Review entitled Significant Investor Visa (SIV) the program was proposed by the government as an initiative to spice up innovation in Australia. An outline of the revised SIV program was published last week, but full details have not yet been released. While the review will result in some welcome improvements, overall this publication represents a missed opportunity to significantly impact Australia’s innovation capabilities.
After greater than a decade of strong economic growth, largely driven by extraordinary investment in the mining sector, Australia’s national accounts data remain disappointing. The case for government commitment to effectively driving innovation in Australia has never been more compelling.
While Australia’s innovation rating has improved over the last decade, this is still the case lags behind many of the world’s more developed economies. Australia’s Innovation Performance Index, which measures a country’s ability to leverage research and other innovation inputs, ranks Australia 81st in the world – well below the global median.
Research has shown that small businesses contribute a disproportionate share of major innovations. Venture capital (VC) funds are an necessary source of startup financing for small businesses. Venture capital too supports innovation by financing research and development and providing management skills to commercialize hidden technologies and develop the firms in which they invest.
The governments of Canada and Singapore have implemented SIV-like programs that aim to spur innovation by funneling recent funds to progressive firms through enterprise capital.
Venture capital investment in Australia is low in comparison with other developed markets. In fiscal yr 2013 amount of invested capital by Australian enterprise capital firms reached the lowest level in 11 years – AUD 111.4 million. In the same yr, enterprise capital firms’ investments in the US amounted to $334 billion, in Israel – $1.7 billion and in China – $3.5 billion. According to the OECD, startup financing accounts for only 0.009% of GDP in comparison with 0.055% in the US and 0.3% in Israel.
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Visas and innovations
The Significant Investor Visa Program is a pathway to everlasting residence for international investors who place investment funds in Australia. The concept is easy. High-net-worth international investors invest at least A$5 million over 4 years in “approved” investments, after which they are granted everlasting residence.
The SIV scheme, introduced by the previous Labor government, has been in force since November 2012. ‘Approved’ investments under the scheme included ultra-safe government bonds, ASIC-regulated managed funds and shares in blue chip firms. They provide additional liquidity to trading markets but are of questionable value in providing recent innovation capital or adding real value to the Australian economy. However, they constituted the overwhelming majority of funds invested under the program.
Since the program was launched, investors, mainly from China, have invested over A$4 billion. With just 124 investments made by VCs in FY 2013 (AVCAL), the program overhaul had the potential to dramatically increase the pool of enterprise capital for hundreds of young progressive firms. Unfortunately, they failed in many key areas.
Financing innovation through SIV
Under recently unveiled changes, as much as 60%, or $3 million, of a $5 million investment can still be invested in “other” investments, which include highly liquid investments in blue chip firms. Although government bonds have been removed from the “approved” list, stocks and real estate are still on the list. Although the revised program now includes a enterprise capital component, it represents only 10%, or $0.5 million.
To invest in small cap firms with a market capitalization of as much as A$500 million, an investment of at least 30% is required. There is no specific requirement that any small-cap investment be made in firms engaged in progressive businesses.
Most small-cap firms operate in the mining, energy, financial services or real estate sectors. Some qualifying “small companies” will likely be considered progressive firms, most will not. If the government were serious about supporting innovation, further criteria can be applied to keep up the focus on innovation capital. For example, eligible investments might be assessed on the basis of innovation inputs (R&D expenditure, employees or variety of R&D alliances) or innovation outputs (patents, investments in progressive products and processes).
Similar visa programs in Singapore and Canada do not allow shares in blue-chip firms or real estate investments. Although their programs have a lower overall investment requirement, 100% of the funds are directed to areas that stimulate innovation.
The international competitiveness of SIVs was cited as the reason for the relatively low demand for enterprise capital. The perceived competitiveness of the program may very well be addressed by reducing the total investment required but increasing the percentage allocated to innovation capital. This would offer a much greater impetus for innovation.
The government announcement mentions the possibility of accelerating the VC component of the SIV for recent applications inside two years. It’s hard to know the logic of putting a program so far behind other leading programs and then waiting two years to boost the VC component to a more significant level.
The time-frame is too short
Under the revised scheme, the minimum investment time-frame of 4 years stays unchanged. While the review notes that VC investments may cover longer terms, this is not a requirement. Venture capital funds typically require an 8-10-year investment period to cover: researching and choosing appropriate investments, developing and growing the investee firms, and implementing effective exit strategies.
Shorter minimum investment periods, reminiscent of the five-year minimum under the Singapore program, encourage funds to offer financing in the type of convertible bonds or mezzanine debt relatively than equity. This limits the kinds of firms that attract financing (young startups generally do not have the money flow to support debt financing) and the activities that might be financed (debt financing is not suitable for riskier and more progressive ventures).
To truly promote VC financing under the program, the government should set a minimum investment period for the VC component of at least eight years to match the typical lifetime of the fund. The period required to acquire a everlasting residence permit does not have to correspond to the investment period, so under the SIV it may well be kept at 4 years. Canada’s Immigrant Investor Venture Capital (IIVC) pilot program requires a 15-year commitment and everlasting residency granted upon acceptance of the applicant.
Other design issues
Recognition of mid-market private equity (PE) funds under the revised scheme is welcomed, albeit under a token VC requirement. These funds invest in firms price $150-200 million, and their role is often misunderstood in the context of progressive business ventures. They provide capital for development to firms that have gone beyond the start-up phase. They can play a key role in the success of progressive firms by commercializing latent technologies and have difficulty attracting capital to Australia.
The quality and transparency of data is one other area that is missing when it involves designing a system that permits for the efficient and effective allocation of innovation capital.
The sensitivity of disclosure of monetary information and performance of individual funds or enterprise capital firms makes it difficult for individual investors to decide on funds. Fund performance and investment valuations are considered confidential and exclusive data aggregated performance throughout the sector are publicly available.
The Singapore program uses independent third parties to guage eligible funds and the results are publicly available. A fund evaluation mechanism under the SIV would help investors make informed selections, ensuring a more efficient allocation of capital.
A transparent framework for ongoing assessment, monitoring and reporting is also essential to make sure compliance of participating funds and track the allocation of funds. Such a framework could provide the basis for informed changes to SIV investment criteria. The outline review, like the existing program, comprises little information on effective monitoring.
Innovation is the key to our economic future
As long as Australia ranks high as a desirable place to live and raise a family, programs like SIV provide an opportunity to draw innovation capital that we cannot afford to miss. The review published by the government was one other missed opportunity for Australia’s innovation capabilities. A properly designed program could make a much more significant contribution to innovation in Australia.