5523 Week 3 Slides.pdf - FINS5523 Alternative Asset Classes Week 3 – Fund Raising and Fund Structure II 1 Lecture Outline Venture Partnerships in

5523 Week 3 Slides.pdf - FINS5523 Alternative Asset Classes...

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FINS5523 Alternative Asset Classes Week 3 – Fund Raising and Fund Structure II 1
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Lecture Outline Venture Partnerships in Australia The Use of Covenants Corporate VCs versus Limited Partnerships 2
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3 Fundraising – Solutions 3 Agency Problem Adverse Selection Building Reputation Incentive Compensation LP structure and contracts VC FUND
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Limited Partnership Structure 4
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6 LP versus other structures Company Trust Normal Partnership Limited Partnership Control Medium Medium High Potentially low Liquidity High Medium Low Potentially low Double Taxation Yes No No No Limited liability Yes Maybe (through deed provisions) No Yes
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7 Venture Partnerships in Australia Venture Capital Limited Partnership program introduced in 2004 by the Venture Capital Act 2002 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 => significant benefits for GPs Provides qualified foreign investors (LPs) with CGT exemption on gains Absence of LPs for VCs in Australia was believed to be bad for the market; hence the introduction of the legislation Without the VCLP structure, limited partnerships are generally taxed as a company (no flow through)
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8 Venture Partnerships in Australia Trust PDF VCLP (a) Investee ownership cap 49% 30% 30% (b) Investee asset cap None $50 million $250 million (c) Other investee restrictions None à Min. 10% stake à New equity à Excluded activities Excluded activities (d) Investor ownership cap None 30% 30% (e) Ability to borrow Yes No Yes (?) Conclusion Most flexible Too restrictive Practically flexible, but excludes large buy outs and infrastructure deals PDF = Pooled Development Fund
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9 Venture Partnerships in Australia PDF = Pooled Development Fund Trust VCLP PDF Flow through of income Yes Yes No Flow through of losses No Yes No Effective tax rate on fund income Investor rate Investor rate 15% Effective tax rate on fund capital gains 50% of investor rate (24% or less) 50% of investor rate (24% or less) 15% Revenue/capital issue Yes No (?) Yes Concessions for foreign investors No Yes No Source: Gilbert&Tobin/AVCAL
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10 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 invest 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. Structured as stapled investment vehicles, with the VCLP investing in eligible investments and the unit trust investing ineligible investments VCLPs failed to channel enough capital into very early stage firms.
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