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GOLDMAN SACHS: The $5 million investor visas could quadruple venture capital in Australia

Investment bank Goldman Sachs says changing the risk profile of Australia’s Significant Investor Visa scheme so that 40% of the $5 million payment is diverted towards higher risk opportunities could quadruple the nation’s venture capital pool to $500 million.

The Australian government recently announced the changes which shift the investment away from government bonds and residential property towards higher risk equities.

The SIV program requires foreigners to invest $5 million for a minimum of four years before they can apply for a permanent visa. Since the program was established in late 2012, 91% of the SIV applications have come from mainland Chinese residents.

With the original program only running for two years it’s probably too early to tell what a normal run-rate is, the bank said. In a little over two years the program received 2,300 expressions of interest. Goldman Sachs estimated if 1,000 visas were granted the capital inflow would be $5 billion.

“If demand increased and all the available visas were granted to SIVs, capital flows would total $AU10 billion p.a., with ’emerging companies’ seeing an annual investment of A$3bn, or 30 days’ current market turnover,” Goldman Sachs equity strategist Matthew Ross said in a note.

The bank expects the changes boosting venture capital, which AVCAL estimated last financial year was about $120 million, driving investment into emerging companies listed on the ASX.

But Ross warned: “A materially higher risk profile of the new asset class mix may deter applicants.”

Of the $5 million, at least $500,000 must be allocated to VC or private equity funds which invest in startups and small private companies. The amount could increase to $1 million for new applicants within two years.

A minimum $1.5 million must be tipped into either managed funds or listed investment companies which invest in emerging ASX entities. The funds’ investment portfolio must have at least 80% of its assets in firms with a market cap below $500 million when the first investment was made.

The bank estimates this part of the investment could add up to $1.5 billion a year and could “have a surprisingly large market impact given it would account for approximately 6% of annual turnover”. But it said there could be a high proportion of existing funds that won’t meet the 80% rule.

Up to $3 million can then be invested in listed companies, corporate bonds or notes, annuities and real property in Australia. There is a $300,000 limit on residential housing and there’s been no change to direct investments in residential real estate aren’t considered a complying investment under the scheme.

“These changes will see a significant re-direction of capital flows from the two assets that have previously dominated the program: 1) government bonds (now not permitted) and 2) residential real estate schemes (now limited to $AU300K) into higher risk / growth oriented investments,” Ross said.

The changes come into play on July 1.

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