Future Fund wants as much Australian VC as it can get, but supply is short

Australian Financial Review
By Ben Potter
23 May 2018

Future Fund chief executive David Neal said the $166 billion Future Fund can't get enough good investments in Australian venture capital funds and start-ups to move the dial on its $166 billion funds because the supply is so limited.

The Future Fund has made a single investment of about $20 million to $30 million in Sydney VC fund Blackbird Ventures out of a total $2.2 billion in global VC, and another $3.9 billion in early-stage growth companies.

Dr Neal said in October Aussie VC funds hadn't generated sufficient returns in the past to be of interest to a global fund manager tasked with getting the best possible return on the taxpayer funds entrusted to it.

But he told Senate estimates on Wednesday the situation was continuing to improve and the Future Fund has asked one of its two global VC consultants, US-based Greenspring Associates, to comb the local market for more "global-grade" VC managers for the fund to invest in.

These are very small amounts of money in a very large portfolio, and so if the opportunities are good enough there's plenty of opportunity for us to continue to contribute more capital. So there's certainly no cap or limit or anything like that," Dr Neal said.

"From a Future Fund portfolio perspective it would not be possible for us to have too much Australian venture capital in a $160 billion portfolio."

'Global-grade' only

But Dr Neal told Labor Senator Jenny McAllister, who asked him how quickly the Aussie VC portfolio could grow, that the fund had to be sure it only invested in global-grade VC managers in order to deliver on its mandate to get the best return it can from the $166 billion funds under its management.

"I would like us to find more funds, I suppose as many as possible, but they have to be of global grade. Our task is to get the strongest returns that we can and to go where those returns are the strongest," he said.

"It's not in our interests or the interests of the taxpayer I don't think for us to be investing in organisations that don't meet that grade. But where we can find Australian businesses that can meet that grade, that is good news for us."

This was because the Future Find should have an advantage in the local market and if local funds' performance stacked up with foreign competition local investments would better match the fund's mandate, which is measured in Australian dollars and against Australian CPI.

Institutional investors' and super funds' reluctance to back local VC funds and start-ups has long been a sore point, but the local VC industry has vaulted in the past four years from a flyweight few hundred million dollars to raisings of $1.2 billion in the 2017 financial year.

Aussie VC surge

This improvement predated the Turnbull government's stop-start innovation agenda. It has been built around been built around successful entrepreneurs ploughing profits into VC funds such as Niki Scevak's Blackbird, Paul Bassat's Square Peg Capital, Brandon Capital and Mark Carnegie's MH Carnegie, with capital from super funds Hostplus, AustralianSuper, HESTA and First State Super.

Dr Neal told Senator McAllister that Australia's situation of playing catch-up with Silicon Valley and Israel on start-ups and VC was shared by many, many nations around the world and there were few if any ecosystems to match those two.

In earlier evidence, Dr Neal said the Future Fund had shifted some of its money into equities and out of cash since last year because "the global economy had got onto a pretty sound footing" and previous concerns about volatility and indifferent global growth had dissipated.

"There's a synchronised growth across the globe that was allowing for example the US Federal Reserve to start slowly increasing interest rates," he said.

"Earnings growth and broader cashflow growth for investments was continuing to look look strong so with some of those risks we had been talking about having dissipated, we felt it appropriate to put a little bit more risk into the portfolio."