At the opening of a science facility in Canberra in 1998, the then Prime Minister, the late Bob Hawke, was confronted by a group of scientists who had just been laid off due to a round of budget cuts.
It was there that Hawke agreed that Australia needed to become “the clever country”.
This was at a time when Australia could still benefit from technological, economic, social and political innovations that were developed in other countries. And when Australia could claim its fair share of innovation success, counting the black box flight recorder, wifi, polymer bank notes, spray on skin and Google Maps amongst many of its home-grown inventions.
Sadly, over the years we haven’t always done a good job of retaining ownership Australian innovations and entrepreneurship, because many of those fast-growing businesses have been forced to relocate offshore or sell the technology to other markets. A lack of institutional-level funding has sometimes been the reason for that loss of intellectual property.
This is where Australia’s growing private capital market can play a critical role in providing means to boost the future growth of early-stage and expansion-phase businesses, across almost all industry sectors of the economy. From 2008 to 2018, Australian-based private equity and venture capital fund managers more than doubled their funds under management from $18.9 billion to $30 billion.
The potential for private capital to drive macroeconomic outcomes is evident in the decisions that other jurisdictions have taken over recent years to encourage the growth in this form of investment.
In 2016, the UK government launched a Patient Capital Review which aimed to identify potential barriers to accessing finance for starting and growing businesses, and to identify the solutions to overcome them. The UK Treasury estimated there was a “patient capital gap” of around £4 billion per year which was resulting in fewer UK companies realising their full potential, when compared to the US.
The outcome of the UK review was a comprehensive action plan to unlock more than £20 billion of finance to support the growth of small, innovative businesses. Understandably, with Brexit barking at its heels, the UK government was seeking to buoy the economy through increased investment into high-growth, innovative firms.
A further initiative was announced in the UK Budget in 2018 for regulatory reforms and a commitment to make UK pension funds a major source of patient capital for growing and innovative firms within their domestic market.
Canada and New Zealand have also realised the potential of private capital investment as a means to boost their economies.
In response to the Canadian Ministry of Finance’s review of the long-term growth prospects for the economy, Canada’s leading banks and insurance companies formed the Canadian Business Growth Fund. This was to provide Canada with an independent, private sector fund that focused exclusively on the financing gap facing Canadian growth companies.
The fund made an initial capital commitment of C$545 million, with plans to increase its commitment to C$1 billion in future years. This fund has served as a model for the Australian Government’s announcement of a plan to establish a Business Growth Fund in our own market.
More recently, in its June 2019 Budget, the NZ Government also announced a new NZ $300 million, 15-year venture capital fund which aims to boost private investment in New Zealand’s early stage companies.
The New Zealand Superannuation Fund will administer the fund, with the New Zealand Venture Investment Fund investing through underlying managers targeting local growth businesses in the $2 million to $15 million annual turnover range. The aim is to reduce the pressure on this sector to sell their businesses prematurely to overseas buyers.
In Australia, there is still plenty of scope for private capital investment to grow.
There is a tremendous window of opportunity for private capital to support growing businesses and to rebuild the clever country that was talked about so many years ago.
One of the priorities for our government should be to lay down a vision-forming plan to boost long-term patient capital investment across our market. After all, investment in innovation builds growth which is good for job creation and good for the economy.
Yasser El-Ansary is Chief Executive of the Australian Investment Council