Gearing up for growth
Australia’s venture capital industry, which has already proven reasonably resilient in the current downturn, stands to benefit from government plans to stimulate overseas investment.

The Australian government, as part of an initiative to speed up the rate of foreign investment into the country’s private equity and venture capital sector, has unveiled plans to introduce limited partnership status for overseas investors looking to invest in Australian general partnerships.

The reforms, announced in September by Minister for Revenue and Assistant Treasurer Senator Helen Coonan, outlined new arrangements to deliver the government’s election commitment to providing Australia with ‘the world’s best practice investment vehicle for venture capital’.

The measures, which were drawn up in consultation with the Australian venture capital industry, will introduce limited partnership status for overseas investors and specified tax-exempt investors, reducing the tax burden for international funds and institutions. Limited partnerships will be taxed as flow-through vehicles, bringing Australia into line with the international standard. Essentially, the reforms will remove capital gains tax on investments made through Australian venture capital funds. “These measures will unlock the potential for more rapid growth of Australia’s venture capital market, particularly through the increased support of tax-exempt foreign investors,” said Coonan when announcing the reforms.

Australia’s venture capital industry has broadly applauded the move. “It’s a welcome change to policy,” believes David Shields, head of private equity at DB Capital Partners’ Australian office. “It reinforces the Government’s policy on venture capital and private equity which has been favourable over the past two decades.”

Primary legislation will be introduced to parliament in the near future, possibly before the end of 2002, although the reforms will not apply to existing funds and are likely to have little effect on overseas investment in the short-term. The likelihood is that it will take some time to make overseas investors aware of the change in tax status. The new legislation will not come quickly enough for funds currently seeking capital in a difficult environment either. DB Capital is currently raising a A$200m ($110m) fund targeting expansion capital and follow-on investments in Australia. “We have spoken to potential overseas investors,” explains Shields, “but the large majority of our funds will come from local institutional investors and pension funds.” This is reflected in figures for Australian private equity investment, which show that only 14 per cent of all funds raised in the country came from overseas investors.

“The measures will unlock more rapid growth”

Mid-market and early stage are going strong
Despite moderate capital contributions from overseas, Australia’s private equity industry has grown at a rapid rate over the last decade. Since 1990, fundraising has increased from an annual rate of less

than $50m to $1.4bn raised in 2001. The number of funds raised has also risen sharply, despite a fall in 2001. In 1993, only three funds were raised compared with 33 in 2000. Despite this growth, Australian private equity investment still only represents about 0.15 per cent of GDP, a fraction of the amount invested in the UK (0.9 per cent) and the US (1.1 per cent).

The main focus for private equity investment in Australia is expansion capital, predominantly in the mid-market. “There isn’t as big an MBO market here as you might get in the US or the UK,” explains Shields. “Dealflow in the sector is usually limited although two big MBO recently have bucked that trend.”

The other distinguishing feature of the Australian market is the resolute nature of the technology sector. Unlike its overseas peers, the sector has managed to avoid many of the problems associated with the collapse of confidence in technologyrelated industries. There is a strong pipeline with university spin-outs and start-ups offering investment opportunities at attractive prices.

According to Shields, the market has not been hit as hard as some by the general market downturn. “The market here has held fairly steady. There was a slowdown earlier this year, but the market has since recovered. Dealflow is good, and we are seeing better terms now than we’ve seen for quite a while.” If the market can maintain this level of performance, overseas investors will be hoping to reap the benefits of reform sooner rather than later.

Asia News
BPEP Asia closes Fund II
Baring Private Equity Partners Asia has closed the Baring Asia Private Equity Fund II LP at $257m. This takes the total now managed by BPEP’s Asia team, led by managing partner Jean Eric Salata, to $563m.

The majority of the capital raised has come from a core group of institutional investors who participated in the firm’s Asia Fund I, including the Singapore Government Investment Corporation, Invesco Private Capital Inc. and CDP Capital, the investment arm of Caisse de Dép^t et Placement du Quebec. BPEP said it had also been successful in attracting new investors from the US, Europe and Asia.

The new fund will invest mainly in the North Asian markets of Hong Kong, Taiwan, China, Korea and Japan, as well as in India and Singapore. It is one of the largest Asia-focussed private equity funds raised in the region this year. The fund aims to purchase Asian divisions of US and European multinationals downsizing and divesting non-core overseas assets. Salata commented: “In the current environment, this pool of capital has two to three times the purchasing power of money raised a few years ago. We think the fundamentals have turned in favour of private buyers, as alternative sources of equity and debt funding have declined substantially in Asia.”

The Asian team consists of 16 investment professionals based in Hong Kong, Singapore, Shanghai and San Francisco. BPEP also recently announced details of an exit from its Baring India fund. The fund has divested its ten per cent interest in Jyothy Laboratories, an Indian consumer product company to funds advised by CDC and Credit Lyonnais Securities. The sale price was not disclosed, although it was confirmed that the investment had realised an IRR of 33 per cent in US dollar terms.

IDG launches Vietnam’s first tech fund
US publisher International Data Group has announced plans to launch a $100m venture capital fund to invest in the country’s growing information technology sector.

IDG, whose venturing activities include operations in Europe, Asia and the US, is planning to back both local and international businesses setting up operations in Vietnam. The fund is the first of its kind in Vietnam to target young technology companies and follows a similar strategy to the $200m venture capital fund established by IDG in China in 1992.

IDG’s Vietnamese manager, Le Thanh Tam, said the fund would aim to make initial investments of between $500,000 and $1m with subsequent investments of up to $5m-$6m.

The fund launch comes at a time when the Vietnamese government is seeking to accelerate the country’s IT development. In October, Prime Minister Phan Van Khai approved plans to invest up to $4bn in the IT sector between now and 2010. Vietnam’s IT sector is growing at 18 per cent per annum, although the government is targeting growth of around 25 per cent.

Pacific Equity achieves packaging exit
Pacific Equity Partners, a Syndey-based private equity firm, and US firm Bain Capital have completed an exit from their investment in Vertex Group, a New Zealand-based packaging business. The exit was achieved via an initial public offering on the New Zealand Stock Exchange.

The listing raised $28.1m and gave the private equity firms a return of approximately four times the original investment. Pacific and Bain backed a $26m management buyout of Vertex in October 2000. In the two years since the acquisition, Vertex has increased turnover by 20 per cent to $42.6m, increasing its market share in its core businesses, food processing, industrial processing and retail distribution to over 50 per cent. Pacific’s exit is also the first time an Australian firm has achieved a 100 per cent exit via IPO.

General Atlantic reaffirms back-office strategy
US venture capital firm General Atlantic has made its second recent investment in India’s burgeoning back-office sector with a $21m commitment to Daksh e-Services, based just outside New Delhi.

General Atlantic has not disclosed the size of the stake acquired although a spokesperson for Daksh confirmed it was a minority stake. The investment from General Atlantic follows previous capital injections from Citigroup Venture Capital and CDC Capital, which invested when the company raised $8m in a previous round.

Daksh plans to use the funds raised to open a new centre in Mumbai, increasing the company’s workforce from 2,200 to 3000. It also intends to open a new sales office in the UK.

The investment is the first to be made by General Atlantic following its $100m investment in Indian IT consultancy firm Patni Computer Systems.