Just what impact a downturn in the world’s largest economy will have on Australia is increasingly being asked by some inside and outside the VC sector write the chief executive of the Australian Private Equity and Venture Capital Association (AVCAL) Yasser El- Ansary.
After struggling for several years in the wake of the tech wreck, Australia’s venture-capital sector has blossomed as a wave of technological innovation has surged around the world.
Total assets under management by venture firms have more than doubled since 2015, reaching $6.9 billion at December 2017, the latest Preqin data published in AVCAL’s 2018 Yearbook shows.
Alongside that growth in AUM have been unprecedented levels of investment activity, which reached a record $962 million across 135 deals in 2017.
Over the 12 months ended March 2018, VC funds tracked by Cambridge Associates quoted pooled returns to investors (net of fees, expenses and carried interest) of 26 per cent, the latest data compiled from the Australian market shows.
After-fee returns for three and five year periods are impressive as well. When the inevitable economic slowdown hits the US, a look at history can give some indication about what to expect.
The 2008-09 GFC began in the US and quickly spread to many markets around the world. While the GFC was one of the largest and most dispersed downturns in history, it had a particularly significant impact on US venture capital – more so than on other VC markets around the world (measured by number of funding rounds and amounts raised), a study titled “Venture Capital and the Financial Crisis”, from The Oxford Handbook of Venture Capital, shows.
Australia’s economic and trade relationship with China is widely acknowledged as the major relevant point of difference from the US. During the GFC, the Chinese economy continued to grow, underpinned by its own massive stimulus package, which drove ongoing demand for Australian commodities.
That isn’t to say the Australian VC industry was unaffected. Fewer new investments were made, the flow of funds into VC firms tightened and IPO exit opportunities diminished – all directly attributable to the economic slowdown and the focus on reducing exposure to risk.
Fast forward a decade, and the Australian VC industry is as strong today as it ever has been. And that’s precisely what you would expect – technology is reshaping whole industries and business models are being permanently altered as a result of innovation and data.
Much is made of Australia’s geographic isolation, but that same challenge presents unique opportunities to foster original ideas and innovations that find new markets and customers all over the world.
A growing number of VC-backed businesses are generating profits while successful expats are routinely returning home to Australia and re-investing in other businesses, bringing the value of their experience.
Meanwhile, major Australian institutional investors, such as Hostplus and the Future Fund, have been working to increase their allocations in the early stage investment ecosystem domestically and offshore for some time now.
The fact that large sophisticated investors like these are adopting such strategies provides an insight into the opportunities that fast-growth businesses with new and emerging technologies present.
So, while a US recession in coming years will have an impact on the Australian economy, the unique features of the domestic market will undoubtedly play a role in shielding us from some of the implications of a downturn. Only time will tell precisely how we navigate our way through when the moment comes.