New rules open SIV dollar pipeline


James Riley
Editorial Director

Changes to Significant Investor Visa rules that came into effect last week will deliver an annual pipeline of about $350 million dollars into the Australian venture capital market, according to leading analysts Basis Point.

The changes will deliver three times that amount – more than a $1 billion annually – into small cap listed companies on the Australian Securities Exchange and funds that invest in this emerging asset class.

Based on a study of application and approval rates for new Visa’s between November and March, Basis Point founder and managing director David Chin expects the pipeline of SIV approvals each year to reach 700. This number excludes a much smaller number of Premium Investor Visa approvals.

Early excitement: The new SIV rules will deliver huge benefits to the Australian innovation sector

The Significant Investor Visa program offers an expedited pathway to permanent residency for potential immigrants who have $5 million to put into complying investments over a four year period.

These complying investments now include a mandatory $500,000 for an eligible Australian venture capital or growth private equity fund, and a further $1.5 million as either direct or indirect investment in emerging ASX-listed companies. The remaining $3million balance can be put in ’safer’ investment options ranging from government bonds, corporate bonds and notes, and real estate (with a limit of 10 per cent for residential property.)

Mr Chin said the new rules significantly increase the risk profile for SIV applicants, but says this is unlikely to have a dramatic impact on the numbers of applicants. Recent Chinese government policy encouraging investments in the domestic startup sector, and the overwhelming strength of the emerging China stock market had under-written an appetite for risk.

“[The new SIV] is more expensive in terms of the risk profile compared to the previous scheme. But that’s ok,” Mr Chin said. “In China itself, the government is encouraging investment in these kinds of companies, and investment in VC funds. So there is a much better understanding of VC and the small caps [among the potential applicant pool] than even a few years ago.”

Basis Point’s estimate of 700 SIV’s being granted each year is based on the annualised number of approvals from November to until March this year. But the numbers could be considerably larger, Mr Chin says.

The company’s latest data points to 1,972 SIV applications currently in the DFAT/Immigration pipeline. Assuming an 80 per cent success rate (not all applications get through), these existing applicants will deliver $2.4 billion to small caps and $800 million to VC funds in Australia.

This may depend on how fast government turns on the tap. There are some concerns among existing VCs that there are not currently enough quality target startup investee companies, and that the Australian market will not be able to soak up the additional dollars.

This might seem a nice problem to have, but it is something that needs to be looked at seriously if the Australian sector is to extract maximum benefit from the opportunity SIV presents.

There is a role for government in this regard. The fact that Trade Minister Andrew Robb has already indicated that government would likely increase the VC investment requirement from $500,000 to $1 million in two years suggests it believes there is plenty of demand for the visa – and that it is aware that there may not be adequate numbers of quality investment targets.

The issue will be explored at Basis Point’s third SIV conference later this month. But it seems clear that targeted policy that increases the pool of VC management talent in Australia, as well as both the quality and quantity of its startup and innovation pipeline looks as though it is already on the government radar.

The creation of a specific new classification of entrepreneur visa has been discussed for some time. The prospect of attracting entrepreneurs to live and work in Australia building their companies is a no-brainer.

Developing a program that makes long term sense for the nation is somewhat more complicated. But it is certainly something that should be encouraged.

A good place to start is among our population of international students. Many are actively engaged in the local startup community, but are hamstrung by the onerously restrictive requirements of the student visa. Perhaps this is an area that where government can make modest reform.

It is still very early days in the life of the SIV program. The channels to market for SIV funds are not even close to maturing, and it is not yet clear whether a dominant channel will emerge. It is understatement to say there is plenty of excitement in the market right now, and that lots of potential players are looking for distribution partners, and looking for products to take to market.

This is a market that could reasonably be expected to be dominated by the larger multinational finance houses. But this is not turning out to be the case. There are currently no dominant gate-keepers, and smaller Australian players are equally active in creating partnerships to deliver SIV investment services.

This itself is exciting for Australian funds that have proven expertise in tech and innovation investments in forming joint-venture partnerships in China. There is a reasonable expectation that a virtuous circle of engagement between Australia and Chinese tech investment talent and the innovation industries will result from this policy.

The much larger pool of potential investment dollars is also attracting Chinese entrepreneurs into the Australian market.

The other consequence of the SIV program may be that our startup and innovation sectors will have a disproportionately large – albeit indirect – ownership by investors from China. This is a good thing, potentially opening further opportunities for expansion in the domestic China market.

Not everyone will share this view. But this is a policy goal that governments have sought for at least the past decade. Trade diversification with our largest trading partner.

Do you know more? Contact James Riley via Email.

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