Significant Investor Visa misses the mark on venture capital and innovation
The review of the Significant Investor Visa program will lead to some welcome improvements, however it is a lost opportunity to significantly impact Australia’s innovative capacity, writes Jo-Ann Suchard.
Published on the 20 May 2015 by Jo-Ann Suchard
OPINION: The review of the Significant Investor Visa (SIV) program was pitched by the government as an initiative to spur innovation in Australia. An outline of the revised SIV scheme was released last week, with full details yet to be released. While the review will lead to some welcome improvements, overall the release represents a lost opportunity to significantly impact Australia’s innovative capacity.
After more than a decade of strong economic growth, powered in large part by extraordinary investment from the mining sector, Australia’s national accounts figures continue to disappoint. The case for government commitment to effective stimulus for innovation in Australia has never been more compelling.
While Australia’s innovation ranking has improved in the last decade, it still lags behind many of the world’s more developed economies. Australia’s innovation efficiency ratio, which measures a country’s ability capitalise on research and other innovation inputs places Australia 81st in the world – well below the global median.
Research has shown that small business contributes a disproportionate share of major innovations. Venture capital (VC) funds are an important source of start-up funding for small business. Venture capital also supports innovation by funding R&D and providing management skills to commercialise latent technologies and grow the businesses in which they invest.
The Canadian and Singapore governments have implemented similar programs to the SIV, aimed at boosting innovation by channelling new funding to innovative enterprises through venture capital.
Investment in venture capital in Australia is low compared to other developed markets. In the 2013 financial year, the amount of capital invested by Australian venture capital firms was at its lowest level in 11 years - A$111.4 million. In the same year, the investment by venture capital firms in the US was US$334 billion, in Israel US$1.7 billion and in China, US$3.5 billion. Startup financing accounts for only 0.009% of GDP compared to 0.055% for the US and 0.3% for Israel, according to the OECD.
Visas and innovation
The Significant Investor Visa program is the path to residency for international investors that commit investment funds to Australia. The concept is simple. Affluent international investors invest a minimum of A$5 million over four years in “approved” investments, after which they receive permanent residency.
The SIV program, introduced by the previous Labor government, has been in place since November 2012. “Approved” investments under the scheme included ultra-safe government bonds, ASIC-regulated managed funds or shares in blue-chip companies. These provide some extra liquidity to traded markets, but are of doubtful value in providing new innovation capital, or adding real value to Australia’s economy. They accounted however, for the vast majority of funds invested under the scheme.
Since the scheme’s introduction, investors, mostly from China, have invested more than A$4 billion. With only 124 investments made by VC funds in the 2013 financial year (AVCAL), the program review had the potential to dramatically increase the pool of venture capital for thousands of young innovative firms. Unfortunately, it has fallen short in a number of key areas.
Innovation funding through the SIV
Under the recently outlined changes, up to 60% or $3 million of the $5 million investment can still be invested in “other” investments which include highly liquid blue-chip investments. While government bonds have been removed from the “approved” list, shares and real property are still on the list. Although the revised program now includes a venture capital component, this represents a mere 10% or $0.5m.
A minimum of 30% is required to be invested in “small cap” firms, with market capitalisation up to A$500 million. There is no specific requirement that any of the “small cap” investments be in companies involved in innovative enterprises.
Most firms in the “small cap” category are in mining, energy, financial services or real estate. Some eligible “small caps” would be considered innovative enterprises, most would not. If the government was serious about supporting innovation, further criteria would have been applied to keep the focus on innovation capital. For example, eligible investments could have been assessed based on innovative inputs (R&D spending, employees or numbers of R&D alliances) or innovation outputs (patents, investment in innovative products and processes).
Similar visa schemes in Singapore and Canada do not allow blue chip share and property investments. Although their schemes have a lower total investment requirement, 100% is channelled into areas that stimulate innovation.
International competitiveness of the SIV has been put forward, as a reason for the relatively low venture capital requirement. Perceived competitiveness of the scheme could have been addressed by reducing the total investment required but increasing the percentage allocated to innovation capital. This would have provided a much bigger boost to innovation.
The government’s release contains reference to the possibility of increasing the VC component of the SIV for new applications within two years. It is hard to understand the logic of pitching the scheme so far below other leading schemes, then waiting for two years to raise the VC component to a more meaningful level.
Time frame is too short
The minimum investment time frame of four years remains unchanged under the revised scheme. While the review states that VC investments may set longer terms, this is not a requirement. Venture capital funds typically need an 8‐10 year investment time frame to cover: investigation and selection of suitable investments, development and growth of investee firms and execution of successful exit strategies.
Shorter minimum investment periods, such as the five-year minimum under Singapore’s scheme, have tended to drive the funds to provide convertible bond or mezzanine debt financing rather than equity capital. This restricts the types of firms attracting funding (young start‐ups generally don’t have the cash flow to support debt financing) and the activities funded (debt funding is not suitable for riskier, more innovative ventures).
To truly promote VC funding under the scheme, the government should have set the minimum investment period for the VC component to at least eight years to match a typical fund life. The period for permanent residency qualification does not need to match the investment period, so this could have been kept at four years under the SIV. Canada’s Immigrant Investor Venture Capital (IIVC) pilot program requires a 15 year commitment, with permanent residency granted when the applicant is accepted.
Other design issues
The recognition of mid-market Private Equity (PE) funds under the revised program is welcome, albeit under the token VC requirement. These funds invest in enterprises in the $150-200m range and their role is often misunderstood in the context of innovative business ventures. They provide growth capital to firms that have progressed beyond the startup stage. They can play a crucial role in the success of innovative firms by commercialising latent technologies and have struggled to attract capital in Australia.
Quality and transparency of information is another area which is lacking, in terms of designing a scheme that is capable of efficient and effective allocation of innovation capital.
The sensitivity of revealing financial and performance information on individual venture capital funds or firms makes it difficult for individual investors to select funds. Fund performance and investment valuations are considered confidential data and only aggregated performance across the sector is publicly available.
The Singapore scheme uses independent third parties to evaluate eligible funds and the results are publicly available. A mechanism for fund evaluation under the SIV would help investors to make informed choices, providing more effective allocation of capital.
A clear framework for ongoing assessment, monitoring, and reporting is also essential to ensure compliance of participating funds and to track the allocation of funding. Such a framework could form a basis for informed revisions to the SIV investment criteria. The review outline, as with the existing scheme, contains little information on effective monitoring.
Innovation is the key to our economic future
As long as Australia ranks highly as a desirable place to live and raise a family, programs like the SIV provide an opportunity to attract innovation capital that we can ill afford to miss. The review released by government was another opportunity lost for Australia’s innovative capability. Properly designed, the program could have made a much more meaningful contribution to innovation in Australia.
Jo-Ann Suchard is Associate Professor, Banking and Finance at the UNSW Business School