The government is planning to inject $100 million of taxpayer money into a business growth fund in “complete blindness” using “dubious data”, according to Centre Alliance senator Rex Patrick.
Legislation paving the way for the Commonwealth to invest $100 million in the Business Growth Fund, which would provide “patient capital” to local SMEs, was referred to the Senate Economics Committee for a whirlwind inquiry.
The committee, which is expected to report back by the end of the week, held its only public hearing in Canberra.
The committee heard questions about why the government was investing in the fund, the lack of information on how it would operate and whether there was any evidence of a funding gap in the market that required government intervention.
The Coalition wants to contribute $100 million in taxpayer money to the fund, with the big four banks also pledging to do the same to create a $500 million-plus investment vehicle.
The fund would target an apparent gap in the market for growing companies approaching a Series A round that don’t want to give up control of the business or take on further debt.
But Senator Patrick questioned whether there actually was a funding gap for the SMEs in question, and why the government needed to get involved at all.
“We’re effectively creating an arrangement to inject $100 million of taxpayer money in complete blindness. We have no idea what these arrangements are,” Senator Patrick said.
“What’s the harm in waiting for those to be developed and then presenting that to Parliament and saying, let’s now ask Parliament to consider it fully informed. We’re taking $100 million of taxpayer money and investing it on very dubious or shallow data.”
Treasury officials appeared before the hearing and attempted to address Senator Patrick’s concerns. They said that the appointed board of the Business Growth Fund (BGF) would aim appoint a chief executive by the end of the year.
This CEO would then appoint an investment committee that would manage the money in the fund according to an investment mandate.
“That is a standard governance arrangement in investment management, it’s very consistent with the way the UK BGF is set up,” Treasury chief advisor, market groups Warren Tease told the hearing.
The government has revealed some details of how the fund will operate. It would provide equity of between $5 million to $15 million to companies with annual revenue of between $2 million and $100 million, with three years of proven revenue growth and profitability. The BGF will take equity positions of between 10 to 40 per cent.
On-Market BookBuilds chief executive and co-founder Ben Bucknell told the hearing the new fund would “skew” the market, and that there is no current gap in funding.
“This will not increase access to capital for SMEs, it will cherry-pick the best SMEs in the market. That does not help SMEs that currently do not have access to equity today, all it does is crowd-out existing equity today,” Mr Bucknell said.
Mr Bucknell said it would be “very difficult” for his business, which assists SMEs in raising capital, to continue under its current model if the BGF goes ahead.
But the BGF is not aiming to replace businesses like this, Small Business Ombudsman Kate Carnell said.
“This is not a fund that is aimed at taking over lending to small businesses, it has simply never been the point. It’s a small bit of the puzzle,” Ms Carnell said.
“This is aiming at a particular group of companies that have growth potential but don’t fit into the slot of short-term private equity investment and can’t get the sort of money that they need from the banks and FinTech sector.
“It’s the ones growing quickest and employing more people and that really have the capacity to contribute a long way above their weight to the Australian economy – that’s what this fund is aiming at,” she said.
“I struggle to see how a fund aiming at about 8 per cent of businesses, that is focusing on this group of businesses, not startups or fast-growing entries, can really skew a market.”
Only six submissions have been received by the committee so far, with its final report due on Friday. The Coalition is looking to pass the final legislation in the next sitting week.
The Opposition has raised a number of “unanswered questions” about some “red flags”, passing the legislation unamended in the lower house but referred it for review before addressing it in the Senate.