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Australia's plan to fund its startup sector has turned out to be a flop so far

Photo by Jeff J Mitchell/Getty Images

Earlier this year Australia’s government announced changes to its significant investor visa (SIV) scheme. The program, dominated by Chinese investors who made up 91% of applicants since it began in late 2012, required foreigners to invest $5 million for a minimum of four years in order to obtain a permanent Australian visa.

In the initial stages of the scheme, applicants predominantly invested in low-risk government bonds or residential property. The changes, announced in May, augmented the scheme so that 40% of the $5 million payment was diverted towards higher risk opportunities.

The government stated that at least $500,000 must be allocated to eligible Australian venture capital or private equity firms investing in startups and small private companies with an additional $1.5 million to be placed with eligible managed funds or listed investment companies that invested in emerging companies.

Importantly, while direct purchases of real estate didn’t count toward the $5 million total under initial SIV rules, applicants could invest their entire sum in residential property managed funds. Under the new changes those investments have been capped at $300,000, or 6% of their total investment.

The rule changes were seen as a boon for Australia’s startup sector. Goldman Sachs, based on analysis of past trends in the scheme, suggested capital flows could surge by as much as $5 billion as a result of the changes.

According to government data, of the 1,679 SIV applications received between November 2012 through to March 2015, 751 had been approved. Under the new changes, 1,000 successful applications would result in $5 billion in capital inflows to the sector.

While based on historic trends, it all but assured a huge funding boost to Australian startups, Matthew Ross, equity strategist at Goldman, warned that “a materially higher risk profile of the new asset class mix may deter applicants”.

In terms of risk versus return it was no longer simply a relatively risk-free bet, but rather one with significant capital risks attached.

Less than five months after the changes came into effect on July 1, it appears that Ross’ warning has come to fruition. According to a report from Bloomberg, just 19 people have applied for the once popular visa since the rule change came into effect.

Chinese millionaires, who happily invested in Australian bonds and real estate to get residency visas, are turning up their noses at small-cap stocks, said the report.

Understandably, those firms which looked set to benefit from the rule changes are, for the moment, underwhelmed by the lacklustre levels of investor interest.

“It’s been a slow start,” Douglas Loh, the Melbourne-based head of equities at Acorn Capital Ltd told Bloomberg.

“The bottom line is that SIV applicants want to be able to get permanent residency in Australia. They are not really looking to make a lot of money from the equity investment, but rather to protect their capital.”

He also suggests recent volatility in China’s stock market, something that saw the benchmark Shanghai Composite index slump nearly 45% from mid-July to late August, may have contributed to the sharp slowdown in visa applications.

“It will take some time to get the message through that equity risk can be managed, that the Australian market is not a trading market like you see in China. The Chinese market is so volatile but if you look at the Australian market it’s steady as she goes,” said Loh.

Similar sentiment was echoed by David Chin, managing director of Basis Point Consulting Pty, who suggested “the cost of the visa has gone up the risk curve”.

“While Chinese people are willing to make risky investments in other circumstances, they view their immigration decisions differently. The visa is about wealth preservation and quality of life.”

Despite the sharp drop in SIV applications, the Department of Immigration and Border Protection, the body tasked with monitoring the program, doesn’t appear to be perturbed as yet, suggesting that “it is too soon to identify any ongoing trends”.

While that’s an understandable response – the changes have only just taken effect and it has been a tumultuous period for Chinese financial markets of late – it does act as a reminder that Australia is competing with other nations for foreign capital investment.

Onerous rules that force investors to take unpalatable risks can and do have consequences. While providing seed capital to growing Australia’s startup sector will help build the Freelancers and Canvas of tomorrow, perhaps forcing investors to place at least 40% of capital into high risk ventures is taking it one step too far.

If the recent trends of the past five months continue into the year ahead, it’s almost certain that the changes to the SIV will need to be revisited.

You can read more here.

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