Despite their potential for strong returns, venture capital investments are not a traditional choice for Australia-based institutional investors. Superannuation fund HostPlus has been a very public advocate in local media as the top venture capital investor in Australia, yet other institutional investors retain conservative allocations to the asset class.
The lukewarm response from superannuation funds stems from the fact that, historically, Australia-focused venture capital funds have not achieved the returns they expected. Fund managers Preqin spoke to attribute the difficulty in attracting capital to the lack of established track record among Australia-based GPs. This may be “due to the lack of required skillsets and focus of investment teams in Australian venture capital firms,” said one firm.
“GPs investing in technology start-ups tend to focus too much on the technology such as artificial intelligence and machine learning, rather than other value-added components which allow companies to grow,” said a Melbourne-based fund manager. They believe that fund managers should be focused on areas such as providing strong management expertise, a good financing framework, strong networks and advice on strategy. “It is crucial to spend more time trying to understand the underlying portfolio companies,” they added.
Despite the negative reception from Australian superannuation funds, money continues to flow into the venture capital asset class. As seen in the chart below, Preqin data shows a significant rise in the level of venture capital activity in the country in recent years, with AUD 2.9bn in aggregate deal value recorded in 2018 YTD (as at October 2018). This is more than double the total amount seen in 2017. With 139 deals completed so far this year, compared to 181 deals in 2017, the average deal size has increased to an all-time high of AUD 23mn from AUD 9mn respectively.
*Figures exclude add-ons, grants, mergers, secondary stock purchases and venture debt.
Fund managers believe that the increase in venture capital activity could be due to the increasing presence of global firms entering the Australian venture capital market. Preqin data reveals that 87% of transactions completed in Australia in 2018 YTD had some form of backing from global investors. One of the largest venture capital deals was for AirTrunk in August 2018; the portfolio company raised AUD 850mn in venture funding from established global investors Goldman Sachs and TPG to fund a major expansion of its data centres in Sydney and Melbourne, as well as across key Asia-Pacific markets.
In terms of industry, the software and technology sectors dominate the venture capital landscape. Software & gaming investments alone have accounted for AUD 1.3bn of total deal value so far in 2018; other IT-related industries such as high-tech, IT, IT security, network, technology and wireless constituted AUD 875mn in deal value. Notably, the prevailing sentiment among fund managers interviewed by Preqin is that Australian venture capitalists have a strong preference for deep technology investments, which have an impact across a range of industries and on the wider society.
The Australian venture capital industry still has some way to go before it resembles the more matured markets. However, LPs and GPs told Preqin that they are optimistic that the industry will continue to grow given the recent momentum they have seen, and the continued support of the Australian Government’s venture capital programs such as ESVCLPs, VCLPs and AFOFs. Specifically, in recent years they have noticed the launch of smaller funds with target sizes between AUD 50mn and AUD 100mn, targeting companies in a diversified range of industries. These are vital first steps if Australia is to develop a robust ecosystem for the venture capital industry.
For more information on alternative assets in Australia and the investment activity of superannuation funds, download our free report, Australian Superannuation Funds in Alternatives.