The Australian Government has released the Venture Australia package (the “Package”) as part of its proposed $1 billion investment project, ‘A Plan for Australian Jobs’. The proposed Package is a welcoming one for the Australian venture capital sector overall, which would be of benefit to the existing Australian investment ecosystem and ultimately entrepreneurial activities.
As part of the proposed Package, the Australian Government is going to commit a further $350m to the Innovation Investment Fund (the “IIF”) and is intending to make a new offer round to fund managers at some stage this year. The IIF is an important scheme that allows fund managers to leverage off government investment to attract private money on a $1:$1 basis. This further commitment by the Australian Government will, prima facie, facilitate fundraising for upcoming venture capital funds. In addition, the Australian Government will use a revolving fund mechanism in tandem with the IIF where all the profits received from licensed IIF fund managers by the Australian Government will be recycled back into the IIF for future investments.
The proposed Package will also amend the early stage venture capital limited partnership (“ESVCLP”) and venture capital limited partnership (“VCLP”) regimes to improve and provide certainty in relation to both regimes and ultimately make ESVCLPs and VCLPs more attractive to investors. Some of the recommendations made by the Board of Taxation and accepted (in principle) by the Australian Government are as follows:
• The minimum total committed capital that a fund requires to obtain ESVCLP status to be reduced from $10m to $5m. Lowering the threshold will enhance the appeal of the ESVCLP regime to consortia of investors and allow them to channel their investment pool into an ESVCLP;
• Investors who invest via an interposed (unit) trust in an ESVCLP will now receive similar tax benefits compared to individual direct investors and will be able to ultimately access distributions from eligible investments (held by the ESVCLP) tax free;
• Domestic investors, being portfolio interest investors, tax exempt entities, widely held superfunds and Australian managed investment trusts (“MITs”), will benefit from the deemed capital account treatment on the gains/profits they receive from a VCLP. The deemed capital account treatment will equally apply to losses made. This means the aforementioned investors will be assessed under the Australian capital gains tax regime on gains/profits distributed by a VCLP;
• Allowing MITs to invest in VCLPs and ESVCLPs without falling foul of the public trading trust rules (and consequentially no longer being eligible to operate under the MIT regime). Potentially, this can open up a new funding avenue for VCLPs and ESVCLPs to attract investors given MIT is the predominant collective investment vehicle (“CIV”) used in the Australian investment landscape;
• The ability for ESVCLPs to invest more than the current 20% committed capital threshold in foreign ventures subject to the approval of Innovation Australia and the ESVCLP satisfying a material ‘national benefit’ test;
• Fund managers will be able to get certainty in relation to their investments by getting binding advice from Innovation Australia in relation to the eligibility of their proposed investments; and
• Flexibility for ESVCLPs to make indirect investments.
Whilst the proposed Package will have a positive impact on the Australian venture capital industry, there are other measures that can be explored to help deepen the venture capital industry in Australia. Some of the short term measures would be to 1) make investments in ESVCLPs (and VCLPs) complying investment for the significant investor visa purposes; this would help in attracting offshore investors to venture capital funds and 2) ensure that limited partnership vehicles are treated as flow through CIV irrespective of whether they are registered as ESVCLP or VCLP given offshore investors have a higher level of familiarity with limited partnerships.
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Pennam Partners is an investment house which focuses on: (1) M&A, MBO, MBI, divestment assignments and (2) designing capital strategies for unlisted and listed plays and raising capital where necessary. In addition, Pennam Partners acts as a manager for domestic and offshore funds (including VC fund) and work on investment mandates on behalf of investors.
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