On Wednesday 14 November 2-018, the Treasurer and Minister for Small Business issued a joint Media Release announcing 2 measures to assist small and medium enterprises (SMEs) get loan and equity funding.

They are:

  1. To establish the ‘Australian Business Securitisation Fund’ with $2b of Federal funds.
  2. To establishment of an ‘Australian Business Growth Fund’ that would provide longer term equity funding to small businesses (which will NOT require any Federal Funds..

The announcement is short of detail, which has been widely bemoaned in the media. We can deal with each by saying what is in the announcement and what has been said about each, in some of the Media.

Australian Business Securitisation Fund

The announcement says:

To ensure that small businesses are able to fulfil their potential and continue to underpin economic growth and employment, the Australian Business Securitisation Fund will invest up to $2 billion in the securitisation market, providing significant additional funding to smaller banks and non-bank lenders to on-lend to small businesses on more competitive terms. 

The Australian Business Securitisation Fund will be administered by the Australian Office of Financial Management (AOFM), consistent with their prior involvement in the Residential Mortgage Backed Securities Market in 2008.

In essence, I understand this to be the Federal Government providing the seed capital to buy up $2b of SME loans originated by banks and fintechs (and not the big banks, so as to provide competition in the market place) to then package that tranche of loans, as a securitised investment, for other investors (including superannuation funds). The risk of bad debts is spread across the whole tranche of loans (most of which should perform). Investors can ‘self-insure’ that risk by taking a higher return, hopefully leaving the SMEs with net lower cost of funds (in essence, splitting the margin banks would normally add to their cost of funds for lending SMEs to borrow without real property security.

There is a self perpetuating advantage in this, in that the initial lenders have their capital freed up (by selling those loans to the Commonwealth) who will package them and sell of the securities, so the Commonwealth’s $2b can also be cycled over and over again, to fund another and another securitisation.

The Australian Financial Review (AFR) noted, in one article:

It is [similar to the]  way that the AOFM, under direction from the Labor government, bought almost $16 billion of residential mortgage backed securities (RMBS) to keep alive non-bank home lenders during the 2008-09 financial crisis, after an initial injection of $4 billion.

Australian Business Growth Fund

The announcement says:

The Government is also in consultation with APRA and a number of financial institutions in regard to the establishment of an Australian Business Growth Fund that would provide longer term equity funding to small businesses. Many small businesses find it difficult to attract passive equity investment which enables them to grow without taking on additional debt or giving up control of their business.

The Australian Business Growth Fund is expected to follow similar international precedents.  By way of example, since its establishment in 2011, the United Kingdom’s Business Growth Fund has invested some $2.7 billion in a range of sectors across the economy.

A similar fund has not emerged in Australia, in part, as a result of the unfavourable treatment of equity for regulatory capital purposes. APRA has indicated that it is willing to review these arrangements to assist in facilitating the establishment of the Australian Business Growth Fund.  To fast track its establishment, the Government will host a meeting of key stakeholders in Canberra during the next sitting period.

It is less clear to me what this Fund is about.

  • The talk about APRA needing to relax regulatory capital, suggests that it is banks that would be investing – and, indeed, NAB has already expressed interest (according to the Media) – though they plainly don’t know exactly what it is, as they say their awaiting clarity on this.
  • I doubt that Banks, though, would be making equity investments, themselves, in SMEs. They lend money and don’t try to pick winners for equity investments.
  • The banks might, however, lend to this ‘Growth Fund’ to allow it to some how provide capital for SMEs to grow. Quite why such lending would need more regulatory capital (and APRA relief) is not clear to me – but I’m not a banker.
  • It seems that the Commonwealth was not expecting to invest any money into this fund.
  • There is this reference to the UK equivalent growth fund, and perhaps it would be built along a similar model.

The UK Growth fund is called BGF (‘BGF’, no doubt, standing for ‘British Growth Fund’). It’s website gives the following information (that might help understand its structure and function).

  • An established and independent company, we have £2.5bn to support a range of growing companies – early stage, growth stage and quoted – across every region and sector of the economy. Hundreds of companies are using our equity capital investments to accelerate growth.
  • Financial backing from Barclays, HSBC, Lloyds, RBS and Standard Chartered. Authorised and registered by the FCA. It doesn’t say what the terms are, but it sounds like it would be long term (perhaps even semi-perpetual debt) and perhaps at a premium to other long term loans – without any equity in the investment company/fund.
  • It seems to have a three stage process that can provide additional funding for the different stages of a growing business.
    • BGF Ventures – is invested in early-stage entrepreneurs with bold ambitions. We invest in entrepreneurs who are building something important – something that with the right investment and long-term support, might even change the world. We can invest £1m-£6m – and more in subsequent rounds – to help you succeed. We invest for a minority equity stake (typically 10%-20%) in companies we believe can scale exponentially.
    • BGF Growth is invested in privately-owned small and mid-sized businesses with exciting forward plans. Companies use our patient capital to make bold moves. Think strategic acquisitions, site roll-outs, increased investment in product development, sales and marketing infrastructure or the purchase of significant new capital assets. Initial investment of £2m-£10m for a minority stake.We only ever take a minority equity stake (10%-40%) in companies that can demonstrate a growth trajectory. And, as a company grows, we’re able to provide additional funding – beyond £10m. We can structure our investments in ordinary shares, loan notes, preference shares or a combination.
    • BGF Quoted is invested in the brightest AIM listed companies keen to accelerate growth. When you’re growing, certainty of funds matters a great deal. Whether you’re scaling your operations, expanding into new markets or pursuing a strategic acquisition, BGF Quoted can provide the cornerstone investment to reduce fundraising and execution risk. Initial investments of £1m-£10m are available. We only ever take a minority equity stake in companies that can demonstrate a growth trajectory. We offer a mix of equity and unsecured debt that few others can match, with potentially less dilution for shareholders.
  • Who holds the equity in this company is not stated. It talks about it’s ‘evergreen balance sheet’, which might mean that any surplus is invested back into the fund, so that, if successful, it will be ongoing and expanding (‘evergreen’). On this basis, equity might be held by the Government on an understanding that it is not expecting dividends (and if it hasn’t contributed anything – that might be appropriate).

So, it seems to be a kind of multi-stage venture capital fund, patiently funded (by loans from banks), with any profits re-invested (not distributed) with a mandate to assist small business grow, without seizing control or demanding external security. And to do this, there would need to be considerable business expertise, in the Fund, to pick the right kind of prospects, and shepherd them successfully.

FJM 30.11.18

[Treasury website: Ministers’ Joint Media Release; LTN 220, 14/11/18; Tax Month – November 2018]

 

CPD questions (answers available)

  1. Did the Treasurer announce the creation of 2 funds to assist Small Business get access to funding for working capital and growth, in the various ways that might be helpful, including lower interest and no external/real estate security?
  2. What is the Securitisation fund called?
  3. Is this to buy bundles of loans originated by non-main bank lending institutions, securitise them, sell them to investors and recoup the Government’s $2b to go another round?
  4. Is the other initiative a fund to help SME’s grow?
  5. What is its name?
  6. Does it require any Commonwealth money?
  7. Does it require a change in APRA regulatory capital requirements for banks to invest in this Fund?
  8. Will it be like the UK equivalent growth fund?
  9. Is the UK fund an independent company?
  10. How much capital does the UK fund have?

 

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