Like many industries, private equity (PE) and venture capital (VC) activity have suffered heavily from the global financial crisis, after peaking in 2007. PE has shown signs of a turnaround but the investments you see today are mainly from “dry powder” that needs to be spent. The VC sector, on the other hand, continues to face significant challenges as GFC-affected investors look elsewhere in quest of liquidity and stable returns. Of 30 VC firms operating in Australia, just 10 make new investments.
In the challenging environment, the life sciences sector has been a sole bright spot. Research investment in the life sciences continues to grow, and Australian VCs have supported many world-class companies including Cochlear, Resmed, Pharmaxis, Neuromonics, CathRx, Verva Pharmaceuticals and Chemgenex.
Life sciences now form the main asset class for VC firms, at approximately 43% of invested funds, followed by ICT at 31% and energy and environment with 13%. The sector is significant for PE, too, with notable investments in such as iNova Pharmaceuticals, medical device company Lomb Scientific and Lifehealthcare.
Life science investments have grown in recent years, and held up in the face of the GFC, with the number of investments growing from over 50 in FY2006 to about 90 for the first half of FY2010. Still, the total amount of funding has not kept pace and many of these investments are for follow-on funding into existing companies, and not new ventures.
The recent, independent evaluation of the Commonwealth Government’s Innovation Investment Fund (IIF) program, which supports VC funds, found that “in the absence of the IIF program, the needs of the innovative and potentially high-impact businesses would remain unfilled,” and “it is likely that fewer businesses would have started up, and of those that did, their activities would have been more limited in both scale and scope.”
Policy stability and continuity needed
Even though the government has praises the program and acknowledged that innovation is central to national prosperity, there is no indication of any on-going policy support once the IIF program ends this year. This is in contrast to initiatives in other countries such as NZ, the UK and the US, all of which have recently enhanced or extended their venture funding programs.
If Australia wants to remain an engine of innovation we need to see some significant changes on the policy front and in the area of tax regulation. We need a national framework that makes both PE and VC investment attractive for investors in an increasingly competitive and global investment environment.
For both PE and VC, we need tax certainty for investors because some of the current arrangements are complex, unclear and subject to interpretation, all of which act as a disincentive to foreign capital. For VC we need greater policy support to encourage the collaboration between our researchers, the commercial sector and investors.
As Australian super funds have grown in size they have become less willing to write smaller cheques, given Australian VC is just 0.22% of the funds under management by the Australian super industry. Having domestic institutions invest more locally, rather than offshore, works in the national interest by supporting local innovation and commercialisation initiatives as well as providing returns to local investors. This is a win-win scenario but we need a national effort to incentivise Australian capital staying in Australia, in addition to attracting foreign capital.
Australia is recognised internationally as attractive for PE and VC investment, and we have a rich history of innovation and entrepreneurship. We need to ensure that Australia remains competitive and attractive in the face of growing competition and to prevent some of our brightest ideas and people going offshore.
Katherine Woodthorpe is the Chief Executive of Australian Private Equity and Venture Capital Association. She has an extensive background as a management adviser and professional director. She is currently a Board member of Commercialisation Australia and the Chair of the Antarctic Climate and Ecosystems Cooperative Research Centre. Woodthorpe has previously been a Director of a number of listed life science companies and is a former Council member of The University of Technology, Sydney.