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Published 18 February 2013 12:01, Updated 10 April 2013 07:32
The announcement of new funding is ‘absolutely welcome’ AVCAL chief executive Katherine Woodthorpe says. Photo: Nic Walker
Successful entrepreneurs could be tempted to establish their own venture capital funds thanks to the $350 million expansion of the Innovation Investment Fund (IIF) scheme under the federal government’s A Plan For Australian Jobs program.
The expansion, which over the next three to four years will see the government match every dollar of private investment into qualifying venture capital funds up to $350 million, will underwrite the venture capital industry for the next decade, says Australian Private Equity & Venture Capital Association chief executive Katherine Woodthorpe.
“The IIF was due to finish this year so the announcement of this new round is absolutely welcome,” Woodthorpe says.
“We got what we lobbied for, we’re delighted.”
The $700 million total will take 10 years to deploy, and Woodthorpe believes it will be enough to entice successful entrepreneurs or spin-outs from university commercialisation offices to hang shingles as venture capital managers.
In the past, the IIF program, which has committed $466 million since 1998, was criticised for not spending enough to create a community of self-sustaining venture capital managers.
Woodthorpe says a VC manager needs a minimum $50 million under management to “keep the lights on”, in part due to their huge ratio of due diligence to deals completed.
“These guys get 400 deals a year thrust under their nose,” she says.
Woodthorpe also applauded other measures in A Plan For Australian Jobs.
The government said all of its future investment returns from the IIF program – it takes a return equivalent to the 10-year bond rate when an individual investment makes more than that, leaving the additional upside for private investors – would be recycled back into the program.
“They’ve done that from time to time. In 2009, an IIF follow-on fund gave $64 million to IIF funds to help get them through the GFC – that came from recycled funds. But this is the first time they’ve committed to recycle returns back into the program on an ongoing basis,” Woodthorpe says.
She also welcomed tweaks that will make venture capital a more tax-effective investment for non-super domestic investors – previously family offices and wealthy individuals had venture capital returns taxed as income, now they will be taxed as capital gains – and for super funds, which will now be allowed to invest in venture capital limited partnerships through their own trusts.
Still on Woodthorpe’s wishlist are for the IIF to be made a permanent program - “so we don’t have this holding of our breath every three years” - and changes to tax rules on employee share schemes to make them more friendly to start-ups.
“Currently innovators can be saddled with an income tax liability before their shares have realised any income and, given the inherent risks of early stage companies, may never be worth anything,” she says.