Government-backed growth fund to offer investments up to $15 million — but there’s a catch

The federal government has convinced Australia’s big four banks to each allocate $100 million to its Australian Business Growth Fund (ABGF).

Treasurer Josh Frydenebrg will deliver a speech tonight outlining the government’s plans for the ‘patient capital’ fund, which was initially announced before the election earlier this year and will provide fast-growing SMEs with access to long-term equity capital investments.

Commonwealth Bank, NAB, Westpac and ANZ will contribute a combined $400 million, while HSBC has dropped $20 million in the bucket. Add the $100 million taxpayer contribution, and that’s $520 million in the kitty initially.

The government hopes the fund will mature to $1 billion. Discussions are ongoing with additional shareholders, including other financial institutions, which will have an opportunity to jump in during the first year.

Frydernberg will sell the initiative in the context of ongoing commentary about economic growth (or lack thereof), noting Reserve Bank concern about access to finance for SMEs in recent months.

“While there are many important issues affecting small business, including regulation, tax, skills and infrastructure, one that is also front of mind is access to the necessary capital to enable the business to innovate and grow,” an extract of the speech reads.

“It is a point acknowledged by the Reserve Bank who has said of small business, ‘it’s not the absence of entrepreneurial spirit, it’s the absence of entrepreneurial finance that’s been the main factor holding that part of the economy back’.”

The comments come after a short four-day Treasury consultation earlier this month which canvassed public views on draft legislation that will give life to the fund.

The catch: Only businesses with between $2 million and $100 million in annual revenue that can demonstrate at least three years of growth and profitability will be eligible to apply, with between $5 million and $15 million on offer for successful applicants.

Those hurdles are likely to exclude the vast majority of businesses in Australia, including most early-stage startups — but proponents of the fund, including small business ombudsman Kate Carnell, have in the past argued the ABGF is specifically targeted at a small cohort of high-potential companies.

Between 30-50 companies are expected to benefit from the fund each year, in line with international equivalent schemes in the UK and Canada.

Investment stakes will range between 10% and 40% — which it is hoped will strike a balance between business owners maintaining a controlling interest and fund stakeholders having sufficient influence to encourage growth.

Participating investors will also offer non-financial advice, mentoring, talent management and network referrals for businesses which participate, which given the investor list means potential access to Australia’s largest financial institutions.

As previously announced, the fund will operate as a commercial entity independent from the government, with a board made up of investor and government interests.

Participating banks will be allowed to refer their own customers to the fund if they feel a particular company is more suited to equity funding over debt funding.

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