Yasser El-Ansary, the chief executive officer of the Australian Private Equity and Venture Capital Association Limited (AVCAL), sees Australian VCs more likely to tap Southeast Asia’s growth opportunities in the coming years as their knowledge of the region grows,
AVCAL, which El-Ansary has led since November 2013, counts about 75 fund managers ranging from small venture capital (VC) funds all the way to larger VC and private equity (PE) funds based in Australia. The organisation also includes institutional investors such as Australia’s superannuation funds, family offices and sovereign wealth funds, among others.
Australia’s VC sector has soared ahead in recent years with a record A$568 million raised in 2016. However, it still remains a fraction of what is really needed to fuel innovation and create the next wave of startup firms, according to AVCAL; VC investment as a proportion of GDP is just 0.023 per cent in Australia, less than half the average for the world’s leading nations as measured by the OECD.
El-Ansary reckons that given international experience, the VC sector in Australia is “far too small for a country with bold ambitions to be an innovation-leader,” with a strong VC sector underpinning an innovative economy. In an exclusive interaction with DEALSTREETASIA, El-Ansary discusses Australia’s venture ecosystem, its venture capital sector and the potential approach to Southeast Asia by Australian VCs.
Can you highlight the basic role of AVCAL in Australia’s venture ecosystem?
Our role sees us represent the industry in discussions with the government, regulators and revenue authorities. We act as a single voice for the industry in that context and work closely with our members to understand the key issues they confront in the market day to day when going about their investment activities.
If there are particular issues or roadblocks which act as a handbrake on the capacity of the fund managers to deploy capital into high growth Australian businesses, we make those issues a priority in our discussions with the government to address them.
Our work is quite broad as we cover a range of issues like the taxation system but are heavily involved in the policy and regulation around foreign investment policy here in Australia, such as around superannuation regulation policy (ie. the rules that relate to the pension system), healthcare and medical research. Our reach is quite broad.
Personally, a major area of focus has been improving our capacity to represent the PE/VC industry with the government. We’ve spent a lot of time and effort in ensuring that we have a much stronger day-to-day relationship with the government that is built on trust and mutual respect for what we have to do. As an industry, we also need to do a much better job of explaining to the broader market and business sector, as well as to the government and the media, what PE and VC really is, and what it is not.
Looking at the current state of the PE/VC space in Australian, what’s your take on its health and deal flow?
If you look at the PE and VC space in Australia, the industry is exceptionally strong; we have a significant amount of capital that has been raised, I think about A$7 billion that can be deployed (as at May 2017).
We’re fortunate that despite a small population – relative to larger developed markets – we have a very significant population of business founders and business owners, with about 3 million SMEs. When you look at the size of the population in proportion to the number of business operating and being formed, we’re actually doing pretty well.
That means for PE and VC funds there’s a constant flow of opportunities and new deals to look at, and it’s certainly consistent. That’s what I hear from the fund managers here in Australia, in that there is no shortage of deal flow coming through the pipeline and there are opportunities for them to look at a large pool of candidates for private capital investment.
The tricky issue always is the same in every market around the world; not only to find strong deal flow but to convert that into completed deals. That’s a challenge here in Australia, just as in about every market around the world. We can expect to see more completed deals coming through because, over the last few years, we’ve seen a significant volume of transactions, coupled with a healthy base of available capital to deploy. I think the future is very bright.
Australia’s one of the largest economies in the world and has this emerging startup ecosystem. But up north you have the emerging markets of Southeast Asia and this entire growth narrative. How will that impact Australian PE/VC developments given they’re rather inwardly focused or target mature economies like the US and Europe?
Historically here in Australia, we’ve tended to gravitate towards the more established, well-trodden pathway towards key markets like the United States, Europe, and the UK. I’m starting to see some change with venture fund managers and entrepreneurs gaining a much deeper recognition of the opportunities that lie much closer to them right here in the Asia-Pacific and Southeast Asia, in particular.
I’m quite hopeful that over the next few years, we’ll see more businesses looking to expand their global footprint do that by entering key markets in Asia rather than thinking almost by default that their only action is to enter markets like the US and Europe.
The reason this has been somewhat slow in developing is that as an Australian, we have not done a very good job building the capacity to understand markets in Asia. As a country, we’ve been sometimes a little bit lazy and haven’t committed adequate time and effort to establish a strong base of networks and relationships across Asian markets.
This is improving, and there is a heightened awareness that Asia is a heterogeneous collection of markets with different attributes in terms of the unique policy and regulatory frameworks, with unique opportunities and challenges. This is starting to be understood across the Australian-US landscape.
Australia’s seen all these entrepreneurial hubs like Melbourne and Sydney emerge, as well as Brisbane. How do you see this evolution going from 2018-2025?
The strength of the VC sector here in Australia will be very much dependent upon the success of fund managers in deploying capital in a manner that balances all of the various risks and opportunities while generating solid returns for investors. That will be the final arbiter if you like, the acid test around how well they do in this part of the market over the next decade.
There’s every indication to suggest that the industry has learnt a lot, as well as the experience of the VC sector in other markets. Ultimately, that makes for a more mature, more sophisticated base of understanding, and expertise within the venture sector. I think that’s the reason why we have every reason to be positive about the outlook.
It’s very hard to know exactly where we will be in five years or a decade, but to the extent that we continue on the trajectory that we’re on at the moment, I think we will be an even more significant venture market, with a more significant pool of capital to be deployed into not just high-growth Australian businesses but across the region encompassing Southeast Asia and New Zealand.
The reality also is that in Australia there’s very deep pool of institutional investor capital available to key sectors and have among the largest accumulated savings pool internationally because we have a compulsory defined contribution paging system; every person working and earning an income in Australia is required to have 9.5 per cent of their earnings directed into a mandatory contribution pension system.
What’re the strengths of Australia’s venture ecosystem relative to other destinations around the world?
The ecosystem here benefits from two or three key attributes: we have a small but very engaged population that is willing to embrace advancements in technology and innovation, and that’s a good thing for the ecosystem.
It means there’s always an opportunity to test and validate products, services, and innovative technologies in your domestic market, as well as grant yourself an opportunity to identify opportunities to refine and adapt your products in order to give yourself the best opportunities for success. We’re a fairly small but diverse country with a very strong following towards adapting innovations.
Similarly, with a small venture ecosystem, it’s easy to connect with key stakeholders and to use the network and relationships to your advantage. It’s very easy to talk to a couple of people and identify from that discussion an opportunity to connect and talk to others. That means you can partner with the people who are best placed to help take your venture forward.
Tapping into the available network of skills and expertise here in Australia is simpler than in other, larger markets, and we’ve got a very entrepreneurial culture.
Regardless of your age or background, we as a culture are very prepared to give things a go. I think all of those attributes are positive, and they set us up in a way that gives some competitive advantages over other markets around the world.
In terms of the big picture, you have state governments like Victoria where there’s a lot of buzz around the startup space. But do you reckon there’s been some neglect of the middle market in government policy?
There’s been a lot of interest in innovation and the VC segment over the years, and it’s quite natural that there’s been a lot of excitement about technology advances globally. It’s the exact same thing in Australia.
What we’re saying to the business community and government is that we must not forget that innovation is not the exclusive domain of startup ventures but the domain of every business, whether you’re running a small business in the fast-moving consumer goods (FMCG) segment or a trading services business like plumbers or electricians. Every business across our economy stands to benefit from innovation and technological advancements.
When formulating policy, we must not be tricked into thinking that the only businesses that are innovative are those that are startups and emerging enterprises. That’s been learned in other markets around the world, and something we’re quite conscious of here in Australia.
I would love to see more policy put in place by our government to support SMEs and to give them the maximum opportunity to benefit from the globalised marketplace that just about every business operates in now. That’s something that Canberra – the government here in Australia – is starting to pay attention to.
The Australian Securities Exchange (ASX) has seen a lot of exits by a number of startups in Southeast Asia. How would you describe the exit architecture – in terms of M&A activities, buyouts and IPOs – for startups in Australia?
I would say that the architecture is very good. We have a longstanding, well-established securities market that has significant volumes of liquidity, very strong policy and regulatory architecture to ensure transparency and certainty around business dealings and the flow of capital and cash flows.
We have strong financial reporting products in place that are consistent with global practises. Our foundations and credentials around market infrastructure are actually very good, and there’s a recognition of this relative to other markets around the world that Australia does exemplify excellent corporate governance controls favourable to attracting capital investment.
There’s an understanding when I talked to offshore investors looking to inject capital into the Australian market; this is one of the attributes that most of those investors cite that appeals to them about the Australian market.
Do you see more Australian VCs tapping the Southeast Asian market for deals, or are they content to stay in Australia given the large base of startups there?
They realise that now our opportunities lie very much in the region that we are a part of. I expect to see more thinking along those lines in terms of fund managers sourcing capital from the region when raising new funds.
Similarly, we will see more investment directed towards Australian businesses that are growing into the region, or direct investments into businesses that already have a regional presence and might be based in key markets in Asia, like Singapore or Hong Kong. We’ll see more of that in the coming years than we have in the past as awareness of those opportunities increases.
Following the Dotcom bust of 2000, the Australian venture ecosystem saw a contraction but seems to have undergone a sort of renaissance. Is this is a sustained affair or a passing trend?
It’s much stronger now than it was a few years ago. The past 2-3 years have seen the return of institutional level investing back into venture capital assets. Since the global financial crisis of 2008, a lot of institutional capital abandoned venture capital assets and shifted away from that asset class; they were no longer allocating capital into venture funds here in Australia or in fact anywhere in the world for a period of time.
What’s changed is that in the last few years, some of our large institutional investors like the Australian superannuation funds have returned to venture capital and made decisions to allocate capital to managers here in Australia or in other markets around the world. They now see the opportunities that come with investing in venture capital that they haven’t seen in the past decade or so.
In the years following the global financial crisis, there was a focus on risk containment and mitigation, which meant that asset classes which carried a higher risk exposure were sidelined, with a focus on a conservative investment strategy that protected value. Now, this period is passed and strategies are normalised once again.
The new normal is a very different normal to the one that existed in the lead up to the global financial crisis. There’s an acceptance of change in the market as being a constant. Therefore, institutional investors are open to being a part of that change and driving it through investing capital to support advancements in technology and science research, as well as the commercialisation of the outcomes.
Corporate venture capital has emerged as a strong player in recent years. Do you see the growth of corporate venture capital rewriting the VC playbook and increasing competition for deal flow, in terms of pushing up valuations? Or will there be more collaboration with traditional institutional VCs?
There’s going to be significant collaboration between corporate venture players and more traditional institutional venture funds. It’s not a zero-sum game where corporate venture capital will take opportunities away from the more traditional VC players. The two will work very well, and overall it’ll drive an increase in the amount of investment activity.
I expect that corporate venture funds will become an even more significant part of the venture sector here in Australia in the next few years and we will see larger corporate institutions devote resource effort to establishing a strong, robust presence in venture capital, and that’s a good thing for the ecosystem.