Navleen Prasad

In a sign of confidence in the Australian private capital industry, aggregate capital raised in the year to 30 June 2022 (FY22) by private equity and venture capital funds more than doubled and quadrupled compared to fundraising in the previous year.

This, and other findings, were published in the annual Preqin and Australian Investment Council Yearbook 2023 released this week. The report confirms that in FY22, private equity funds raised $9 billion and venture capital raised $2.7 billion.

Fund inflows were not limited to institutional funds. Australian superannuation funds in 2022 comprised 28 per cent of all private capital investors, down from 42 per cent in 2018, driven by the consolidation of funds that has occurred at a rapid pace. Increasingly, fundraising activity includes high-net-worth individuals, family offices, and wealth managers, all of whom are attracted by the proven benefits of diversification, hedging characteristics and exposure to higher returns.

Funds raised in FY22 take assets under management (AUM) across private equity, venture capital, private credit, infrastructure, real estate and natural resources to a record $118 billion. This underscores domestic and international investor appetite to seek returns by investing in Australian ideas, businesses and assets. The report also confirmed there is a record amount of undeployed capital, with $37 billion available for investment in Australia, up by 17 per cent on FY21.

Private equity, venture capital and private credit account for more than 50 per cent ($61.7) of that $118 billion of AUM, outweighing private capital allocated to Australian infrastructure, natural resources and real estate combined ($56.6 billion).

Australia’s emerging private debt industry grew steadily in 2022 supported by robust deal activity and tighter lending conditions amongst traditional debt providers. As interest rate pressures remain priced into markets, private debt facilities remain an attractive funding facility for investors.

The nation’s venture capital sector remained resilient despite more challenging market conditions; 338 venture capital deals were completed with an aggregate value of $5.6 billion invested in 2022, seed or pre-seed deals continue to remain central to the focus of major venture capital funds.

In a sign that international investors have found Australia to be an attractive investment destination for alternative assets over the long term, foreign investment has grown considerably over the past two decades, accounting for 46 per cent of active investors committing to Australian-based funds of vintages 2018 to 2022, compared to 18 per cent in funds of vintages up to 2002. Among foreign investors, North America accounts for the highest proportion at 25% of all active investors.

Preqin Research Insights VP Angela Lai, said: “With LP sentiment turning cautious globally, Australia-focused private equity and venture capital fundraising surprisingly reached record highs in 2022. This was partly due to higher commitments from the country’s superannuation funds, and new participation from family offices and wealth managers.”

Australian Investment Council CEO, Navleen Prasad said: “It is pleasing to see such strong investor support for Australian private capital, and private equity, venture capital and private credit in particular. In a globally competitive market, Australia offers a relatively stable regulatory and legislative environment as well as access to high quality talent pools and a gateway to Asian markets.

“It is worth noting that since 30 June 2022, the global economic and market environment has become even more uncertain, and we anticipate that will have some impact on private capital investment. While Australia’s economy has been relatively resilient to date, uncertainty does impact a range of investment dynamics such as the types of investments being made, and the time taken to make investment decisions.

“While there was substantial fundraising activity last year, we anticipate that activity to moderate this year and investment managers will be even more discerning as they seek opportunities to invest record levels of undeployed capital. That said, we believe that high-quality assets with strong fundamentals and robust growth prospects will continue to be attractive to investors.”

Australian-focused private capital funds delivered a median net Internal Rate of Return (IRR) of 14.9 per cent, in line with Europe, and slightly below Asia and North America. Private capital’s positive returns contrast with negative returns for Australian equities (shares) and fixed income (bonds), building a strong case for alternative assets in a diversified investor portfolio.

Ms Lai added: “Australia’s real assets have proven to be resilient given their ability to hedge against inflation and provide long-term risk-adjusted returns. We expect that value-added strategies will gain momentum as the commercial real estate sector adapts to new hybrid working styles and the need to retrofit buildings for sustainability purposes. At the same time, the country’s natural resources and infrastructure asset classes have benefited from higher energy, food, and commodities prices in the recent years.”

Australia’s alternative assets industry continues to see opportunities arising from developing new technologies and infrastructure that support the energy transition. The country continues to lead its peers in APAC in ESG investing, with 212 UN PRI signatories, and its regulators have continued to scrutinise and combat greenwashing. These developments will draw responsible investors to allocate more towards assets in Australia.

Ms Prasad noted: “For Australia to remain an attractive destination for investment, remaining competitive is of paramount importance and requires constant attention, particularly where governments around the world are looking to private capital to supplement constrained public balance sheets. The right policy settings will continue to be crucial for Australia to remain competitive on the world stage as an attractive investment destination.”

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Jonathan Kelly

The Australian Investment Council has released Building a Resilient Future, a policy blueprint for economic and jobs growth. The blueprint highlights the private capital industry’s view of key policies for consideration by an incoming government in building a prosperous and resilient future for Australia.

“Australia has an opportunity to build upon the productivity-enhancing impact of businesses underpinned by technology with robust policies that support the growth and expansion of businesses aligned with core industries of the future,” said Jonathan Kelly, Interim CEO of the Australian Investment Council.

“The Council and its members believe that sustainable, long-term economic growth requires policies that focus on encouraging the flow of investment capital and a globally competitive investment regime; providing world-class infrastructure assets; and supporting funding and growth for the commercialisation of innovation.

“These policies should be underpinned by the government’s digital economy strategy to secure economy growth, the development of skills aligned to future jobs and the acceleration and development of technology as an enabler of businesses across all sectors of the economy,” Mr Kelly said.

The Council has identified six policy priority areas which are relevant to any incoming government:

1. Building a world class investment regime – introduce a flow-through, international best practice Limited Partnership Collective Investment Vehicle to support the broader policy objectives of building Australia as a financial services hub and major supplier of global financial services and ensure policies around foreign investment provide clarity and certainty for market participants
2. Strengthening trade ties regionally and globally – ensure policy settings through bilateral and multilateral agreements encourage trade and investment and that reciprocal arrangements can be made for the flow of foreign investment capital and human capital
3. Building the next generation of global talent – commit to a world class education system that is dedicated to developing the right skills and experience for a knowledge-based economy
4. Redefining university commercialisation – incentivise closer ties between universities and private sector investors to commercialise university research and continue to establish innovation precincts to create a culture of collaboration, innovation and public engagement for the development of new businesses and industries.
5. Reforming taxation – including a reduction in the headline tax rate for all Australian businesses and reducing reliance on direct tax and rebalancing towards a greater reliance on ‘user pays’ pricing mechanisms and indirect taxes
6. Reducing ‘red tape’ – only regulating when there is a clear and unavoidable need and where new laws or regulations are required, they are enabled through technology.

Building a Resilient Future outlines several pillars to underpin these policy priorities including keeping borders open, maintaining a flow of investment capital, protecting against cyber threats, achieving net zero and managing the economy against a backdrop of higher inflation.

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[1] Building a Resilient Future

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