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 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.