Venture Capital – an overview for those working with SIV Applicants

Seed_growingWhy has the government targeted this sector?

When announcing a review the Significant Investor Visa program in October 2014, Andrew Robb, Minister for Trade and Investment, said:

“Our aim, as part of our broader competitiveness agenda, is to attract more investment into Australia that makes a material difference to supporting sustainable growth, productivity and job creation. We are keen to attract additional investment which supports innovation and which provide new sources of growth capital.”

In terms of accessing suitable venture capital opportunities in line with the governments innovation agenda, it was determined that the Early Stage Venture Capital Limited Partnership program would be the preferred vehicle for 10% or $500,000 of the $5M Significant Investor Visa complying investment portfolios.

What is the The Early Stage Venture Capital Limited Partnerships program?

This program is aimed at stimulating Australia’s early stage venture capital sector by allowing generous tax concessions for funds meeting the registration and investment criteria set out in the legislation. Early stage venture capital involves investment in businesses at the pre-seed, seed, start-up, and early expansion stages of development.

For both Early Stage Venture Capital Limited Partnership (ESVCPL) and Venture Capital Limited Partnerships (VCLP) the minimum amount a manager must seek to raise is at least $10 million. For ESCVPL’s the maximum size of the fund is $100 million, and if any of the underlying assets become worth more than $250M, divestment requirements apply.

Investments under the program that are not permitted include property development and construction, land ownership, banking and insurance, and acquisition of infrastructure.

How are they regulated?

ESVCLP’s and VCLP’s are structured as a limited partnership that makes eligible investments and is registered under the Venture Capital Act 2002 (the Act), by Innovation Australia.

What can they invest in?

The funds can acquire shares in a company, units in a unit trust, options (including warrants) and convertible notes provided they are not debt interests. For an ESVCLP the Australian business must be worth less than $50M and for a VCLP less than $250M.

How are the investments made?

The nature of the venture capital is a long term, illiquid investment with focus on capital growth. The investor commits a total amount which is draw down as investment opportunities arise. A common structure is to call 20% pa of the committed capital each year for the first 5 years . The investor is required to allocate funds upfront which will be held in cash, accessible to the funds when required.

Exits are as and when they arise with capital returned to the partners from each asset sale. The 10 year term of venture capital funds can be extended subject to agreement of the partners.

Whilst permanent residency may be granted after 4 years (or extended for 2 years, twice), venture capital funds generally have a minimum 10 year term, so SIV applicants would need to remain invested until the funds is wound up. 

How are they taxed?

Income distributions and capital gains earned as a result of investment in an ESVCLP is exempt from tax in Australia for both domestic and foreign partners. However capital losses can not be used.

In relation to VCLP’s the returns are subject to the concessional capital gains tax regime.

Note the investment must be held by individuals and not through an entity such as a company or trust to receive the tax exemption.

What funds are available?

There are in excess of 60 funds currently registered, with just over 10% of those conditionally registered (have not yet reached $10M). Many of those managers have a number of fund offerings. Funds are typically closed ended, that is once the desired amount of capital is sourced the fund will not take on new partners. Interested investors can be kept informed of potential new fund offerings.

Registered funds are listed on the AusIndustry website for ESVLP and VCLP.

To find out more about this sector, which funds are currently open and what to consider in constructing an appropriate solution to meet individual investment preferences, feel free to contact us.