1st December, 2019
Last week, Treasurer Josh Frydenberg announced that the Coalition is now ready to pull the trigger on its campaign-promised SME Business Growth Fund. If you’re an SME owner looking to tap into these funds, here’s what you need to know.
During its electoral campaign in April of this year, the Coalition announced that if re-elected, it would work with the corporate sector to create a Business Growth Fund (BGF) that would be designed to offer investment to Australian SMEs.
Now the Government’s making good on that promise.
In a media release outlining the government’s agreement to establish the fund, Treasurer Frydenberg confirmed that the Morrison Government has secured $400 million in funding from the likes of ANZ, CBA, Westpac and NAB, and has convinced HSBC and Macquarie Group to cough up $20 million each as well.
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Between the $440 million being contributed by the corporate sector and the Government’s own commitment of $100 million in taxpayer money, the fund’s initial investment capacity will be $540 million, with the “ambition to grow to $1 billion as it matures”.
SmartCompany reported that negotiations between government and other financial institutions are already underway, which is hoped to see additional contributors join the fund in the new year.
While the equity investment fund is a government initiative, it is set to operate as a commercial entity of its own, governed by an independent board comprised of corporate and government agents, each representing their respective interests.
Assuming the business qualifies to receive the funds (we’ll talk about what that entails soon), the board will run a series of analyses on the businesses, and potentially offer investment of up to $15 million in exchange for between 10 and 40 percent of the company’s shares.
The idea behind the 40 percent cap of the BGF’s ownership of shares is to allow the founders and business owners to hold on to the majority shareholding of their companies (meaning, ultimate control), while allowing the BGF to have enough skin in the game to have a say and influence on the big decisions.
Aside from the financial investment that the BGF will offer, there will also be an element of non-financial assistance and mentorship provided to the fund’s portfolio companies.
While all of this might sound exciting, if you thought the Government and banks were getting together to hand out free lunches, you’re about to be heavily disappointed.
In order to be eligible to pitch for this investment funding, there are two criteria that must be met:
1. The business must have an annual revenue of at least $2 million, and at most $100 million; and
2. The business must have a three-year track record of consistent profitability and growth.
It is these two criteria that separate the BGF from other venture capital and private equity investment funds.
Normally, investors are willing to take a punt on ambitious founders who are at much earlier stages of their business’ development. But, the BGF has been designed in a completely risk-averse fashion, only showing interest in those businesses that are already seeing profit and growth on their own.
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Because of the high barrier of entry and limited amount of funds in the pot, the reality is that most businesses won’t be able to access the BGF and, out of all of those that do qualify, only several dozen companies nationwide will actually end up receiving any sort of investment on a yearly basis.
Notwithstanding the above downside to the fund, the BGF has arrived onto the SME funding scene in a seemingly timely fashion.
In October of this year, Techboard released its annual report into the Australian tech funding landscape, and identified that while the appetite for investment had been growing among Australian investors, the ecosystem had development a gap in which $5 million to $15 million investments were becoming scarce.
The data from the report indicated that investments of $20 million or more were being poured into the already highly successful Australian startups (with a particularly large amount of investment being given to the fin-tech sector), and there was still plenty of support coming through to early stage startups through smaller funds, angel investor networks and accelerator programs.
But companies looking for a large cash injection to accelerate their newly thriving businesses were beginning to run out of options for where to turn to for growth funding.
While one can only speculate at this stage, since the BGF is looking to tackle this specific niche, there may be some consolation for companies looking to raise the amounts of capital in the $5 million to $15 million range. Assuming the fund takes off as planned, these investments could help decrease the size of the gap that Techboard’s report highlights.