Australia’s VC industry

Historically, technology, energy, life sciences, biotech, and to some extent communications have all been prime targets for venture firms. In 2010, 33 venture investments were made totalling just under $200 million, according to AVCJ Research. While this makes up less than 2% of the PE and VC industry by capital deployed, those operating on the ground have well-founded hope for the future of venture.

Room to grow

Brigitte Smith, Co-Founder and Managing Partner of GBS Ventures explains, "Venture in Australia is in its nascent phase." The federal government launched a program in the 1980s which was intended to promote the venture capital industry. While some excellent companies came out of that, the industry was not sustainable at that time. Fast forward to 1998, and the Innovation Investment Fund Program was launched, making the government a cornerstone LP for a number of first time managers. Many of those first funds invested into a market that saw the bubble burst in the early 2000s, which has hampered development of Australian venture.

Notes James Macdonald of Norton Gledhill, "When you look at Australian venture, it's a lot younger than in the US and Europe. Some of the venture funds in the US are in their 6th or 7th generation funds; our most experienced managers are on fund number three, with many managing and investing their first fund."

The government has placed a decided emphasis on venture because it is valuable to society to foster innovation, growth and entrepreneurialism, and Smith notes that because of this, "there is a small core of the industry, which has sustainable managers, good deal flow and attractive results."

GBS Ventures, which remarkably closed its fourth fund in the aftermath of the GFC in 2009, is focused solely on the life sciences sector, and Smith says that they see around 200 companies a year, with due diligence performed on around 50, and just 3-4 investments made.

While her firm is in a fortuitous position, Macdonald says that the industry itself is in an interesting place, because "Most groups who are currently managing funds raised money three to four years ago. That means they are likely 12-24 months away from raising again. From that perspective, it will be critical in the next year or so to establish that track record," so that managers will be attractive to potential investors.

One potential hurdle however remains the 2009 tax changes to employee share option plans. "The government used to allow employees the choice to be taxed up front, or defer taxation until the point at which an employee actually exercised their options." Today, however, the default provision is up front taxation with the value of anyoptions treated as income when they are granted. It is much harder for employers to design an employee option plan that allows for deferred taxation to a point where an employee has the ability to exercise the options. "For venture firms looking to retain senior management, it is a massive issue." But, while it is an additional burden to the ways that firms devise incentive plans, Macdonald says that lawyers like himself are becoming more prescriptive in the way that they draft plans, making them open to a wider range of employees and ensuring they vest or expire ahead of the maximum 7 year deferral allowed.

For venture firms, the tax concerns related to the TPG-Myer case is "less of an issue than with the larger buyout funds. People won't ignore it, but it's not as relevant."

Sectors with potential

Life sciences is for Australia what technology investments are for China. The country has an extremely favourable regulatory environment around life sciences. Medtronic and GlaxoSmithKline are two global players that look to Australia to hold a large portion of first in man studies.

A long history of medical research and practitioners with a breadth and depth of skills certainly don't hurt the sector. And, explains Smith, dividing the market cap of listed life sciences companies by GDP, the US comes first, but Australia comes second in the world. "[Australian venture firms] are well-positioned in this space;" a trend that continues to feed an industry in which companies are sought after by global majors. This is a natural exit strategy, which mirrors that of buyout exits. Australia it seems has no shortage of selling points.

Further, across a variety of sectors, where many countries have protected industries, Australia's regulations come in at a deal size much larger than venture typically operates. "You aren't making investments of the size and scale that the Foreign Investment Review Board would have to approve," says Macdonald, which makes it easier for LPs to tap into Australia's growing companies without fears of being blocked by protection measures.

 

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• Topics
• Australasia
• Venture
• Brigitte Smith
• GBS Venture Partners