Venture Capital Is the New Buzz Word for Australia Pension Funds

(Bloomberg) -- When Julio Ribeiro began tapping venture capital firms last year for his Sydney-based medical technology startup, he feared it would be a hard slog. Instead, Inventia raised A$10 million ($6.8 million) in a matter of months and ended up turning some U.S. investors away.

The strong interest came from an unlikely quarter -- venture capital firms backed by local pension funds. The typically risk-adverse money managers are embracing the sector as they diversify investments to generate higher returns. Funds including Host-Plus Pty and Telstra Super Pty helped VC firms raise a record A$1.3 billion last year, up from A$200 million in 2014 before pension interest took off, Australian Investment Council data show.

There was a “decade of darkness” where super funds didn’t want to touch venture capital, said Craig Blair, the co-founder of AirTree Ventures Pty, which for years had to rely on family office money and high-net-worth individuals. “It’s completely changed the dynamics of raising funds.”

For firms that manage A$2.9 trillion, the world’s fourth-largest pension pool, it’s not hard to see the attraction -- particularly at this point in the cycle. Ten-year U.S. Treasuries yield about 1.8%, some government bonds are in negative territory and volatility has become a hallmark of equities globally. Acorn Capital Investment Fund Ltd., a Melbourne-based investor that’s raising up to A$50 million with Scale Investors Ltd. for a fund to back female-run startups, is forecasting average annual returns of 20% over the vehicle’s lifetime, fund manager Xing Zhang said.

“The traction we’ve seen in venture capital is largely driven by institutional-level investment from domestic superannuation funds,” AIC’s Chief Executive Officer Yasser El-Ansary said. “And that’s made a very significant impact.”

Venture Capital Is the New Buzz Word for Australia Pension Funds

More than one-quarter of venture capital firms in Australia now manage money on behalf of super funds, according to a July survey by KPMG LLP and Innovation Bay. It’s led to an increase in both deal activity and transaction size as investors hunt the next unicorn.

Hostplus, which has assets under management of A$43 billion, has put money into early stage companies such as Culture Amp Pty and Canva Inc. via VC firms including Blackbird Ventures. The nation’s largest pension fund, AustralianSuper Pty, meanwhile, favors co-investments in later stage rounds to minimize risk.

Check Size

Online design platform Canva scored $70 million in a funding round in May, valuing it at $2.5 billion. The round was led by Blackbird Ventures.

“Investing in Australian tech is less of a risky game than in the past,” Canva Chief Financial Officer Damien Singh said. “If it means more capital is being made available, then it can only be positive for the future.”

According to Ian Gardiner, the co-founder of startup incubator Innovation Bay, “nobody could have written a check like that four or five years ago.” When Atlassian Corp., the country’s first unicorn, was raising serious money in the early years of this decade it turned to Silicon Valley.

The size of the VC industry in the U.S. still dwarfs that in Australia -- a record $130.9 billion was deployed in 2018, a January report by PitchBook and the National Venture Capital Association showed. In Australia, firms invested $899 million, according to KPMG.

Not Risk Free

Plowing money into VC isn’t risk free, of course. And when a company is big enough for investors to consider an exit, things aren’t always smooth sailing -- Uber Technologies Inc. slumped 18% in its first two trading sessions when it listed in May. Pension-backed Prospa Group Ltd. took about five weeks to recover after dipping below its offer price.

Graeme Miller, the chief investment officer at TelstraSuper, is cautious about allocating more capital to an emerging sector lest too much money floods the zone and unwise investment decisions are made.

Hostplus’s Chief Investment Officer Sam Sicilia agrees. “Some funds will try and raise too much money, and that won’t be good,” he said.

The patient, illiquid capital that early-stage companies often require can also be a stumbling block. Some pension funds still aren’t comfortable about putting money into an asset class that may deliver returns in a decade, Scale Investors CEO Ariane Barker said. “We haven’t got enough data points yet. Investment teams are waiting to see how it plays out, but they risk missing an opportunity,” she said.

AirTree Ventures’ Blair says it’s incumbent upon venture capital firms to “earn our stripes.” It wasn’t so long ago that the dot.com boom and bust chewed through billions of dollars.

“If we blow up the money again, then it’s not great,” he said.

©2019 Bloomberg L.P.

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