 3 March 2015 Ms Michaela Browning Deputy Head and Assistant General Manager Investment Division Austrade Aon Tower, Level Kent Street SYDNEY NSW Dear Michaela, Submission on Significant and Premium Investor Visa Programmes: Second Round of Stakeholder Consultations The Australian Private Equity and Venture Capital Association Limited (AVCAL) welcomes the opportunity to put forward this submission as part of Austrade's second round of stakeholder consultations in relation to the proposed changes to the Significant Investor Visa (SIV) and the development of the new Premium Investor Visa (PIV). AVCAL is the national association representing the private equity and venture capital industries in Australia. Our members comprise most of the active private equity and venture capital firms in Australia. These firms provide capital for early stage companies, later stage expansion capital, and capital for management buyouts of established companies. AVCAL is very supportive of the targeted changes that are proposed to be made to the investor visa regimes to boost the flow of much-needed capital into key high growth segments within the Australian economy. We believe that these changes will help improve the effectiveness and economic impact of the investor visa regimes, while at the same time catalysing much-needed venture capital investment in Australian startups. Our recommendations on key aspects of the proposed new SIV and PIV framework are outlined in the attached submission. If you would like to discuss any aspect of recommendations further, please do not hesitate to contact me or Dr Kar Mei Tang on Yours sincerely, Yasser El-Ansary Chief Executive AVCAL

2 AVCAL SUBMISSION Submission on Significant and Premium Investor Visa Programmes: Second Round of Stakeholder Consultations AVCAL is very supportive of targeted changes that are proposed to be made to the investor visa regimes to boost the flow of much-needed capital into key high growth segments within the Australian economy. By any measure, Australian venture capital (VC) is chronically underfunded at present relative to the strong pipeline of startup investment opportunities available. As an illustration: VC investment in Australia currently amounts to only 0.02% of Australia's GDP; and Australia currently invests just $4.50 per capita in startup capital. In Israel, the equivalent figure is $ We believe that the targeted changes proposed by the Government will help improve the effectiveness and economic impact of the investor visa regimes, while at the same time catalysing much-needed VC investment in Australian startups. Our recommendations on some of the key questions posed in the discussion draft are set out below. 1. Regulatory Requirements for the SIV and PIV AVCAL broadly supports the regulatory requirements set out in Box 1. We have the following specific recommendations: Requirement that investments are to be FIRB compliant. It should be noted that under the venture capital limited partnership (VCLP) and early-stage venture capital limited partnership (ESVCLP) rules non-australian investments are permitted to be treated as eligible VC investments as long as they do not exceed 20% of the fund's committed capital. Hence FIRB compliance does not apply in these instances. Use of derivatives for risk management purposes only and combined cash and derivatives is limited to 20% notional exposure of a fund s net assets. It should be clarified that all instruments allowed within the VCLP and ESVCLP framework, including convertible notes, debt, options, preferred equity and ordinary equity, are allowable instruments. Also, depending on the fund manager's arrangements with their investors it may be possible that in the early investment phase cash might constitute over 20% of the fund's net assets. A suggested rewording of the text to clarify and address any uncertainty could be: "derivatives are to be used for risk management purposes only and non-investment related derivatives be limited to 20% notional exposure of a fund s net assets. For the avoidance of doubt, ordinary equity, preferred equity, convertible notes, debt and options are all valid investment instruments. The fund manager should use reasonable endeavours to limit cash within the fund, beyond the first year of the fund s inception to <20% of net assets on average during the year". Treatment of fund-of-funds. For clarity, it should be specified that "fund of funds" that are deemed to be eligible investments under the VC or microcap mandatory investment requirements should be invested in managed funds that fulfil the criteria for VC and / or microcap investments. Reducing red tape and duplicated costs in client due diligence. Given that the Government requires that the visa applicant s funds to be unencumbered and lawfully acquired, consideration should be given to allowing VC fund managers to rely on the Government's due diligence report and ongoing due diligence to fulfil their AML/CTF obligations. This will help reduce the high cumulative costs of conducting duplicative due diligence for overseas individual investors, particularly where the same investor is invested across multiple funds where 1 Sydney Morning Herald, What's wrong with our startup sector?, 16 April

3 each has to conduct its own AML/CTF customer due diligence. It is our understanding that under Canada's Immigrant Investor Venture Capital (IIVC) scheme, for example, the Government has appointed a number of accounting firms to conduct forensic audits on all selected applicants to ensure that they satisfy the scheme's wealth requirements, and that their funds have been lawfully acquired. 2. Mandatory Investment in Venture Capital Funds as part of the SIV AVCAL is very supportive of the proposed requirement for a mandatory minimum SIV investment of $1m in VC funds. The proposed targeted changes will help direct much-needed capital into value-adding, high growth sectors within the Australian economy were demand for risk capital is greatly outstripping supply. We believe that these reforms will greatly improve the effectiveness of the investor visa regimes, potentially have a transformational impact on VC investment in Australia, and facilitate greater alignment between the interests of new migrants and Australia's future sources of long-term economic growth and productivity. AVCAL s response to some of the specific questions in Box 2 is set out below. 2.1 How could the program measure the qualifying investment period, given industry practice is to call funds over time? VC funds are typically ten-year funds where funds are drawn down on a "just-in-time" basis. Unlike many other types of managed funds where the investor capital is transferred immediately in one lump sum to the fund, the VC fund only draws down funds incrementally over time, as and when individual investment opportunities are identified. New investments will typically take place over the first five years of the fund's life, with follow-on rounds likely over the remaining life of the fund. Under the SIV programme, applicants are able to withdraw their investment at the end of the initial four-year qualifying term whilst still remaining eligible for permanent residency. This poses the question of whether the applicant should be compelled to remain committed to the VC fund once their qualifying period ends. AVCAL s view is that the programme should remain flexible in its requirements in that the VC fund manager be able to require the applicant to continue their VC commitment or investment for as long as required under the fund s Limited Partnership Agreement, whilst ensuring that the applicant is fully aware of the fact that their commitments/investments may extend beyond the four-year qualifying period. To ensure that all commitments are honoured, the fund manager may require a bank guarantee for the total funds committed by the applicant, either over the life of the fund (ten years) or at least over the initial investment period of the fund (around five years). This may be required at the discretion of the fund manager. Applicants may opt to sell their interests in the fund in the secondary market after the four-year visa qualifying period, although they should be aware that the market for secondary interests (while extant) is relatively illiquid and conditions under which they can sell these interests may be prescribed in more detail in the Limited Partnership Agreement. 2.2 Should the Government mandate that funds be taken upfront and establish parameters by which this can be done? AVCAL recommends that the fund managers be allowed the flexibility to make the required arrangements with their investors as to the best mechanism for ensuring that fund commitments are met. To minimise the ongoing compliance costs for VC funds while still safeguarding the integrity of the investment policy, one option may be for the fund managers to require, at their discretion, a bank guarantee or escrow 3

4 arrangements for the total funds committed by the applicant. This guarantee may last either the life of the fund (ten years) or at least over the initial investment period of the fund (around five years). In either case, the guarantee should cover the initial four-year visa qualifying period. If such a bank guarantee is in place, it should be deemed as sufficient proof of investment for the purposes of the visa application. The fund manager should then only be required to report to the Government in the event the bank guarantee is not honoured or if there is a material change in this arrangement. If the fund manager opts not to make any such guarantee arrangements, it may be the case that the Government may wish to obtain a report on the applicants' investment status at the end of the four-year qualifying period to confirm whether or not they have fulfilled the required investment criteria. The VC fund's annual statements, in-line with AVCAL reporting guidelines, would confirm that the VCLP or ESVCLP has been deploying funds in investee companies and the total amounts drawn down to date from each investor. If there has been a default in respect of a capital call, or if there has been a material change in the fund's operations, the Government may wish to retain the option to defer awarding permanent residency to the applicant until it is satisfied that its policy objectives have been met. Given the pipeline of investment opportunities available to VC funds in Australia, AVCAL does not believe there will likely be an issue for qualified VC funds to source suitable early stage investments in-line with their mandate within the investment period. Applicants will also have the incentive to conduct appropriate due diligence on the funds to check that they have the necessary investment expertise and an appropriate pipeline of potential new VC investments. In any case, it is also possible that applicants may be more inclined to agree to a guarantee or escrow on their funds to mitigate uncertainty around the risk of delay in the award of permanent residency. 2.3 For the avoidance of doubt, the policy should clarify that SIV applicants are permitted to put in a minimum investment of $1m in more than one Australian ESVCLP or VCLP, and not necessarily in one single ESVCLP or VCLP fund only (as currently drafted in the discussion paper, a "mandatory investment of at least $X (minimum $1 million at time of investment) in an Australian VC limited partner fund"). We believe this to simply be a question of clarifying the explanatory material to support the over-arching policy intent of allowing applicants to diversify their interests across funds to the extent they wish to. 3. Balancing Investment Items for the SIV 3.1 Inclusion of VC funds as eligible balancing investments. It is unclear from the current list of eligible investments under this section whether VC funds are included as eligible investments in the balancing investment items. AVCAL believes that it is not the policy intent to cap VC investments at their mandatory limits, and that this ambiguity should be clarified in the final policy guidance. AVCAL also recommends including the necessary exemptions to the minimum $100m funds under management requirement to facilitate VC fund inclusion under this list. 3.2 Inclusion of PE funds as eligible balancing investments. AVCAL strongly recommends that Private Equity funds be specifically included in the list of eligible investments. Private Equity funds play an important role in facilitating access to private capital for unlisted businesses. They represent an important source of not only capital but also expansion expertise for a variety of Australian businesses including family businesses, management buyouts of spinouts from larger companies, technology and mining businesses seeking capital for R&D, turnaround investments in distressed companies, and many more. AVCAL therefore recommends that the list be amended to include "AFS licensed fund managers that are Australian domiciled providing managed funds (open and closed-end) invested in Australian unlisted companies". 4

5 5. Design of the PIV AVCAL recommends that the same principles applicable to SIV applicants should apply to PIV applicants as well. In the context of the Australian marketplace for VC, 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 VC fund managers would seek institutional investment allocations of A$15m and above from a variety of sources such as 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 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. 5