With over $8.5b in COVID-19 relief already committed to direct business grants and fast-tracked infrastructure projects, the Victorian government is taking a different tack with a $250m investment fund that will support “meaningful” small businesses and give the state a share of the company’s equity.
Initially established for a 10-year period, the new Victorian Business Growth Fund (VBGF) is intended as an alternative funding source for small businesses struggling to get the funds or partners they need to grow their businesses.
In arrangements that effectively turn the government into a state-wide venture capital (VC) firm, fund manager Roc Partners will work to evaluate and choose investment proposals with an eye to securing a commercial return on its investment.
Decisions will be made at arm’s length to the Victorian government, with Roc Partners “targeting a commercial return on its investments” and First State Super also guiding the “investment mandate” by which the VBGF will be administered.
The program “finds a new way of backing our local businesses to become bigger and better,” Victorian Treasurer Tim Pallas said in launching the new effort and flagging similar efforts to come.
“We know access to capital is often a handbrake on growth [and] we’re fixing that.”
Funding in the COVID-19 era
The program was announced a year ago, predating the COVID-19 pandemic, but its launch couldn’t come at a better time for Victorian small and medium businesses, which are suffering under the impact of an economic slowdown that Prime Minister Scott Morrison recently said would last two years or more.
Governments would need to be “extremely cautious about expenditure” as the economy slowly clambers back to life, Morrison said – echoing recent warnings from Pallas’s office that the pandemic would shrink the Victorian economy by around 14 per cent.
Victoria is anticipating a deficit of $773 million, he said, adding that the government “has to find a better way to effectively raise its revenue base”.
Securing an equity position in fast-growing businesses could potentially help close this gap, with potential returns offsetting the massive revenue hit the state government faces after months of providing bootstrap funding to shutdown-affected businesses.
Victorian startup agency LaunchVic has been spearheading a change in investment strategy for years, investing $2.35m in a 2018 initiative to improve investor education and boost investment in quality startups.
Commerce and health-related startups like Airwallex ($20.3m in funding) and Vinomofo ($19m) were the most successful at fundraising compared to other sectors, with health and education startups (such as QUE Oncology and Unified Healthcare Group) attracting the largest backing from venture capitalists.
With Australia’s funding climate well behind global standards, however, LaunchVic CEO Kate Cornick had previously flagged challenges in accessing capital as “inhibiting early-stage startups from scaling and realising their economic potential”.
Early-stage startups, however, may struggle to access VGBF funding; rather, the new fund will be targeted at companies with annual revenues of $5m to $100m, which have less than $250m in assets and have (or will have within the program’s timeframe) a positive cash flow.
Successful companies will need to “present a compelling growth opportunity to Victoria”, the fund’s eligibility criteria state, suggesting that investments are “expected to lead to growth in a Victorian business”, support expansion into Victoria, create new jobs or add “meaningful capital investment” in the state.
As the economic impact of the pandemic continues to add up – PwC modelling, for one, estimates the pandemic could slash Australia’s GDP by 1.32 per cent ($34.2b) this year and a UNSW analysis predicted a 15 per cent contraction; state and federal governments have been under pressure to make equity investments in struggling businesses rather than simply handing over cash.
Queensland Investment Corporation, for example, was among the private investors aiming to secure an equity stake in Virgin Australia – mirroring similar strategies overseas as Australian economists advised government bodies to pursue equity-based investment strategies.