Australia’s Innovation Investment Fund (IIF) will distribute A$100 million (€82 million; $104 million) across three venture capital firms in an attempt to give a boost to the struggling industry.
The distributions include A$40 million to Carnegie Venture Capital and A$30 million each to GBS Venture Partners and Innovation Capital Associates, according to a government statement. The capital is the last from IIF’s third round of venture funding, which started in 2010.
The venture firms will now have to raise a matching amount to the government’s contribution from private investors. All three firms are commencing fundraising for new funds, and must hold a first close within six months.
IIF has made past investments in Carnegie and GBS, but this is the first investment in ICA, according to Graydon Smith, manager of venture capital funds at the Australian government department of industry and innovation.
GBS managing director Brigitte Smith believes the government’s commitment will be a significant boost of confidence to the Australian venture capital industry, which has been struggling recently. In 2012, venture investments plunged 75 percent to $177 million across 51 deals compared to $718 million across 75 deals the previous year, according to figures from Thomson Reuters.
“[The IIF commitment] is a vote of confidence from the government in our fund,” Mark De Ambrosis, investment director at Carnegie, told Private Equity International. De Ambrosis particularly hopes to use this capital to help Australian technology startups expand offshore – an area for which there isn’t a lot of capital available, he said.
One of venture capital’s biggest struggles in Australia, according to GBS’s Smith, is that one of its largest sources of capital has “dried up”. Most Australian venture funds over the past 15 years have had significant commitments from the country’s more than A$1.5 trillion superannuation industry. However, that industry has not invested in a single venture fund since 2009 due to the increasing size of the supers’ assets and general under-performance of venture worldwide, Smith said.
The government’s commitments provide the firms with a good deal of leverage to attract new sources of private capital, Smith explained. Even though the IIF acts as a cornerstone investor, the venture firms only return the base capital at a long-term bond rate of 5 to 6 percent, along with 10 percent of profits. That means that the firms can give almost all the profits to their private LPs.
“The end result is that the private investors don’t really pay carried interest or even management fees,” Smith. She credits the fund with the creation of the Australian venture capital industry.
IIF has invested in 16 funds since its 1998 founding. Of those, three have returned the capital with profit, seven are still active, while six were not able to turn a profit but returned the capital, according to Graydon Smith. The fund has now reached a point where it is self-sustaining, and just last month committed A$350 million to its fourth round, he added.