SYDNEY, NEW SOUTH WALES, Australia – Two Australian venture groups recently launched domestic private equity funds, and a third group is awaiting a government overhaul of the tax system before raising its vehicle.
Development Australia Nominees Ltd. is launching a second fund-of-funds targeting A$300 million ($191 million) for investment in Australian venture capital and buyout managers. The group plans a first close in June on the Development Australia Fund II (DAF II) and a wrap in September, said Chief Executive Ian Court, who expects the vehicle to hit its goal by the first close. The fund will be capped at A$350 million ($222 million).
At the same time, Macquarie Direct Investment Ltd. is winding down its domestic fund-raising efforts and gearing up to solicit capital outside Australia.
The investment bank subsidiary is raising A$200 million from domestic investors, targeting A$150 million ($95 million) from institutions and A$50 million ($32 million) from high-net-worth individuals.
Development Australia Nominees expects commitments for DAF II to come from four major investors, totaling around A$200 million ($127 million). The remaining A$80 million to A$100 million ($51 million to $64 million) likely will be raised in the coming months, Mr. Court added.
DAF II will target superannuation funds, essentially Australian pension plans, as investors. The vehicle is a follow-up to the open-ended Development Australia Fund, which was raised in 1990 as a direct vehicle and converted to a fund-of-funds in 1995 because the fund mushroomed to about A$640 million ($407 million). The vehicle is now closed and fully invested, Mr. Court said.
Development Australia Fund invested some A$500 million ($318 million) in infrastructure and A$140 million ($89 million) in venture capital and development capital opportunities, Mr. Court said.
Infrastructure investments from DAF have yielded a 7.5% per annum net return, and development capital has an interim rate of return of 10%. Mr. Court noted that only 10% of the deals had been realized, and he expects the development-capital portion of the fund’s return rate to reach 15% to 20% over the life of the vehicle.
Development Australia Nominees, a four-manager operation, takes no carry because it essentially is a non-profit group. The firm, however, charges a 20 basis point management fee.
Later this year, the firm plans to offer Australian investors an opportunity to invest abroad, particularly in the United States and the United Kingdom. Mr. Court was uncertain whether a new fund would be structured as a fund-of-funds or whether the firm would simply pick one manager – probably American – to handle the vehicle. The fund likely will target about A$100 million.
Macquarie Direct Investment will target institutions for Macquarie Investment Trust III and individual investors for Macquarie Private Equity Trust, said Managing Director Sandy Lockhart. A separate fund, Australian Ventures L.L.C., aims to raise A$50 million to A$100 million from foreign investors, including those in the U.S., the U.K., Hong Kong and Singapore. Australian Ventures, Macquarie Direct Investment’s first foray into the foreign market, will have its own U.S. board of directors.
The three funds will invest side-by-side in later-stage and emerging-growth companies as well as buyouts in Australia and New Zealand. Investments will be highly opportunistic, with a heavy focus on deals in the services and natural resources sector, including mining. Investments in early-stage technology, agriculture and real estate are off limits, Mr. Lockhart said.
Macquarie’s nine-member professional staff will hold multiple closes for its vehicles, and fund raising should be completed by the end of the year. A first close on domestic funds is slated for mid-May.
The firm must surpass a hurdle of the Australian inflation rate plus the return of management fees before reaping an “incentive fee,” which is essentially a carried interest split. Beyond the hurdle, Macquarie will get 20% on the next 20% IRR and another 10% above that. The firm’s management fee is 1% of funds committed, plus 0.5% of funds invested.
Investment bank Macquarie Bank Ltd. and its management affiliates are committing A$30 million ($19 million) to the domestic vehicle, Mr. Lockhart noted.
The bank began direct investing in 1982 and created an off-balance sheet subsidiary in 1988 to handle such investments. Macquarie Investment Trust, a A$50 million fund, was raised to support the effort and a subsequent vehicle, the A$100 million Macquarie Investment Trust II, was raised in 1994.
Since 1982, Macquarie has invested A$123 million ($78 million) in 25 companies, achieving realizations on a dozen businesses by press time. The weighted average IRR for all investments has been 37% per annum, according to the bank. The first fund backed nine companies and has had six realizations, reaching a 29% IRR. The second vehicle, with a 32% IRR, has so far invested A$65 million ($41 million) in 10 companies, leading to two realizations.
Meanwhile, County Investment Management has put its fund raising on hold until the government rewrites its tax code to reflect the shift to a more service-based economy from an industrial-based economy. The firm wants to create the most tax-effective partnership following the revamped tax situation, which County Investment’s Paul Murphy does not expect to have a negative impact.
The firm plans to raise a A$100 million fund to back medical research in Australia or companies that have received grants from the National Health & Medical Research Council, Australia’s equivalent of the U.S. National Institutes of Health (VCJ, December 1998, page 24).
Since its fall announcement about the fund’s creation, County Investment has been studying medical research investments to substantiate its business strategy – the firm will not selectively choose its investments but will back all interested Research Council grantees. County Investment also is working on agreements with Australian research institutes to gain access to their researchers and discoveries, Mr. Murphy said.
DAF was not worried about the new tax laws, given that its backers are pension funds, and Macquarie’s Mr. Lockhart said that regardless of how the tax situation shakes out, everyone will be in the same boat. Mr. Lockhart also does not expect tax reform to hurt the venture capital industry.