The legislation is designed to allow private equity firms from the United States, United Kingdom, Japan, Germany, France and Canada to invest in Australian private equity funds on the same tax basis as they can invest at home, said John Brakey, associate director at Macquarie.
"We are beginning to see a marked increase in interest from U.S. and European investors wanting to invest in Australia," Mr. Brakey said. "At this point, the interest is predominantly from fund of fund players, but I think that it is beginning to extend to some of the more sophisticated and progressive LPs in the U.S."
Still, the new venture capital limited partnership reforms do have a couple of flaws that have limited the flow of private equity dollars from foreign investors. Although the law was designed to restrict limited partners' liability, it doesn't necessarily work this way throughout the country, according to a proposal by the Australian Venture Capital Association. The association has suggested changes that would limit investors' exposure to loss through a limited partnership to the amount of the investment. This modification, however, would require alterations to laws in each of Australia's states and territories, and those changes are not expected to be completed until the end of the year.
"Some U.S. funds have indicated to AXISS that … they are pleased that the government has instituted the new VCLP arrangements but would like to see these proven prior to making investments," Mr. Chambers said.
Australia has a relatively small private equity market, Mr. DePonte said, and therefore private equity firms would not want money flooding into the country and decreasing returns.
However, Australian officials do expect the private equity market to grow.
"As the industry in Australia matures further, there will be more opportunities for investment as some deals (particularly in the leveraged buyout/management buyout sector) come to market," Mr. Chambers said.
For now, Australia's $350 billion compulsory pension system remains the largest source of venture capital in Australia. As of June 2003, the superannuation funds invested 20% of overall assets in U.S. and other foreign investments. Of this, 3% is in venture capital. As of June 2003, venture capital funds under management in Australia totaled $4.7 billion.
And there are attractive investments in Australia, such as Starfish, Mr. DePonte said. "They have a nice track record, but they're only raising between $50 million to $75 million," Mr. DePonte said. "It's a long plane ride to Melbourne to put $5 million to work."
But Mr. Chambers pointed out: "There's been a longstanding relationship between U.S. firms in the financial sector and Australia.
"The (Australian) government was interested in capital flowing to stimulate the biotech sector and to get the money to commercialize the medical technologies involved."