This article was first published in the Australian Business Review.
Australia is now starting to turn to the arduous task of rebooting its economy. To do this, business needs some eye-watering amounts of capital. AMP Capital has estimated business will “pull” in the order of $350bn across capital raisings, JobKeeper,rent relief and various other measures.
The government has done a great job with its quick and decisive policy measures to save the economy from falling off a cliff. But in a world where share markets have arguably overshot fundamentals and most investors are sitting on the sidelines, the question arises: how does Australia encourage investment at a time when it is most needed yet most unlikely?
I wrote in The Australian a few weeks ago about how our biggest economic risk is ahead of us as business seeks to turn the lights back on and struggles with sufficient working capital to reboot and ride out turbulent revenues.
I argued that Australia has world-class talent to steer business out of this hole — they just need investors to get behind them. I argued that superannuation funds can and should be investing now by taking a longer-term strategic view. It is in their members’ best interests.
Since then, AMP Capital has as mentioned above estimated the immense size of this “tapping” for capital and Greg Combet, chair of Industry Super Australia, was slated to appear before the House economics committee on super funds’ role in recovery.
Combet effectively said superannuation funds can and should be supporting recovery. He noted hundreds of millions of dollars already spent supporting listed company capital raisings. Now that superannuation funds have a better feel for liquidity needs, they are better prepared to invest.
Now while all that good news may bring a sigh of relief and visions of the white knights riding in, having an insider position on institutional capital raising into unlisted Australian business, I can say that newly committed private capital is still only trickling in. Clearly, this needs to be fixed quickly.
So how do we get this trickle into a healthy cascade of capital?
At the end of the day institutional and high-net-worth investors (which form the bulk of private capital investment) weigh up risk versus return versus liquidity.
With predictions of global recessions and the unpredictability of returns, risk appears high and returns … well, they are a bit of an unknown (although history has shown investing in down times can return handsomely). And liquidity has to be viewed as longer-term. Not sounding good.
But there is one thing that can make up for higher risk and also enhance returns. Any guesses?
Tax! An upfront tax offset of, say, 15 per cent for new investments made into Australian businesses over the next 18 months and a capital gains exemption on those returns (capped at eight years) would mitigate some of the risk and liquidity concerns of investors.
This idea is not exactly new. The Turnbull government introduced similar measures in 2015-16 to kickstart investment in Australian innovation.
At the time I advised Treasury on how to implement these changes in a way that would work for the investment community and at the same time not create a system that could be abused. After some strong debate a system was born. The system had to address investor psychology that at the time shunned early-stage investment because the returns over the previous 20 years had not stacked up.
And it worked. Before the changes, venture capital deals in 2014 totalled about $500m (source: AIC, Prequin Pro), rising more than fourfold by 2018 and activity has since been sustained above $2bn per annum.
While the early stage renaissance is not purely to do with the Turnbull policy, it played a significant role. Having been involved in many such capital raisings, I can say that investors felt the tax offset was a way of derisking the investment somewhat and the potential tax-free gains was a carrot worth pursuing.
So we have a model that investors and government understand. There is legislation already drafted. Policy documents exist. Treasury has previous costings.
So it makes sense that this model can be swiftly applied to our current environment to get investors off the sidelines when they are most needed to reboot Australian business.
Nathan Cahill is a director of the Australian Investment Council.