Submission to Australian Financial Centre Forum
The Australian Private Equity & Venture Capital Association Ltd
The Australian Private Equity & Venture Capital Association Limited (AVCAL) is a national
association which represents the private equity and venture capital industries. AVCAL's 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.
Around the world, private equity is an increasingly important tool in investment policy for pension
funds, sovereign wealth funds and other institutional savings pools. Both Australian superannuation
pools, which are increasingly seen by foreign countries as examples of global best practice, and
their overseas equivalents, use private equity investment as an important element of their
investment policy. Global allocations to private equity have steadily grown in the last decade. It is
therefore important for Australian tax and regulatory policies to be conducive to embracing what is
emerging as a major new force in standard institutional investment practice.
Value of private equity
Private equity (“PE”) and venture capital (“VC”) are important components of the financial services
sector. In their own right they are a significant industry. However it is their investment into
Australian companies across all sectors which is the most important aspect of their value to the
VC investment enables tomorrow’s industries (primarily in the technology sectors such as biotech,
cleantech and ICT) to establish themselves and grow into sustainable entities. Some of Australia’s
largest technology companies, particularly those in the life sciences sector, would not be here today
without VC funding. The jobs and tax revenues that companies such as Cochlear, ResMed and
others bring to Australia are valuable. They are also the ‘smart’ future of Australian industry,
capitalising on our intellectual property and growing highly profitable enterprises.
PE investment provides much-needed finance to small-to-medium businesses looking to expand
and also an exit opportunity for business owners approaching retirement. PE managers work
actively with investee companies of all sizes to improve operational performance, leading to an
increase in jobs and enterprise value.
1. At the forefront of the changes which AVCAL urges you to consider in order to maximise
Australia’s ability to attract capital for private equity and venture capital investments are
changes to clarify the tax treatment of gains from PE and VC investing. Such gains should be
on capital account and statutory amendments should be introduced to confirm this.
2. Establishment of a simple limited partnership vehicle (such as was recently introduced by New
Zealand) to enable investment in PE and VC.
3. Removal of the FIF rules would also enhance Australia’s attractiveness as a destination for
investment capital. The flow-on effects through the portfolio companies of employment growth
and improved operational performance would be of undoubted benefit to Australia’s future.
Dr Katherine Woodthorpe
Australian Private Equity & Venture Capital Association Limited
Gateway Building,Level 4l, 1 Macquarie Place, Sydney NSW 2000 Telephone +61 02 8243 7000
ABN 84 056 885 708 www.avcal.com.au
1. About AVCAL
The Australian Private Equity and Venture Capital Association (“AVCAL”) was established in 1992
as a forum for participants in the private equity and venture capital industry. AVCAL is the central
voice of the Australian industry and its membership includes almost all the domestic, regional and
global private equity and venture capital firms active in Australia.
2. What is Private Equity?
Private equity is investment typically in unquoted companies that are considered to have high
growth potential, with the aim of building and improving them over a period of years and then exiting
the investment at a higher value. Here, we use the term ‘private equity’ in its broadest sense to
encompass both early-stage (venture capital) and later stage investments.
Private equity investment is frequently categorised according to the stage of development of the
company being invested in. Expansion and buy-out stage investments are often termed ‘private
equity’ investment, whereas seed and early stage investments are termed ‘venture capital’ (“VC”)
Private equity (“PE”) involves:
− equity investment typically over a 3 to 5 year investment period in unquoted companies
considered to have significant growth potential;
− active involvement by the investor in the governance and management of the investee
− consideration, at the time of investment, of the subsequent sale of the investment rather
than its indefinite retention.
3. Value to the Australian economy
3.1. Benefiting Australian Businesses And Investors
PE provides much-needed finance to small-to-medium businesses looking to expand
and also an exit opportunity for business owners approaching retirement. This will be
increasingly the case as an entire generation of family businesses stemming from the
immigration boom of the 70s to 80s begins to look towards succession planning.
PE managers work actively with investee companies to improve operational
performance. A study of Australian private equity exits in 2007 found that:1
– Enterprise value in these firms grew by a CAGR of 21%: almost double that of public
– EBITDA grew 2.5 times faster than public company benchmarks.
The benefits of PE allocations are largely returned to Australian retirees. Although only
about 1% of Australian superannuation is invested in PE, domestic superannuation funds
accounted for over half of PE drawdowns in FY08.
PE is associated with productivity gains. An independent study commissioned in 2004 by
AVCAL indicated that the labour productivity of private-equity backed firms increased over a
period of two years by a total of 6.3% which was almost double the comparable national
figure of 3.4%.2
PE is good for employment and professional development in the financial services
sector. Besides the estimated 1,000-odd people employed directly by PE firms, the industry
also generates substantial fees, employment and professional development in a significant
Source: Ernst and Young, How Do Private Equity Investors Create Value, 2008. Figures exclude two (positive) outliers.
Source: Meyrick and Associates, Labour Productivity Study, 2004.
section of the financial services sector. It is also estimated that PE-backed companies
employ 1 out of 13 jobs in the Australian private sector.
PE and VC are vital to the innovation framework and the technological enablers of
Australia’s future competitiveness. An independent study commissioned by AVCAL in
2006 found that 72% of PE investee companies launched new products the previous year,
compared to only 27% who did so in the year prior to the initial PE investment.3
PE plays an important role in investing in and regenerating those companies which
otherwise would continue to be starved of financial/management capital. The vast
majority of PE deals involve the acquisition of unwanted or non-core assets. This is
irrespective of whether the assets are acquired from public or private companies. An
excellent example is Bradken Ltd, acquired by CHAMP Private Equity from ANI Ltd where it
was an under-resourced division. Following three years of ownership, restructuring and
growth it was re-listed separately as a profitable company in its own right. Since that time it
has continued to grow in profits and employment and export earnings.
3.3. Proven Capacity To Be A Regional Centre In Private Equity
Australia is a major PE investment centre in the region. In 2008, Australia received the
largest amount of PE investment of any country in the Asia-Pacific region, with over
US$1.68 billion of deals reported that year. China saw just over US$1.13 billion of deals,
none above $200 million in size, with Japan just behind at US$999 million.4
Australia has a well-developed financial services infrastructure for PE relative to
other regional markets. In 2008, Australia was the biggest market for M&As in the East
Asian region. It accounted for 20% of total deal value for the region, followed by China
(17%), HK (16.5%) and Japan (14%).5 Industry data availability, reporting standards and the
tax and legal framework re generally reported to be among the most well developed in the
3.4. Scope For Growth
Despite its positive role for the economy, PE in Australia is still relatively small
compared to other forms of business financing. The value of businesses purchased by
PE in Australia in 2007 was less than 0.4% of the value of all businesses listed on the ASX.
The total value of funds raised by PE firms in the 9-year period to 2007 is still under 2% of
ASX market capitalisation: less than the market capitalisation of the 10th largest ASX stock
Foreign investment into Australian PE funds has remained low although local
investor commitments have risen over threefold since 2000 (thanks in a large part to
strong growth in local superannuation funds over this period). The absolute value of foreign
investment is today at approximately the same level it was at 2000, but as a proportion of
total PE commitments it has halved over the last nine years from 22% to 11% (see Figure
Given the natural limits to sourcing further funding from the domestic pool of funds, it is vital
that Australian PE and VC firms should to be able to successfully tap foreign funds to
ensure that Australian innovations and businesses can continue to grow and thrive.
Source: PricewaterhouseCoopers, Economic Impact of Private Equity and Venture Capital in Australia, 2006.
Source: AVCJ KPMG Asian Private Equity Quarterly Investment Report, Feb 2009.
Source: mergermarket Monthly M&A Report, Dec 2008.
Figure 1: Resident and non-resident commitments to Australian PE (Source: ABS, 2009)
D Resident commitments
0 1 2 3 4 5 6 7 8
0 0 1 2 3 4 5 6 7
- 0 0 0 0 0 0 0 0
9 0 0 0 0 0 0 0 0
9 2 2 2 2 2 2 2 2
4. Regional Cooperation
AVCAL has taken the initiative to build links with equivalent industry associations in Asia Pacific.
The Australian association mentors its NZ counterpart and has led regional discussions on issues
such as valuation guidelines. AVCAL is seen as the most professional and comprehensive
association in Asia Pacific. It is the association to which others turn to for advice.
A longer term initiative is to build a pan-Asia industry group which will cover broader issues such as
standards and education, in a similar manner to the European Venture Capital Association.
Specific barriers to Australia becoming a regional centre for PE and VC.
The Board of Taxation is currently examining the impact of the current confusing tax regime
regarding the tax treatment of gains arising from the investing activities of managed investment
trusts (MITs) such as PE and VC funds. The current regime is largely based on case law and is
subject to differing interpretations. In addition, the ATO has prepared (but not released) a draft
determination which seeks to treat gains made from the investments of MITs as being on revenue,
rather than capital, account.
This issue has a direct impact on the attractiveness of Australia as a location for both locally-grown
and overseas PE and VC funds. Regional competitors for the sector such as Singapore, Hong
Kong and even New Zealand have simpler and more attractive tax regimes for fund managers.
Investors such as superannuation funds are discouraged from investing in PE and VC when the tax
treatment of gains is unclear and differs depending on whether the super fund invests directly or via
AVCAL and almost all other submissions to the Board of Taxation Review have argued that the
gains from Managed Investment Trusts should be treated as capital gains and that there should be
legislative clarity around this. AVCAL’s full submission can be found at:
n_Private_Equity_And_Venture_Capital_Association_Limited.PDF. An extract from the
submission is appended to this document.
It would be an enormous disruption to the industry and its investors for there to be differing taxation
treatments of gains derived directly and gains derived via managed funds. Specifically, if a
superannuation fund invests in securities directly and attracts a clear statutory taxation treatment of
gains via section 295-85 of the Income Tax Assessment Act of 1997, it is inappropriate to treat the
gain as being on revenue account if derived via a managed fund. The superannuation fund will lose
the benefit of an explicit policy setting if this happens. It would be disastrous if superannuation
funds decided to withdraw their investment support for Australian fund managers as a result, and
chose to invest in overseas markets where the tax regime clearly identifies such investing as being
on the capital account (such as the UK and the US).
If gains from managed investment trusts become taxable as revenue it would be totally
counterproductive to the Government’s policy aims.
An approach to clarify matters would be to establish a limited partnership (“LP”) vehicle similar to
the one introduced by New Zealand in 2007. More details can be found at:
http://www.nzsecurities.com/limited_partnership.htm. It is clean and simple with no caveats to
Australia’s attempt at a an LP structure (the Venture Capital Limited Partnership or “VCLP”) and
the subsequent Early Stage VCLP are so complex and trammelled with caveats that they become
unworkable and fund managers are reluctant to use them. Rules such as the degree to which they
can own foreign assets make managing a VC investment extremely difficult, if the entity wishes to
set up overseas operations that can be deemed to change the domicile of the company. In VC
backed businesses the reality is that they are the ‘born globals’, who inevitably have to venture
overseas to be successful.
Other rules regarding the size of the investment, particularly after a period of ownership and growth
effectively punish a successful investor for growing the investee company.
1. AVCAL urges you to consider in order to maximise Australia’s ability to attract capital for PE
and VC investments are changes to clarify the tax treatment of gains from PE and VC
investing. Such gains should be on capital account and statutory amendments should be
introduced to confirm this.
2. Establishment of a simple limited partnership vehicle (such as was recently introduced by
New Zealand) to enable investment in PE and VC.
From inception, the FIF rules have been seen to overreach their primary purpose of dealing with the
tax deferral opportunities for Australian investors in roll up funds located in tax havens. In the
result, when the provisions were introduced, they contained numerous complex provisions
and exclusions and presented difficult interactions with other parts of the tax law.
Moreover, since introduction, qualifying US FIFs have been removed from the scope of the
provisions and, as well, Australian superannuation funds and PSTs etc have been given exemption
from the application of the FIF rules. This leaves a complex set of rules which, due to a myriad of
exemptions and exclusions, in all probability raises little revenue but causes substantial compliance
costs to the commercial community.
Rationalising the FIF rules or dispensing with them altogether would have a positive impact on the
attractiveness of Australia as a location to establish managed funds.
3. Removal of the FIF rules would also enhance Australia’s attractiveness as a destination for
investment capital. The flow-on effects through the portfolio companies of employment
growth and improved operational performance would be of undoubted benefit to Australia’s
Appendix 1 – taxation discussion (extract from AVCAL’s submission to the Board of
1. As has already been noted, AVCAL represents the PE and VC sector. A typical PE or VC
fund is an unregulated, managed investment scheme. The principal reason such funds
are unregulated is that such funds' investors are large, regulated superannuation funds,
registered managed investment schemes and other sophisticated and professional
investors, with the largest proportion being regulated superannuation funds.
2. Presently, the great majority of PE and VC funds treat their gains and losses as being on
capital account. This provides consistent treatment with the treatment of Australian
regulated superannuation funds, which entities make up a considerable proportion of
investors in PE and VC funds.
3. If the Board of Taxation review were to exclude unregulated funds whose investors were
large regulated superannuation funds and managed investment trusts the review, in
AVCAL's opinion, would not realise the opportunity for significant reform in this sector and
would potentially create even greater complexity and uncertainty. Moreover, if the scope
of the review is extended in the way AVCAL suggests, but the outcome of the
deliberations on Chapter 7 is to treat gains as being on revenue account, the outcome will
be also regrettable. Specifically, this outcome would result in indirect investment by
regulated superannuation funds being taxed differently than direct investment and
increase their tax burden on such gains by 50%. Put simply, it would be disastrous for the
industry and for the Government’s efforts to promote Australia as the financial services
hub of the region were such superannuation funds to withdraw their investment support
for local PE and VC fund managers.
We are aware that numerous other organisations, including the Taxation Institute of Australia, the
Property Council of Australia and the Investment and Financial Services Association have made
detailed submissions on these points. All the submissions, in one form or another, recommend that
gains by managed investment trusts should be on capital account and that a statutory amendment
should be introduced to confirm this. AVCAL clearly supports such a legislative confirmation of the
current treatment and it commends that such legislative confirmation extend to wholesale trusts in
the form discussed earlier.