Australian private equity a problem for foreign investors

Overseas investors are drawn to Australian companies for their proximity to Asia but are put off by inadequacies with the country’s private equity sector such as slow exits and tax issues, according to the Asian Venture Capital Journal Group.

At a Sydney conference of international investors held by the AVCJ Group, an information source on Asian private equity, speakers highlighted the fact that Australia’s close proximity to Asia raises the profile of Australian businesses, and serves as an incentive for venture capitalists.

It was also noted that Australia’s familiar regulatory framework means Australian companies can provide a safe platform into Asian economies.

However, many US venture capitalists choose to remain within their own country or favour Europe over Australia. Speakers at the AVCJ Group conference pointed to slow exits and tax issues for creating barriers to investment.

Apparent problems within the sector were highlighted late last year when private equity company Texas Pacific Group was pursued by the Australian Taxation Office for part of the proceeds from its float of department store chain Myer.

Despite the ATO’s involvement, there was no suggestion TPG was trying to avoid tax or even knew of the ATO’s $452 million tax bill claim.

“Australia survived the GFC relatively unscathed thanks to demand for its rich resources, a relatively self sufficient economy and its prudent, well-supervised banks,” the AVCJ Group said in a report.

“The Australian private equity industry has also weathered the storm, but for the industry to have a sustainable future it will take more than that, as a number of obstacles stand in the way including slow exits, tax issues and increasingly skeptical limited partners.”

Speaking at the conference, Assistant Treasurer Nick Sherry says Australia is a highly attractive investment option, particularly for the mining, manufacturing and financial services sectors.

“Of course, as part of a diverse market, there is also a role for private equity finance… Local investor commitments to private equity have risen over threefold since 2000,” Sherry said.

“Australian private equity funds have historically performed on a par with American and European funds. Furthermore, I am advised that there is an estimated $6.5 billion in unused commitments available for investment over the next two or three years.”

“So the message is that private equity is an important part of a diverse investment sector…. and of course we also value the innovative thinkers, entrepreneurs and researchers behind our venture capital market.”

Sherry says that the private equity and VC markets have a “cut throat” approach to competition elsewhere in the world.

“Here in Australia, you work much more closely together and that’s, in my view, a good thing… Australia has cut a role as a leading Asia Pacific venture capital market and that is also strongly supported by the government.”

“There are many in the wider community and some in the business community too, who have a somewhat dim view of the contribution private equity makes to our economy generally and to the companies you invest in specifically.”

“So I would say to you – the challenge you face, regardless of the final landing point on the ATO rulings and the Government position – is that a further, clearer and more digestible message about the positives would be a good thing.”