30,000 extra businesses could benefit from private equity and VC with a few changes to the system

Australia needs to reform the venture capital system to enable more companies to access local private equity, according to a submission by capital peak body Australian Venture Capital Association Limited (AVCAL).

The report highlighted that only 350 out of a possible 30,000 companies received private equity or venture capital funding last year.

The federal government’s Financial System Inquiry was welcomed by AVCAL as a once-in-a-generation opportunity to overhaul the policy hurdles holding Australian entrepreneurs back.

“With the mining sector entering a slower capital investment phase, Australia will be relying more and more on the efficient deployment and allocation of capital in the financial system to drive productivity in the non-mining sectors of our economy,” the report says.

The organisation highlighted the need for greater growth capital, stating the need for more efficient allocation of capital is not just confined to startups but also small and medium-sized businesses looking to grow.

“For Australian businesses that don’t have access to debt financing from banks, venture capital and private equity funds can help to provide capital and skills to expand business operations and deliver growth in productive output and employment,” chief executive Yasser El-Ansary said in a statement.

The submission noted the major roadblocks to a more dynamic Australian capital ecosystem, including disincentives to long-term investment, superannuation asset allocation and liquidity support, effectiveness of government programmes and tax policy settings.

A breakthrough for private equity could come from aligning the longer term interest of superannuation funds, currently worth $1.75 trillion, with innovation and growth capital, which often won’t see returns for several years.

“Our superannuation savings pool is a vitally important part of the foundation of our financial system now,” says El-Ansary.

“But there is a very clear opportunity to remove roadblocks that deter some superannuation funds from backing private equity and venture capital firms to invest in Australian businesses.”

AVCAL estimates just $17.6 billion is committed to private equity by superannuation funds (just 1.2%) and only half of this amount is invested in Australia ($9.6 billion).

The submission also calls for smaller venture capital boosting initiatives of the government to be consolidated and the savings from these cuts added to the Innovation Investment Fund allocations.

It also proposed a ‘HECS’ style innovation grant program, where companies pay back their capital in instalments after reaching profitability and a certain size.