Private equity in Australia – recent developments
Early stage private equity investment in Australia may now be more
attractive to foreign investors
by Andrew Lind, Partner and Zmarak Zhouand, Associate,
Gadens Lawyers, Sydney
Private equity is making headlines in
Australia, as it is around the world. Recent
developments in Australia include:
a Senate enquiry into private equity
and its effects; and
new legislation in relation to venture
capital limited partnerships.
It is not expected that the Senate enquiry
will result in any changes affecting private equity transactions, but the
recent amendments to legislation affecting venture capital limited partnerships
should make the use of these vehicles more attractive to local and foreign
investors for early stage private equity investment in Australia.
enquiry into private equity and its effects
On 29 March 2007 the Australian Government
referred to the Senate Standing Committee on Economics (the Committee) an inquiry into private
equity and its effects on the Australian economy and capital markets.
The Committee has been directed to assess:
domestic and international trends in
whether private equity could be a
matter of concern for the Australian economy if ownership, debt/equity ratios and
risk profiles of Australian businesses were significantly altered;
long term effects of private equity debt structuring on government revenue;
the current laws are sufficient to deal with any attack on national economic or
strategic interests by private equity and, if not, what laws should be
if any, laws should be brought in to deal with private equity.
The Committee's terms of reference and the
assumptions underlying the terms of reference have been questioned by numerous
stakeholders in submissions to the Committee.
With few exceptions, the general view in
Australia is that private equity, within the current legislative framework, has
had a positive impact on Australia's capital markets, government revenue and
general economic performance and will continue to do so if not over-regulated
A concern held by some stakeholders is that
the Committee's report could lead to legislation regulating private equity
activity which could potentially slow the growth of private equity activity in
The Committee has scheduled hearings for late
July 2007 and its report is expected in September 2007.
Venture capital limited
venture capital activity in Australia has not experienced the same level of
growth as the general private equity market.
One reason attributed to this is that the
Venture Capital Limited Partnership (VCLP),
introduced in Australia in 2002 to promote foreign venture capital, was too
The aim of the VCLP was to provide a flow
through entity for tax purposes and capital gains tax exemptions for foreign
investors only. However, the taxation
benefits were subject to the satisfaction of certain conditions.
On 1 July 2007 legislation came into effect
removed some of the restrictions that
applied to VCLPs; and
introduced a new vehicle to promote
venture capital investment, the Early Stage Venture Capital Limited Partnership
Removal of restrictions on VCLPs
As a result of the recent legislative changes:
a VCLP can now hold up to 20% of its
capital in investee companies that are not Australian residents;
the minimum committed capital has been
reduced from A$20m to A$10m;
capital gains tax is no longer payable
on most assets disposed of by non-residents;
a VCLP can be established in Australia
or with any country with which it has a double taxation treaty;
a general partner can be a resident of
any country with which Australia has a double taxation treaty; and
investment can now also be made
through convertible notes and in unit trusts.
Introduction of ESVCLPs
The new legislation also introduces ESVCLPs.
ESVCLPs are intended to encourage
investment in start up enterprises, allowing smaller organisations to seek capital
to fund future activities.
An ESVCLP must have the following features:
the maximum size of the investee entity
must not exceed A$50m (at the time of investment);
the fund administered by the ESVCLP
must have a minimum size of at least A$10m and a maximum size of A$100m;
an investment must be divested when it
the maximum contribution by an
investor (unless the investor is a bank, life office, superannuation fund or an
investor approved by the Venture Capital Review Board) must not exceed 30%;
the maximum percentage of committed
capital of the ESVCLP for each investment must not exceed 30%;
an ESVCLP must have a minimum life of
5 years, and a maximum life of 15 years;
an investment must be for a minimum
period of one year; and
an ESVCLP must report quarterly to the
Venture Capital Review Board on the implementation of its investment plan.
Prohibited features include:
the entity in which capital is
invested must not be listed on the Australian Stock Exchange (at the time of
an ESVCLP cannot acquire a pre-owned
investment from a third party, unless it had a pre-existing interest in that
investment, and has made a further significant new investment; and
an ESVCLP must not invest in property
development, some financial services, insurance, construction, infrastructure and
passive income investments.
Advantages of ESVCLPs include:
income and capital gains will not be
taxed under the ESVCLP, but will flow through to the general and limited
partners (although any losses from investing in the ESVCLP will not be deductible);
benefits will extend to domestic
investors, as well as foreign investors.
Disadvantages of ESVCLPs include:
ESVCLPs cannot be used to acquire
mature businesses from third parties (investments must be early stage);
investment in certain industries is
the investment must be divested when
it exceeds A$250m.
As the ESVCLP tax concessions are designed
to stimulate Australia's early stage venture capital sector, the tax
concessions are not available where "pre-owned" investments are acquired.
That is, the focus is on providing new
investment, not providing an exit for those that made the early investment.
An investment is "pre-owned" if it
was issued or allotted to an entity other than the ESVCLP (other than to an
underwriter or another person for the purpose of being offered for sale). This would include shares or units in an
entity owned by a third party.
An ESVCLP can only invest in pre-owned
the ESVCLP already owns shares or units in the
entity or it makes other investments in shares or units in the entity, some or
all of which are not pre-owned; and
the value of the pre-owned shares/units, combined
with the other investments in that (pre-owned) entity, does not exceed 20% of
the ESVCLP's committed capital.
Overlaying this are other ESVCLP
requirements, including the requirement for the ESVCLP to have an investment
plan approved by the Venture Capital Registration Board (VCRB). The VCRB, in
approving an investment plan, is likely to take into account the extent to
which the plan focuses on early stage venture capital. Ongoing reporting by the ESVCLP to the VCRB
on the implementation of the investment plan is required. An ESVCLP's registration (and the tax
concessions that go with it) can be revoked by the VCRB if the ESVCLP does not
comply with the ESVCLP requirements.
So, whilst the general legislative landscape
for private equity in Australia is unlikely to change as a result of the Senate
enquiry, the recent changes to VCLP requirements and the introduction of
ESVCLPs may encourage both local and foreign early stage private equity
investment in Australia.
This publication is
provided to clients and correspondents for their information on a
complimentary basis. It represents a brief summary of the law applicable
as at the date of publication
and should not be relied on as a definitive or complete statement of the