What are Self Managed Venture Capital Funds?
Self Managed Venture Capital Funds do for SME equity investment what Self Managed Super Funds did for superannuation investment, and in the same way.
Self Managed Super Funds allow the investor to retain investment control of their superannuation while reducing the fees paid to over-compensated fund managers through a government created and legislated investment vehicle with significant tax advantages.
Your Self Managed VC Fund empowers investors to invest into the burgeoning Australian SME equity market without loss of control, within a government created and legislated tax exempt investment vehicle and without any out-of-pocket fees.
SME Funding Objective
Regarding Australian SME investment, we share the same objectives as the Federal Government:
1. To increase the level of capital available to SMEs;
2. To develop the skills and expertise of SME investors; and
3. To encourage more investment into expanding enterprises and those commercialising new technology and innovations.
We do this by balancing the needs of all stakeholders; SME owners and managers, regulators and investors.
In a simplified form there are two types of investors; passive (who do not wish to be active in the management of their investments) and active (who do wish to be actively involved, to some extent, in the investment decision making). It is actually much more nuanced than this, but this is the starting point. Within each nuance there are advantages and disadvantages, and an investor can be both active and passive within their investment portfolio.
To maximise the amount of investment capital available to SMEs we have developed a nuanced approach for the benefit of investors, resulting in our Self-Managed Venture Capital Fund (SMVCF) model.
Self-Managed Venture Capital Funds are administered by Lellco.
| Direct SME Investment | Angel Investment Tax Incentive Scheme | Standard Venture Capital Funds | Self-Managed VC Funds | |
|---|---|---|---|---|
| Minimum Investment | No Minimum | No Minimum | $2 million | $100,000 |
| Investment Selection | Investor selected | Investor selected | Manager | Investor directed |
| Investment management | Investor | Investor | Manager | Investor directed |
| Investment range | Unlimited | Very limited | Venture (speculative, high risk) | Within broad range |
| Investee types | Venture (speculative) & Enterprise (lower risk) | Venture (speculative) | Venture (speculative) | Venture (speculative) to Enterprise (lower risk) |
| Min & max investment hold period | N/A | 12 months – 10 years | 12 months – 10 years | 12 months – 15 years |
| Max Investee Entry value | N/A | Not prescribed but ESIC test sets a very low valuation | $50m | $50m |
| Investment Divestment | Nil | Nil | Tax benefits cease at $250m value | Capital tax benefits cease at $250m value |
| Income Tax | Yes | Payable | Exempt | Exempt |
| Capital Gains Tax | Yes | Exempt | Exempt | Exempt |
| Tax Offset | Nil | 20% of invested capital capped at $200,000 p.a. | 10% of invested capital, uncapped | 10% of invested capital, uncapped |
| Capital Loss Tax Deduction | Yes | Disregarded | Does not apply | Capital Loss Mitigation Strategy |
Angel Investor Vs Venture Capitalist
What is the difference between an angel investor and a venture capitalist? While the broad aspects of investment structure, professional management techniques, and access to deal flow can all be argued as differences, in Australia a crucial difference is government support. Whereas an individual early stage investor can access the limited benefits of the Angel Investment Tax Incentive Scheme, a venture capitalist can access the potentially very broad benefits of the venture capital program, not least is complete tax exemption on investment returns.
Your Self Managed VC Fund Vs Other VC funds
There has historically been only two ways of making an Australian SME equity investment; a direct investment (angel investing), a managed investment (Venture Capital or Private Equity managed investments).
Managed VC/PE investments have certain benefits of professional management, scale investments and considerable government support, including complete tax exemption on investment returns. But, for the average investor it has considerable disadvantages in that the size of investment is beyond many investors, there is no investor control or input, the lock-in term is long (ten years). Managed VC/PE investment in Australia is approximately $1B per annum.
Direct SME investment is the opposite, i.e. much less professional management, scale benefits, few real government support and benefits, but does allow for lower investment size and more investment control. Direct SME investment in Australia is approximately $5B per annum.
Lellco’s purpose is, in part, to aid in redressing the imbalance in Aust SME funding from 95% Debt: 5% Equity, to the far more correct 70% Debt: 30% Equity. Thus we have spent over ten years building a third way of Aust SME equity investment, Self Managed VC Funds (SMVCFs).
Your SMVCF optimises the benefits of both managed VC/PE investment and your direct SME equity investing. This is achieved by us compliantly managing a pool of investment from SMVCFs, but incorporating your investment selection and management input and aligning specific investment outcomes to your SMVCF.
You can be the venture capitalist, while we provide the vehicle, compliance, licensing, administration and support.
This creates the hybrid between direct investment and professional VC management, delivering the best of each model, Self-Managed Venture Capital Funds.
| Investor Benefits | Direct SME Investment | Industry Standard VC Fund | Self-Mgd VC Fund |
|---|---|---|---|
| Income Tax Exemption | X |  | |
| Capital Gains Tax Exemption | X | | |
| Professional Monitoring & Reporting | X | | |
| Investment Selection | | X | |
| Investment Management | | X | |
| Investee Board Representation | Optional | X | Optional |
| No. Exit Options | Low | Medium | High |
| Exit Strategy Input | Perhaps | X | |
Too Expensive Not to Do It
Today, up to 45% of investor return is going to the tax office. But through the federal government’s tax incentivised investment program and your SMVCF, investors keep 90% or 95% of investor returns, the gap is our fees, thus our fees are only a small portion of what would have otherwise gone to the tax office.
The result is that not only do our investors get enhanced professional investment monitoring and management, at no cost, plus they receive a higher net investment return.
This is a registered federal government tax incentive program to encourage greater early-stage investment in Australian SMEs.
Which of my Investments Comply?
Purpose Driven Capital’s Sustainable Enterprise Fund is only available to genuine equity funding
of Australian SMEs; roughly if its an ‘at risk’ investment and the investee, at first investment, is Australian, unlisted, up to $50M valuation, and in most activities other than property and financial services it qualifies, however it must also meet the parameters of the fund’s Investment Plan. To determin if your investment complies you should seek Pre-qualified Tax Exempt Investment or check the investment listing on AuSMEquity to ensure it is SMVCF Certified, then you know all of the assessment has been completed and you are ready to create your own Self Managed VC Funds.