The federal government has launched a whirlwind five-day consultation period for its $100 million cash injection into its business growth fund, which would provide “patient capital” to Australian SMEs.
During this year’s election campaign, the Coalition pledged to provide $100 million to the Australian Business Growth Fund, which was unveiled in 2018.
After a lack of interest from the big banks and superfunds, the government decided to contribute the cash over the first five years of the fund, as it looks to grow it to $1 billion by 2024.
The fund would provide equity funding to small and medium businesses with annual turnover between $2 million and $50 million, with shareholdings capped at 40 per cent. It aims to fill a gap in the current funding market in Australia for growing companies approaching a Series A round that don’t want to take on further debt or give away control of the company.
Treasury this week released draft legislation allowing the Commonwealth to invest in the fund and appropriating the $100 million. Consultation on the bill is largely a formality, with only five days given for submissions. The Coalition plans to introduce and pass the legislation by the end of the year.
The draft legislation provides little detail on how the fund would operate or its investment terms, instead just clearing the way for Commonwealth funds to prop it up.
The fund is clearly targeting growing tech companies and early-stage startups, with these sorts of companies significantly more likely to pursue additional funding for expansion or runway before raking in revenue.
But when announcing the plans for the fund earlier this year, Treasurer Josh Frydenberg pointedly didn’t mention the tech sector, instead pointing to local breweries, restaurants and family-owned construction companies.
The draft legislation and explanatory memorandum now confirm that the fund is to focus on tech companies and startups.
“The Reserve Bank of Australia found that banks were reluctant to finance startups given the high risks involved. Entrepreneurs found it difficult to borrow more than around $100,000 on an unsecured basis to support their day-to-day trading activities,” the draft exposure said.
“In addition, medium-sized businesses reported that it was hard to obtain additional finance once they have pledged all of their real estate as collateral. As a result, many entrepreneurs delay expanding their businesses until the expansion can be funded from retained profits.”
The government said that these sort of businesses are not suited to debt financing due to the large time gap between taking on the cash and reaching profitability, and many are against seeking equity funding due to the loss of control of the company.
The government fund would provide “patient capital” in the form of equity funding with a focus on long-term returns rather than short-term profit.
“Australia currently lacks a patient capital market for small and medium enterprises. Patient capital can provide entrepreneurs the finance needed to expand without relinquishing control of their business,” it said.
“Patient capital equity funds established in the United Kingdom and Canada have shown that there is a need for this type of finance and that patient capital investment can be profitable for investors.”
The fund will be regulated by APRA and administered by an independent board and chair, to be appointed by its shareholders.
Before the Coalition announced it would be stumping up Commonwealth funding, only the National Australia Bank had committed to the fund. Now all the major banks have confirmed they will be providing some amount of cash to the fund.
Submissions on the draft legislation opened on Monday and close only five days later on 8 November. The process is largely a formality, with the Coalition planning to introduce the bill to Parliament before the end of the year, where it will likely sail through both houses.