Week 3 Lecture 2014 - FINS3623 Venture Capital Week 3 Fund...

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FINS3623 Venture Capital Week 3 – Fund Raising and Fund Structure II 1
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Lecture Outline Venture Partnerships in Australia The Use of Covenants Research Evidence Venture Capitalists Compensation Research Evidence Choice of Organisation Form Research Evidence 2
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3 Review Questions How does the pecking order of funding change as entrepreneurial firms mature? Why is reputation important in VC fund raising? Why are PE/VC funds usually organised under the LP structure? What are the roles of priority returns and clawbacks? 3
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Limited Partnerships in Australia 4
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5 Venture Partnerships in Australia VCLPs recently created (2004) Main benefits: Limited liability of limited partners (institutional investors) Flow through taxation (no double taxation as in the case of a corporation) Treats carried interest as capital gains for tax purposes Provides foreign VCs with tax exemption on carry Absence of LPs for VCs in Australia was believed to be bad for the market; hence the new legislation
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6 Venture Partnerships in Australia The Australian VCLP structure has been criticized on a number of fronts It is too restrictive compared to US and UK structures. Can only investment in Australian companies Can not invest in companies with more than $250 million in asset Can not invest in financial services, property and construction This had led to the use of a complex dual unit trust/VCLP structure. Such a structure is complex and unique to Australia thus discouraging critical foreign investment into Australian PE. Importantly this structure does not necessarily recognize carry as capital gain or exempt foreign VCs from tax on carry.
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7 Early Stage Venture Capital Limited Partnerships (ESVCLP) are similar to VCLPs except that: They have a 100m maximum fund size Can not invest in companies with assets more than 10m Provides foreign and Local VCs with tax exemption on carried interest. Venture Partnerships in Australia
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8 Venture Partnerships in Australia Slow results since the introduction of VCLPs in Australia. 39 funds organized as VCLP and 4 more funds are coming 8 funds organized as ESVCLP and 7 on the way. See: http:// www.ausindustry.gov.au/programs/venture-capital/esvclp/Do cuments/ESVCLP-PartnershipList.pdf for ESVCLPs and http://www.ausindustry.gov.au/programs/venture-capital/vclp/ Documents/PublicVCLPlist.pdf for VCLPs
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9 Venture Partnerships in Australia Big buyout funds mainly use the trust structure Big VC funds use a dual trust/VCLP structure While the trust structure provides flow-through taxation it doesn’t allow carry to be treated as capital gains, which leads to higher taxes See Myer/TPG buyout as an example complications of trust structure.
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10 Venture Partnerships in Australia In 2006 a consortium of investors led by Texas Pacific Group (TPG) purchased Myer department stores from the Coles Myer Group for $1.4 billion.
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