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5678.0 - Venture Capital, Australia, 2001-02  
Previous ISSUE Released at 11:30 AM (CANBERRA TIME) 23/06/2003   
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FURTHER INFORMATION

For further information about these and related statistics, contact the National Information and Referral Service on 1300 135 070 or Glyn Prichard on Canberra 02 6252 6257.


NOTES

INTRODUCTION

Venture capital is high risk capital directed towards new or young businesses with prospects of rapid growth and high rates of return. Venture capital is an investment not only of money but also of skills and time. This publication presents aspects of both financial and non-financial contributions to venture capital investments.

There has been considerable growth and interest in venture capital markets in recent years. The Federal government and various state governments have introduced schemes to foster the sector, including changes to tax regimes.

ABS undertook the first survey of venture capital for the period 1999-2000 and has now undertaken surveys for 2000-01 and 2001-02, at the request of and with the financial support of the Department of Industry, Tourism and Resources and the Department of Communication, Information Technology and the Arts.

ABS conducted these surveys with the advice and assistance of users, industry bodies and data providers.


ABOUT THIS ISSUE

This issue contains the results of the 2001-02 Venture Capital survey and compares results with the two earlier surveys (2000-01 and 1999-2000).


EFFECTS OF ROUNDING

Any discrepancies between totals and sums of components in the tables are caused by rounding.


ABBREVIATIONS

$bbillion (thousand million) dollars
$mmillion dollars
ANZSICAustralian and New Zealand Standard Industrial Classification
AVCALAustralian Venture Capital Association Limited
IPOInitial Public Offer
LBOleveraged buyout
MBImanagement buyin
MBOmanagement buyout


SUMMARY OF FINDINGS


OVERVIEW

The results of the third Venture Capital survey show further strong growth occurred during 2001-02. As at 30 June 2002, investors had $6.9b committed to venture capital investment vehicles which were either specialised venture capital funds or corporations which directly invest their venture capital. This compares with $5.7b at 30 June 2001. Investors had $4.4b of committed funds drawn down at 30 June 2002, an increase of 21% on a year before ($3.7b at June 2001), leaving $2.5b of committed funds yet to be called on ($2.0b at June 2001). See Table 1 for details. Most of these funds were sourced domestically, with 91% of the total investment from Australian investors (little changed from June 2001 or June 2000).

The selection of investee companies (into which venture capital is invested) was an intensive process. A total of 113 venture capital managers reviewed 10,732 potential new investments during 2001-02 and conducted further analysis on 1,087 of those, with 152 (just over 1% of those initially considered) being sponsored for venture capital. These managers spent a total of 153,000 hours with the investee companies (182,000 hours in 2000-01 and 180,000 hours in 1999-2000), advising and assisting in the development of the enterprises.

The 162 venture capital investment funds and companies (150 in 2000-01) reported investments held in a total of 839 investee companies (up by 4.1% on 2000-01). After deduction of fees and other expenses, exits and allowing for holdings of liquid assets, the $4.4b drawn down resulted in $3.3b ($2.7b at June 2001) invested in the 839 investee companies. There was an increase of 10 (12.3%) on 2000-01 in the number of funds registered with a government sponsored program (mainly Pooled Development Funds); 56% of all vehicles are now registered with a government sponsored program.

During 2001-02, the venture capital sector recorded a profit through exit sales of about $53m. The following diagram summarises key findings for venture capital in 2001-02.


KEY FIGURES 2001-02

Image - Venture Capital - Key Figures 2001-02



ANALYSIS OF RESULTS


Investors

Venture capital investors are generally sophisticated individual investors or organisations such as pension (superannuation) funds. Investors invest in venture capital investment vehicles organised as either trust funds or corporations. Venture capital trust funds obtain investment commitments from investors, which are drawn down over time. They must return capital plus profit (minus loss) as investments are realised. On the other hand, venture capital vehicles organised as corporations are able to choose to make distributions to investors (including parent corporations) or to retain capital for further investment. Investors in corporations may liquidate their investment by sale on the secondary market. Drawn down funding from investors in corporations can be estimated from paid up capital and borrowings, but the ability of corporations to reinvest retained earnings and the tradability of investor equity in corporations makes analysis of investment by type of investor difficult. Certainly the concept of commitments by type of investor is less clear-cut, by comparison with trust funds.

At June 2002 investors had $6.9b committed with venture capital investment vehicles. This compares with $5.7b at June 2001 and $5.0b at June 2000. See table 1 for detailed source of funds data. Of the $4.4b drawn down at June 2002, 66% was by venture capital trust funds while corporations accounted for the remainder (34%).

The following graph analyses drawdown investment for venture capital investors by type of investor. The graph shows that the largest source of funds in terms of drawdowns for venture capital vehicles was domestic pension funds with 36% of total drawdowns by venture capital vehicles. Non-resident pension funds accounted for 2% ( 9% for all non-residents) of the total drawdown value.

Graph - Drawdown investment in Venture Capital Funds by Investor type



Venture capital managers and investment vehicles

The venture capital manager is generally a skilled business person and financial analyst. The gathering of commitments from investors takes a considerable amount of time as does the process of undertaking an initial evaluation of potential investees and later due diligence. The survey identified 113 active venture capital managers who were managing 162 venture capital investment vehicles. This compares with 107 active managers managing 150 vehicles in 2000-01.

Venture capital fund managers spent 153,000 hours with investee companies (tables 2 and 3) and received income in the form of management fees ($96m), see table 4. In 2001-02, fund managers spent on average 2.1 days a month per investee company. This compares with 3.2 days 2000-01 and 4.0 days in 1999-2000.

The decline in average days spent on deals in 2001-02 was reflected in deals involving all activities except Biotechnology, Pharmaceuticals and Health which increased slightly over the previous year (see Table 2).

Graph - Number of investment deals by Venture Capital manager



Venture capital managers typically had between three and six deals in June 2002 (a deal is an investment which may include advising and assisting an investee company). There has been a proportional shift from 1 or 2 deals to 3 or 4 over the three years of the survey, with just on 25 of the 113 venture capital managers (22%) being involved with three or four deals at June 2002. A further 21 (19%) were involved in more than 10 deals.

Of the 162 venture capital vehicles, 17 did not have any investments active during 2001-02 but were involved in preparatory activities such as sourcing funds, selecting investments and other endeavours. The remaining 145 vehicles reported a total of 839 active deals during the year.

For a number of the smaller investment vehicles, the managers were involved in a range of business activities in addition to the management of the investment vehicles.

Venture capital investment vehicles had net assets of $3.7b at June 2002 compared with $3.1b in June 2001 and $2.7b in June 2000 (see Table 5). Most venture capital investment vehicles were either trusts (funds) or corporations. Table 6 indicates that, of the 162 vehicles operating in 2001-02, 100 were companies. Of these, 74% were not listed with the Australian Stock Exchange. At June 2002, about 38% of venture capital vehicles were trust funds, this compares with 39% a year earlier and 35% at June 2000.

Many venture capital investment vehicles participated in government-sponsored programs. Table 7 indicates that 91 of the 162 venture capital investment vehicles were participating in a government program at June 2002, an increase of 10 on June 2001 and 36 on June 2000. Most of the participating investment vehicles were with the Federal government's Pooled Development Fund (PDF) program.

Graph - Investment Vehicles by Value of Assets held



The range of total assets held by investment vehicles was widely dispersed, from 80 investment vehicles having less than $10m in assets to 14 with more than $80m in total assets (see the preceding graph). A proportional shift from the number of vehicles with $10m to $19.9m in assets to less than $10m in assets has occurred over the three years of the survey.

Table 8 shows the financial flows of venture capital investment vehicles over the survey period. Most return on investment to investees is through exits from investments. The main form of exits was through trade sales or initial public offers (floats). The total value of all exits through trade sales, IPOs and buybacks amounted to $379m in 2001-02 (representing $326m of investment and $53m profit over the lives of these investments). The following graph also illustrates the investment flows for deals by the venture capital industry over the three survey years. From this it can be seen that investment in new deals increased in 2001-02, while follow-on investment increased over the three years, with significant increases in 2001-02 ($155m, or 77%). The use of trade sales became more significant over 2001-02 as a means of exiting ($197m not including buybacks which were another $9m). This compares with initial public offers which have declined over the three survey years to $120m for 2001-02. The value of deals by vehicle that have dropped out of the Australian venture capital industry was again significant in 2001-02 ($240m). The reasons for leaving the industry include re-location overseas, enterprises going into liquidation, or enterprises that have left venture capital for longer term private equity arrangements.

Graph - Change in Investment by Venture Capital vehicles in investees


Table 4 indicates that investment vehicles had total expenditures of $157m in 2001-02, mainly in management fees, which totalled $96m, down by 26% over the previous year's expenditure ($129m). Performance fees at $7m were still significantly down on the $52m recorded in 1999-2000 ($5m in 2000-01).

Graph - Income and expenditure of Venture Capital vehicles



Venture capital funds used various valuation methods. The Australian Venture Capital Association Ltd method was most frequently used, with 77 vehicles using this method, followed by directors (38) and independent (30) valuation methods.

Graph - Valuation methods used by Venture Capital fund vehicles



Investee companies

Of the $3.3b that had been invested in the 839 investee companies at June 2002, $725m was invested in new projects during the 2001-02 financial year (up by 5.8% on 2000-01), with additional investments in existing projects of $357m (see Table 8 for more details).

Graph - Number of deals by Age of investment



There was an increase in the proportion of venture capital investment arrangements in place for between two and four years. At 30 June 2002, 54.7% of investments were 2 to 4 years old. The number of investment arrangements in place for less than 2 years declined.

Graph - Value of investment by investee stage



See paragraph 11 of the Explanatory Notes for a definition of the venture capital stages referred to in the above graph.

Investments for all three survey periods were predominantly at the expansion stage, with $1.3b or 41% of total value at June 2002. The value of early stage investments was also significant, with 20% of total investment at June 2002. The more developed stages such as expansion, late and management related exits increased over the three years, while less developed stages, such as seed and early, declined from the 1999-2000 levels. Note that the age of the investment is not necessarily a reflection of its stage; some investments may go from seed to expansion within a two year period, yet others will stay in the seed stage for a number of years.

Graph - Percentage of investee company owned by Venture Capital vehicle



Venture capital arrangements typically do not involve a level of controlling equity by a single venture capital vehicle in investee companies, with most having less than 40% ownership, as the above graph illustrates. However, it is worth noting that more than one fund manager may invest in the same investee company. For example, an investment vehicle manager may invest at the seed/start-up stage and receive 10% of the business and another investment vehicle manager could arrange the next round of funding and also receive 10% of the company.

Graph - Value of investment by number of investees



The above graph shows the distribution of value of investment placed by venture capital managers in individual investee companies. Most deals attracted less than $10m from any one investment vehicle and the proportion receiving less than $1m has been steadily increasing over the three survey years.

Graph - Percentage of total investments by location by investee



The above graph indicates that most of the venture capital funds continued to be invested in investee companies with head offices in NSW and Victoria (42% and 30% respectively at June 2002). Table 9 shows that $2.3b was invested at June 2002 in these two states in 545 investment deals. This compares with investment of $2.0b in 546 deals at June 2001 in these two states. Victoria and South Australia experienced steady increases over the three survey years, while New South Wales and to a lesser extent Queensland experienced relative declines over the same period. Overseas investment remained significant and relatively steady over the survey years, while Western Australian investments eased from June 2001. Investment in Tasmania and the territories strengthened in 2001-02 over the subdued levels of the previous year.

Graph - Percentage of total investment by industry of investee



Venture capital investment was undertaken in investees in a wide range of industries and activities. Of the total value of $3.3b invested, Finance and Property attracted $737m (23% of the total, a similar percentage to June 2000 but up on June 2001). Manufacturing and Utilities amounted to $685m or 21% of investment in all industries at June 2002; these industries were steady in proportional terms over the three survey years. Health and other services had $555m of investment or 17% of total investment at June 2002, down on June 2001 in relative terms, but still ahead of June 2000 investments. See Table 10 for details of investment by industry.

Graph - Percentage of value of investment by activity of investee



When activity, as defined by the Standard and Poors Activity Classification, is analysed, the above graph shows that the Manufacturing and Transport related activities attracted the largest share of investment, with $1,172m or 36% of total investment in June 2002. These industries have been steadily growing in relative terms over the three survey years. IT, Media, Electronics and Communication related activities attracted $882m of investment or 27% of total investment in June 2002. These industries have declined in relative terms over the period of ABS venture capital surveys, in line with the decline in the fortunes of the broader technology sector.

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