What tops your agenda at the moment?
Tax. It never goes away!
The feedback period on the Australian Taxation Office’s (ATO) final determinations on private equity tax was due to end in January. Where did the discussions get to?
I’m working together with a group headed by the Institute of Chartered Accountants and we have been given some extra time, not least because the ATO actually wants to meet with us before any submission goes in. The ATO has said it doesn’t want to go against double taxation treaty agreements, so for example for complying overseas taxpayers who reside in a tax treaty jurisdiction they will be satisfied that they are paying tax and therefore will not double tax them in Australia. We’re very happy that they’re thinking the same way as us about the nature of the underlying investors, but the practical implementation is difficult, especially given the fact a big proportion of the money that comes into Australia from international investors comes through funds of funds vehicles, which adds to the practical complexity. They want some sort of assurance as to who those people are and we’re concerned about the practical problems.
Any idea how long the discussions could go on for?
Definitely months. There’s a lot to work through in terms of the practical problems.
Presumably at the end of it all there will still be some tax impact on global firms investing in Australia?
Potentially, but only if they have many ultimate investors who do not reside in tax-treaty jurisdictions, in which case they’ll have to price in the tax impacts. Most global firms have the similar general set of investors – they generally reside in tax treaty countries or similar sort of jurisdictions – and so the impact is not necessarily any worse for them than for domestic GPs, who also have a lot of international investors.
What else is going on with tax?
There’s also a review from the Board of Taxation into collective investment vehicles, which includes a specific piece on the Venture Capital Limited Partnership and we’ve got 28 February as our final date to make a submission to that. The review comes off the back of things like the Johnson Report on Australia As a Financial Center [commissioned by the Australian government in September 2008 and released by the Australian Financial Centre Forum in January 2010], so it’s looking at blockages and why people might find it impractical to invest in Australia under the current investment structures. It has the potential to have positive outcomes for the industry.
It might be one step towards having an internationally recognised limited partnership structure. I don’t believe we would get it in one hit but my dream is it would actually happen, and my realistic hope is that it would take us slightly further towards that ideal goal.
On the venture capital industry, earlier in the year, you were quoted in the Australian media as proposing that super funds be mandated to commit a certain proportion of their capital to Australia’s venture capital industry. What was the reaction to this suggestion?
A lot of people didn’t like me for saying that! I still maintain though that given superannuation funds exist by mandate, and given the beneficial tax regime they enjoy, this idea could be considered as something that was nation-building and had a potentially significant outcome for the country and a relatively low risk for superannuation funds themselves. For example, you could have 0.1 percent of your superannuation put towards venture capital by default, but with the ability to opt out. It’s not that hard, but the potential reward for the economy is very high. It’s still something that is worth banging on about – it might make the public say hang on a minute, why doesn’t my super invest in this?
Addressing the funding crisis facing Australia’s venture capital industry has long been a priority for AVCAL and is something you lobbied Kevin Rudd’s government on extensively. What impact has the change of leadership had?
Certain things that were under way are on complete hold because of the budget constraints and will be until around 2013.
Will it potentially be too late for some firms by that point?
Yes, I think will. There will always be a handful of survivors, but my fear is that we will lose so much momentum from the industry that we will also start to lose some of the next layer of skills: for example lawyers with special understanding of venture capital issues and other service providers.
What realistically would need to happen to stop the downward spiral?
There are a couple of things. One is that it would be good to have government support of some kind. It’s important the government comes to understand that we are part of the picture for growing the next generation of companies and they can’t really do it without us and we can’t really exist without them. It’s really a symbiotic relationship. Another thing is to look at how we market to a different range of investors. The family office industry is getting more sophisticated in Australia and we have things like the Early Stage Venture Capital Limited Partnership vehicle which gives tax benefits to investors. There’s the opportunity to find a new range of investors that VC hasn’t really tapped into before.
Do you also see consolidation coming in the private equity industry, as several people are predicting?
We still haven’t seen any, but you still feel it may be likely at some stage. There’s been some fundraising recently, like that of Quadrant Private Equity, which was extremely successful – I think the fundraising environment is tough but not quite as bad as it was. We need some of the middle-ish managers to go out there and test the water.
You recently wrote a letter to the Australian Financial Review in response to some negative comments made by the Tax Commissioner Michael D'Ascenzo on the short-term nature of private equity. Private equity has historically been a bit of a whipping boy for the media and politicians in Australia, would you say that it still is?
I think the media’s opinion has changed enormously over the last four years. It had a very dim view of private equity then and now it has a pretty balanced view. We’ve done a lot of work to achieve that, both in terms of one-on-one sessions with me, but also taking company CEOs to meet journalists so they see the whole picture of the private equity model. That’s been tremendously effective in turning a lot of opinions around.
Politicians also are on the whole more knowledgeable about private equity than they used to be – and again that’s off the back of things like the Johnson Report. Some of the entrenched views of people like the tax commissioner are, however, worrying. There isn’t any logic in his comment about the quick turnaround of the private equity investment period and therefore it’s an emotional reaction. This is not a place for emotional reactions. He said that maybe if private equity firms held their investments for ten years it would be considered long-term capital. However, the government aligns the capital gains discount with a holding period of over one year, so obviously at some stage in the government’s mind one year has been deemed long enough to class as ‘holding assets’.
Other people in the tax office are being very open-minded and collaborative in working with us. We have fundamental disagreements, but we’re working through those and coming out with ways to find a middle ground that works for both of us. That’s why I was particularly upset by the commissioner’s remarks – just when we we’re getting more comfortable working relationship with the tax office, we see the boss of the whole thing basically thinks we are a bunch of plunderers.
Environmental, social and governance issues have been a core focus at AVCAL over the last couple of years. How would you describe the take-up among GPs on this issue?
Improving. It was being seen very much as an issue on the compliance side, so we would put on a forum and they would send along their CFOs. That has changed in the last 12 months – they are starting to look at it from the top and recognise it’s about value creation, not just compliance, and that’s really heartening.
What is a new focus for AVCAL this year?
Growth funds. Growth funds are actually the bulk of our membership and they’re doing a lot of exciting things in turnarounds, successions, and expansion capital, but they tend to get overlooked. I’m trying to get more focus on them.