Of noble aim
The Australian Business Growth Fund Bill 2019 is designed to increase investment in Australian small- and medium-sized enterprises (SMEs) by establishing a fund to provide patient capital to SMEs across a range of industries and locations.
The bill’s aim is noble. Its implementation comes with concerns.
The company that you keep
If this bill is passed into law, the government will partner, using $100 million of taxpayers' money, with the big four banks—ANZ, Commonwealth, NAB and Westpac—along with Macquarie Group and HSBC, to establish a $540 million Business Growth Fund. After the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, one might think the government would be a little more cautious about the company that it keeps and very meticulous about laying down very clear rules of engagement.
Memories in the Federal government appear to be short. Despite the very recent abhorrent conduct within the financial and banking sector, the government demonstrates a strong desire to jump into bed with the banks in circumstances where abstinence might be more appropriate.
The fact that the government will only own a 19 per cent stake in the venture and the banks will own 81 per cent is an important point. When this is considered in conjunction with the operation of clause 13 of the bill that prevents the government from controlling the composition of the Fund’s board, it is clear that the big four banks will exercise effective control over the Fund.
As detailed in the main report, both the Business Growth Fund in the UK and the Canadian Business Growth Fund (from which the ABGF is purportedly modelled) does not involve investment of taxpayer money.
The UK Business Growth Fund was set up as an independent investment company with financial backing from Barclays, HSBC, Lloyds, RBS, and Standard Chartered. It was authorised by and registered with the UK’s Financial Conduct Authority.
The Canadian Business Growth Fund was set up after encouragement by the Canadian government using pre-committed capital from Canada's leading banks and financial institutions and receives appropriate capital treatment under the current Office of the Superintendent of Financial Institutions (OSFI) regulations.
It is curious that the government feels a need to invest when it hasn’t been required in the UK and Canada. It is noted that a resolution is set to be voted on at the upcoming annual general meeting of the Commonwealth Bank which may prevent it from investing its intended $100 million in the Fund. When Treasury officials were asked what would happen if this resolution was passed they answered, '[the] Fund doesn't need $540 million'. This begs the question, if the Fund can be established without the Commonwealth Bank’s $100 million, why can’t it be established without the taxpayers' $100 million?
Recommendation
The Government should facilitate the establishment of an Australian Business Growth Fund without investing $100 million of taxpayers' money, similar to the arrangements in the UK and Canada.
Just trust us
Treasury indicated at the public hearing that governance arrangements and the investment mandate are yet to be finalised. These are likely to be finalised after the appointment of a board and CEO in mid-2020.
The Senate will be asked to vote on the commitment of $100 million of public money without an understanding of the governance arrangements for taxpayers’ money or, indeed, the Fund’s investment mandate.
It is further noted that there will be very limited Parliamentary oversight once the fund is constituted.
Recommendation
The Senate should not proceed to vote on this legislation until such time as it is informed as to the governance arrangements of the $100 million of taxpayers' money and the investment mandated for its use.
Competitive neutrality breach
As indicated in the main body of this report, the Australian Government has had a Competitive Neutrality Policy in place since 1996. It appears from preliminary advice provided to the committee by the Australian Government Competitive Neutrality Complaints Office (AGCNCO) that the ABGF will be so organised to bring it within the complaints jurisdiction of the AGCNCO.
It is highly likely on the establishment of the ABGF that a complaint will be lodged with the AGCNCO in respect of breaches of competitive neutrality. There is also a strong likelihood that the ABGF will fall foul of the Australian Government’s Competitive Neutrality Policy.
It is advisable that the AGCNCO be asked to examine whether the ABGF will operate within the government’s long established Competitive Neutrality Policy.
Recommendation
The Senate should not vote on this legislation until such time as the Australian Government Competitive Neutrality Complaints Office has established that the ABGF will operate within the government’s long established Competitive Neutrality Policy.
Investment for all Australians
At present, the ABGF permits investment by the participating entities: the banks and the government. 'Mum and Dad' investors and indeed all Australians would be excluded from participating and benefiting from investment in SMEs.
The Australian Shareholders Association expresses a concern that the ABFG 'could lead to the disenfranchisement of retail investors by excluding them from investing in SMEs that otherwise would have conducted an Initial Public Offering on the ASX'.
A remedy to this would be a modification to the Fund whereby it is permitted to underwrite, partially-underwrite, or sub-underwrite equity for SMEs. Such an approach would permit all Australians (and not just the banks) to have the opportunity to invest in high-growth companies that are guaranteed by the ABGF.
Whilst this proposition was put to Treasury, it was not properly examined.
Recommendation
That analysis is carried out on repurposing the Fund to allow it to underwrite, partially-underwrite, or sub-underwrite equity for SMEs.
Adverse Outcomes
Evidence was presented to the committee by the Chief Executive Officer of On-Market BookBuilds Pty Ltd, Mr Bucknell. His company has 50,000 investors on its books and has raised capital for more than 150 companies. One hundred and twenty-five of those were SMEs that fall within the definition used by the ABGF. From those 50,000 investors, the company has raised over $100 million of equity capital directly which in turn has facilitated $2 billion of institutional co-investment.
Mr Bucknell raised a serious concern:
We do about 40 SME equity raising per year. So, if you take out the top 10 performers of that because the BGF cherry picks that, then there's a negative return. Effectively, what you're doing is taking away the returns from other investors. It would be natural for SMEs to choose to go to the BGF first. The reason for that is that the BGF has the lowest cost of capital, which has been artificially created through the change of APRA ratios and the government's $100 million. They will go there because they have a pool of $540 million that's ready to deploy. This means that the rest of the market will be left with BGF rejects. As the fund is currently intended to fund 10 SMEs in its first few years, raising to 30, the effect would be that you would fund 10 SMEs from the BGF and not be able to fund 40 from the private market, so we would actually have a reduction.
This perspective is concerning and failed to be addressed by officials in their submissions or evidence to the committee.
Recommendation
Treasury should examine the proposition that has been put and make available the results of that analysis to senators before the legislation is voted on.
Senator Rex Patrick
Member