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Companies and organisations in this issue 2

Purchase to end court action 10

Local VCs back marketing push 11

Quantenna adds to funding round 16

UK firm in outback investment 18

‘Upstart’ fund makes first investment 19

Milestone for Sunshine Heart 11

Drug developer nears moment of truth 14

Cuffe joins Centric board 17

First patients to receive anxiety drug 17

KKR-backed Seven moves on rival 18

Crescent Capital acheives exit 15

Follow-on funding to be spread widely 3

Investors driving managers’ fees down 3

EDITORIAL: Challenges, opportunities of new

environment 5

Boom period buyouts 6

Big US funds commit to private equity 8

Logistics business open for offers 8

Split casts doubt on new direction for fund 14

IT innovation advisers include venture

capital sector 16

New Zealand urged to keep supporting

venture sector 18

New stakeholder in Blue Sky Private Equity 6

Incubator triples its venture capital 10

Asia fund raises US$1bn 10

UK government backs venture sector 11

Capital raising begins for early stage fund 13

New management for early stage fund 16

Climate ready carbon fibre 15Israel co-operation funding available 16

Venture specialist leaves Access Capital Advisors 13New chair takes up VFMC role 15

BENEFITS OF PRIVATE AUCTIONS 20BOOK REVIEW: Enterprise & Venture Capital - A Business Builder’s and Investor’s Handbook 24

COMING EVENTS 25

SHARES CHART 25

FEATURES

PEOPLE MOVES

INFORMAL VENTURE CAPITAL

NEW FUNDS & FUNDRAISING

NEWS

PERFORMANCE

INVESTEE NEWS

INVESTMENT ACTIVITY

INDEX

YEAR 18 NO 189 AUGUST 2009

Direct Click Story in Contents (above)

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AUSTRALIAN PRIVATE EQUITY & VENTURE CAPITAL JOURNAL AUGUST 2009 PAGE 2

AAccess Capital AdvisersAdvent (UK)AiMedicsAir ChangeAlta PartnersAltAssetsAmadeusANU ConnectApplied PhysilogyArkx Investment ManagementATP InnovationsAudinateAuckland UniServicesAustralian Bee ServicesAustralian Capital VenturesAustralian Cranes & MachineryAustralian Information IndustryAssociationAustralian Small Scale OfferingsBoard

BBeach BurritoBioCentral LabBionomicsBHP BillitonbizCapitalBoom LogisticsBlue Sky Property PartnersBlueSky Securities AustraliaBlue Sky Private EquityBlue Sky Water PartnersBrandon Capital PartnerBSPE HoldingsBT Imaging

CCalifornia Public Employees’Retirement SystemCalifornia State Teachers’Retirement System

Capital TechnologiesCarlyle GroupCavitusCathRxCentric Wealth ManagementChallenger Financial ServicesCHAMP Private EquityClarus VenturesCM Capital InvestmentsColonial First StateCommonwealthCommercialisation InstituteCommStratConsolidated Media HoldingsCrescent Capital PartnersC7CVC Asia PacificCVC Capital PartnersCVC REEF

DData#3Delphi VenturesDilithium NetworksdistIPDSAH HoldingsDWS

Ee-Channel OnlineEllassay FashionEmber TechnologiesEndeavour-iCapEnGeneICEurope Voyager Holdings

FFilsenFirewireFlexirentFood & Drug Authority (US)FoxtelFuture Capital Development

FundFrontline AustraliaFrucor

GGBS Venture PartnersGenosGlobal Voyager HoldingsGrazia EquityGresham Private Equity

HHalo Investment ManagementHallmark EditionsHarbrew GroupHarvard Business SchoolHatchtechHealthcare SoftwareHeard SystemsHeximaHoodlum ActiveHydrexia

IIMBcomICE AngelsInformation TechnologyIndustry Innovation CouncilInovia HoldingsInnovation CapitalInvestec

KKathmanduKestrel CapitalKohlberg Kravis Roberts (KKR)

LLECGLenardsLend Lease Ventures

MManawatu Investment GroupMcAleese Investments

McAleese GroupMcAleese TransportMesaplexxMG CapitalMIGfastMimenticaMillers RetailMonitoring DivisionMFS LimitedMTIMultiplexMurdoch UniversityMyer

NNational CranesNeo Technology VenturesNeuro VisionNews LimitedNew Zealand VentureInvestment FundNo 8 Ventures Management

OOctaviar LimitedOfidiumOhio State University MedicalCenter199-Query199-BongoOpen Kernel LabsOurWishingWell.com

PPackaged Solutions (Getbusi)Pacific ChannelParadise Motor HomesPaul Cheever ConsultingPengana CapitalPhoenix Power RecyclersPlayford CapitalpowerHouse VenturesPreqin

Private Equity MediaProactaProvidence Equity PartnersProtea Hotels

QQantasQuantenna CommunicationsQuickstep Technologies

Rrealestate.com.auReproductive Health ScienceResMedRocheRoche Venture FundRPO Inc

SSciVenturesScottish Equity PartnersSequoia CapitalSeven NetworkSigma PartnersSignosticsSimply SqueezedSky TechnologiesSouthern Cross VenturesSparkbox InvestmentsSpinifexSPO PartnersStanford UniversityStarfish VenturesStart-up AustraliaStella GroupStone Ridge VenturesSunshine HeartSupreme Court of NSW

TTechlynx HoldingsTelstraTemasek HoldingsTerra Rossa Capital

Tikit SystemsThe Learning Edge InternationalTherapeutic Goods AuthorityThird Link Investment ManagersThree Arch Partners

U

UBSUniseedUniSuperUniversity of AucklandUpstart Angels

V

Vecor AustraliaVenture AcceleratorVenrock AssociatesVerva PharmaceuticalsVictorian Funds ManagementCorporationViking RentalsVISTECH

W

Walter Wright AustraliaWarehouse Group (Aust)Westscheme

X

XenomeNote: To locate names in this list inthe text of the Journal, whenviewed as a PDF, scroll to the topline of the PDF menu bar at thetop of the page, click on Edit, scrolldown to Find, type or paste namein search box, click on down arrowto right, scroll down to “Find Nextin Current PDF”, click on far rightof two symbols to right (“FindNext”). Further clicks will findfurther occurrences.

INDEX

Companies and organisations in this issue


NEWS

AUSTRALIAN PRIVATE EQUITY & VENTURE CAPITAL JOURNAL

Owned and Published byPRIVATE EQUITY MEDIA(a Hallmark Editions business)

Level 3, 30 Alfred St, Milsons Point, NSW 2061

Ph 02 8923 8004 Fx 02 8923 8050www.privateequitymedia.com.au

MANAGING EDITORAdrian HerbertPhone 02 8923 8004

Email [email protected]

NATIONAL ADVERTISING MANAGERPhilip ThomsonPhone 02 9489 0033

Moblie 0419 757 211

Email [email protected]

MANAGING DIRECTOR Peter Stirling

Australian Private Equity & Venture Capital Journal is an independent

publication.

The Journal welcomes editorial contributions. All opinions are those

of the authors.

All material copyright Australian Private Equity & Venture Capital

Journal and individual authors.

ISSN number: 1038-4324

News

Follow-on funding to be spread widelyThe $64 million Innovation Investment Follow-on Fund (IIFF)set up by the federal government to ensure follow-onfunding for some promising early stage companies is to beallocated to eleven early stage funds, that is half of theeligible funds.

Twenty of the eligible 22 applied for funding in thecompetitive tendering process.

Each applicant was required to submit a proposed portfoliowithin which it would use its allocation. These applicationswere considered by an independent committee of theInnovation Australia Board.

Perhaps the only surprise was that two companies thatnominated proposed portfolios of only one company wereeach allocated more than $5 million, AMWIN ManagementPty Ltd (CHAMP Ventures) with EGeneIC Pty Ltd and NeoTechnology Ventures Pty Ltd with Open Kernel Labs Pty Ltd.

EnGeneIC is developing a new range of cancer drugs anddelivery vehicles and expects to begin clinical safety trialswithin months.

Open Kernel Labs is commercialising a wireless mobiletechnology “microkernel” operating system. The companyis based on technology spun out of federally fundedNational Information and Communications TechnologyAustralia (NICTA).

Announcing the total IIFF allocation of $64.407 million,innovation minister Senator Kim Carr said: “The new IIFF isa temporary, targeted and timely response to address thelack of capital available to the most promising innovativecompanies during the global financial crisis. The fund willenable these early stage companies to continue to developand to commercialise research.

“The IIFF provides a future beyond the financial crisis forour best and brightest start-up companies.

“They are doing ground-breaking work in cutting-edgeareas like clean energy, biotechnology and informationtechnologies and services to market. The companies thatbenefit from this fund employ more than 450 people inhigh-skill, high-wage jobs.

“If we lose theses innovative companies we will never getthem back making capital available for investment now willboost confidence and help shake loose additional privatesector capital.

View table outlining full details on next page.

News

Investors driving managers’ fees downThe balance of power in private equity is swinging awayfrom managers toward investors and forcing fees down.Key industry figures, including some fund managers, acceptthat the conventional private equity manager fee structureof a 2 per cent management fee and 20 per cent share ofprofits above a predetermined hurdle is no longersustainable.

No managers have stated this publicly but some privatelyconcede that the ground rules have changed forstructuring new funds. Investors are adamant that theyexpect conventional fund structures to be revised in theirfavour.

Recent research by UK-based alternative assets sectorresearch company Preqin confirms that this is part of aglobal trend. Preqin found:

• 43 per cent of investors recognised a shift toward limitedpartners (LPs) in the negotiation of terms and conditions

• 90 per cent of placement agents were advising theirclients to press for terms to be changed in favour of LPs

• The mean management fee for buyout fundscurrently seeking investment had dropped by20 basis points compared with the mostrecently closed funds

• The mean management fee for the mostrecently closed venture funds had dropped by15 basis points

• Managers of the largest funds were cuttingfees by the largest amounts

• LPs were receiving larger shares in rebatedtransaction fees

• More funds were including key man and “no-fault divorce” clauses in contracts.

The results of the Prequin survey show clearlythat investors are becoming increasinglyconcerned about terms and conditions.Placement agents are advising their investorclients to press for proposed fee structures to bealtered in their favour and the private equity fundmanagers, general partners (GPs), are listening.

Responses to the Prequin survey show that thenewest funds – both recently launched andthose that have been in the market for sometime – are offering lower fees. Resulting frominvestor pressure, new funds are also morelikely to include important governance statutessuch as key-man and “no-fault divorce” clausesin contracts.

Tim Friedman of Preqin said the findings of thesurvey made it clear that GPs should carefullyconsider how they structure new offerings inthe light of changed expectations if they wantto ensure they attract interest in the currentmarket. Full findings of the survey are availablefrom Preqin (Web:www.preqin.com).

Locally, managing director of placement agentPrinciple Advisory, Les Fallick, said power hadalready shifted decisively in favour of investorsin Australia.

IIF managers portfolios

Applicant State ProgramMax portfoliofunding ($m)

Proposed portfolio

Allen & Buckeridge Asset Management NSW Pre-Seed Fund $7.10 BT Imaging Pty Ltd

Heard Systems Pty Ltd

RPO Inc.

AMWIN Management Pty Ltd NSW IIF $5.44 EnGeneIC Pty Ltd

Coates Myer and Company Pty Ltd Qld IIF $1.91 Dilithium Networks Inc

Divergent Capital Partners Pty Ltd NSW ICT Incubator $2.75 Genos Pty Ltd

Inovia Holdings Pty Ltd

GBS Venture Partners Pty Ltd Vic Pre-Seed Fund $10.05 AiMedics Pty Ltd

Applied Physiology Pty Ltd

Hatchtech Pty Ltd

Hydrexia Pty Ltd

Spinifex Pty Ltd

Verva Pharmaceuticals Ltd

Xenome Ltd

InQbator (Timsco Pty Ltd) Qld ICT Incubator $3.95 distIP Pty Ltd

Hoodlum Active Pty Ltd

Mesaplexx Pty Ltd

Sky Technologies Holdings Pty Ltd

In-tellinc Pty Ltd Tas $2.30 Healthcare Software Pty Ltd

Packaged Solutions Pty Ltd (trading as Getbusi)

The Learning Edge International Pty Ltd

Tickit Systems Pty Ltd

Neo Technology Ventures Pty Ltd NSW IIF $5.10 Open Kernel Labs Pty Ltd

Playford Capital Pty Ltd SA ICT Incubator $7.45 Cavitus Pty Ltd

e-Channel Online Pty Ltd

Ember Technologies Pty Ltd

Neuro Vision Technology Pty Ltd

Reproductive Health Science Pty Ltd

Signostics Pty Ltd

Starfish Ventures Pty Ltd Vic Pre-Seed Funds $9.85 Audinate Pty Ltd

MIGfast Pty Ltd

Mimetica Pty Ltd

Monitoring Division Inc

Ofidium Pty Ltd

Start-up Australia Ventures Pty Ltd NSW IIF $8.51 Bionomics Limited

Mimetica Pty Ltd

Total $64.41


News

EDITORIAL: Challenges, opportunities ofnew environment Adrian Herbert

Institutional investors have been critical of private equityover the last 12 months; hardly surprising in prevailingeconomic conditions. But the opportunities that havedeveloped in the sector over the same period haveattracted far less attention.

Opinion appears to have been coloured by theperformance of investments made at the peak of the boomthat have since been revalued sharply downwards. Withcorporate values falling in most sectors, probably the bestthat could have been expected from private equity sincemid 2007 would have been smaller reductions in valuesthan in the listed sector.

In fact, that has been the case for many portfolios but, withthe pessimism of the times, investors have frequentlyascribed that to the differences in reporting between privateand public, listed companies – principally information delayresulting from quarterly reporting. That may be true to somedegree but other factors are also in play.

Few investors have been willing to recognise that thebetter performance of private equity investee companiescould be the result of superior strategic and operationalmanagement.

Private businesses in general are better placed to react torapidly changing conditions than listed companies. Thosethat are backed by private equity are most likely to takeadvantage of that.

Private equity managers encouraged early action when theglobal financial crisis hit. Ever since, most have been

focusing on their investee companies as if their verysurvival depended upon it, as indeed it does.

Many of these investee companies have now adjustedtarget markets and product ranges to ensure moreimmediate returns on investment. Employee headcountshave also been reduced in many cases, often withredundancies occurring in senior executive ranks. Someprivate equity investee companies have even persuadedtheir employees to accept pay cuts with the cuts typicallyapplying from the chief executive down.

Strategies have been altered to ensure survival but they willalso prepare companies for rapid expansion and renewedprofit growth once economic conditions improve. We onlyhave to look back to the tech wreck at the beginning of thecurrent decade to see how the survivors of a downturn canquickly become the dominant players in their sectors.

Investment executives who were around then shouldappreciate that history indicates we are now in a period ofexceptional opportunity for private equity investment, fornew investments and expansion of existing investeecompanies in many cases through bolt-on acquisitions.

Institutional investors have had their own difficulties.

Some have faced significant liquidity concerns while mosthave had to cope with asset allocations jolted severely outof kilter. Typically they found themselves overweight inalternative assets including private equity as a result of theplunging values of investments in listed equities. This hasresulted in many investors holding back from making newcommitments to alternative assets.

Investors naturally have to invest and can be expected toseek to invest a proportion of their portfolios ininvestments that will – at least to some degree – behavedifferently to listed equities. Recent experiences haveshown how difficult this is but it will remain an objectivefor investors.

NEWS


Changing economic conditions are now rekindling interestin alternative assets including private equity. This issue ofAPE&VCJ reports signs of this in the US. There are alsosigns of renewed interest in private equity from majorAustralian superannuation funds.

Unfortunately for local private equity managers, theimproved Australian to US dollar exchange rate mayencourage funds to look overseas first. This certainlyappears likely in the venture sector where the funds ofsought-after managers, which had previously been largelynon-accessible to overseas investors, are now available.

The challenge for private equity will be to show that it isan asset class that fits the bill as an investment class thatperforms differently to listed equities. Clearly, superiorstrategic and operational management are likely to appealmuch more to investors than investment and financialskills, although naturally these will be as important as everin identifying and structuring deals.

But the factor that is likely to be the clincher in attractinginvestment back to the sector will be discussions on feestructures. This issue of APE&VCJ reports that pressurefrom limited partners has achieved this in the US.Australian LPs and their advisers can be expected to exertsimilar pressure over coming months. They are expectedto focus on the 2 per cent management fee inconventional 2 & 20 per cent in conventional feestructures. Private equity firms with aspirations to raisenew funds will need to listen.

New Funds & Fundraising

New stakeholder in Blue Sky Private EquityFormer Investec Bank executive Tim Wilson has taken a“significant” stake in Brisbane-based Blue Sky PrivateEquity. Mr Wilson will now lead the firm’s private equityoperations as managing director.

Mark Sowerby, who started the business in 2006, remainsmanaging director of Blue Sky Private Equity’s parentcompany, BSPE Holdings Pty Ltd

Mr Wilson said his entry into the business would help freeup Mr Sowerby to spend more time on property, water andagribusiness investment, areas in which he has particularexpertise. Mr Sowerby would, however, still be activelyinvolved in the private equity business and oversight alldecisions.

Blue Sky Private Equity was launched with plans to raise a$40 million institutional Blue Sky Private Equity SME Fundin partnership with responsible entity BusinessManagement Ltd. Although the manager has notsucceeded in closing this fund, Blue Sky Private Equitynow has substantial funds under management and hasmade direct investments in four businesses, each as aresult of specific capital raisings from high net worthindividuals.

The investee businesses are chicken and specialty meatsretail franchise chain Lenards, luxury accommodationvehicle builder Paradise Motorhomes, Mexican cuisine fastfood business Beach Burrito and portable toilets hirebusiness Viking Rentals. Apart from Bondi, Sydney, basedBeach Burrito, all of these businesses are Queensland-based.

Earlier this year, Blue Sky Private Equity took over themanagement of South Australian investment vehicle thePCI Trust (APE&VCJ, May 09) now renamed ProfessionalCapital Investment Equities Trust No 1.

Investments of Capital Investment Equities Trust No 1 areCommStrat (ASX: COJ), parent company of Melbourne-based conference management, publishing and onlineservices business Hallmark Editions and of Private EquityMedia, publisher of the Australian Private Equity & Venture

Capital Journal; BioCentral Lab, an ecologically responsiblewater additives manufacturer; and premium surfboardmanufacturer and wholesaler Firewire.

BSPE has also invested in water and property through BlueSky Water Partners and Blue Sky Property Partners andnow manages a total of about $100 million on behalf of200 investors. The business now has a team of 11 and anoffice in Adelaide as well as Brisbane.

News

Boom period buyouts Media reports on private equity over the last year havemainly focused on large boom period private equitybuyouts that are now well underwater.

There is little doubt that many of the businesses acquiredby private equity in deals close to the peak of the marketin 2007 will require a lot of operational work and asignificant improvement in the global economy to regaintheir values at the time of investment. But that is by nomeans the whole picture.

As the accompanying table shows, some of the largerinvestments made over the last four years, do not nowlook excessively overpriced. Compared with other deals, afew even look cheap; Myer, for example, at a 2006enterprise value of $1.4 billion, comes in as only the ninthbiggest deal and represents less than a fifth the value ofthe most expensive deal, Multiplex in 2007.

Only a few of these deals have yet been fully exitedprofitably, and one, the Millers Retail, Warehouse Group(Aust) discount retail businesses, has been exited as aresult of the business being placed into voluntaryadministration. But there is still plenty of time for an exitfor most, regarding up to seven years as a conventionalprivate equity holding period.

NEWS

Larger Australian PE deals* financial years 2006-2009

Investment Firm Enterprisevalue $m Year * by enterprise value

1 Multiplex Group (ASX) Brookfield Asset Management 7300 20072 PBL Media (ASX) (50 per cent, 25 per cent in separate 2008 deal) CVC Capital Partners/CVC Asia Pacific 5600 2006 *Feb 2009 $335m recapitalisation reduced enterprise value to $1.8bn 3 Eircom Group plc (10.8 per cent) Babcock & Brown Capital 3240 20064 Seven Network (ASX) (50 per cent) Kohlberg Kravis Roberts & Co 3200 20065 DCA Group CVC Asia Pacific/CVC Capital Partners 2700 20066 Coates Hire (ASX) Carlyle/National Hire Group (ASX) 2200 20077 Brambles Cleanaway and Brambles Industrial Services (ASX divest) Kohlberg Kravis Roberts 1830 20068 Fleet Partners Nikko Principal Investments (Australia) 1650 20069 Myer (ASX: CML divestment) "Texas Pacific Group, Myer Family Company" 1400 200610 ABC Learning Centres (ASX divestment) US arm only Morgan Stanley 820 200811 MediaWorks (NZX) Ironbridge 583 2007 NZ$72712 Repco (ASX) CCMP Asia Pacific 570 200713 Super A-Mart Ironbridge Capital plus co-investors 500 200614 Transpacific Industries (ASX) (underwriting rights issue) Warburg Pincus 498 200915 MYOB (ASX) Archer Capital/Harbourvest Ptnrs (Asia) 451 200816 Hoyts Group (ASX) Pacific Equity Partners 440 200717 Colorado Affinity Equity Partners 430 200618 Stella Group (65 per cent) CVC Asia Pacific 400 200819 iSoft plc (UK) Allco Equity Partners/ IBA Health (ASX) 362 200720 3M Asia Pacific and African region pharmaceuticals Archer Capital/Ironbridge Capital 349 200621 Rebel Sport Archer Capital 308 200722 Godfreys Pacific Equity Partners/CCMP Capital Asia 300 200623 Worldwide Restaurant Concepts (NYSE) Pacific Equity Partners 257 2006 US$21024 Vision Systems Limited (ASX) fire & security division divestment Pacific Equity Partners 253 200625 Loscam (35 per cent) Affinity Equity Partners 250 200626 Kathmandu (51 per cent, 49 per cent in separate later 2006 deal) Goldman Sachs JBWere Quadrant Private Equity 220 2006 NZ$275m26 Pacific Print Group Gresham Private Equity 220 200528 Zig Inge Retirement Villages (49 per cent) Macquarie Capital Alliance 204 200629 Millers Retail, Warehouse Group (Aust) discount retail businesses Catalyst, PPM Capital (UK) CHAMP Private Equity 200 200629 Gorey & Cole, Nudrill, Sides (simultaneous acquisitions) Ironbridge Capital 200 200829 WA Freightliners, Bunker, Kagan, Hoffmanns, Doolans (simult acq) Gresham Private Equity 200 200832 Universal Weather and Aviation Macquarie Capital Alliance/Macq Global Ops Ptnrs 169 2007 US$160m33 Signature Security Allco Equity Partners 145 200634 Alleasing CHAMP Private Equity 135 200835 ASX Perpetual Registrars Pacific Equity Partners 132 200636 Onesource Group (New Zealand) Archer Capital 120 2006 NZ$150m37 Borders Group (Australasia) Pacific Equity Partners 116 2007 US$110m38 Aconex Francisco Partners 107.5 200839 McColl's Transport, Scott's Refrigerated Freightways ABN AMRO Capital unknown 200640 Elrond Holdings Limited, Qualcare Group (New Zealand) Ironbridge Capital unknown 200641 WA Forktrucks, WA Access Equipment, NT Forktrucks, WAGMAC AMP Capital Investors Private Equity 78 200642 Barbeques Galore (NASDAQ) Ironbridge Capital 60 200642 Amdel CHAMP Ventures 60 200644 Instant Access Australia, Instant Access New Zealand RMB Ventures 40 200645 Unwired Australia (ASX) Intel Capital unknown 2006 $37m in secured convertible notes to mature in 2009 46 Ampcontrol Souls Private Equity (ASX) 28.6 2006


A few now appear to have potential for floating on the ASXwithin the next 12 months if the sharemarket continuesthe upward trend of recent months, most likely led byMyer and possibly followed by Kathmandu. This wouldperhaps exhaust the appetite for retail floats in the shortterm but it represents a very different outlook for retailthan at the beginning of the year.

A few private equity investments in other sectors appearto have good potential for trade sales to offshore buyers ina similar timeframe assuming continuing global economicrecovery.

A number appear to have potential to add significant valuewithin the next 4-6 years. Others look problematic.

One point to ponder; how would the private equity sectorlook today had the Qantas deal gone ahead?

View table outlining detalis of larger details of recent yearson previous page.

News

Big US funds commit to private equityThe two largest pension funds in the US have confirmedcommitment to the asset class despite reporting largedowngrades on the valuations of their private equityportfolios.

The California Public Employees’ Retirement System(CalPERS) reported, on preliminary figures, a decline inmarket value of its total assets of 23.4 per cent for theyear to June 30, its most severe single year decline. Privateequity was down by 31.4 per cent for the 12 monthsending March 31.

Chief investment officer Joe Dear said the market value oftotal assets was US$180.9 billion as of June 30; a yearearlier the figure had been US$237.1 billion. This figure haddropped to US$160 billion by the end of March beforerebounding by US$20 billion by the end of June.

Mr Dear said: “The good news is we have the opportunity

to capture future returns because of our long term

investment horizon. The System has more than enough

cash through contributions and income from investments

to meet our present liabilities so we are in a good position

to ride out the current downturn and come out stronger.

“In the meantime we are using a disciplined and proactive

approach to position the fund for investment returns while

carefully managing investment risk.”

He said asset allocation would be revised to maintain

flexibility in the current market for making opportunistic

investments in private equity, real estate and

infrastructure. A fuller asset allocation and liability review

was planned for 2010.

Efforts were also being made to realign relationships with

hedge fund and private equity partners with the objectives

of reducing fees and better aligning interests to develop

more mutually beneficial long term relationships.

The California State Teachers’ Retirement System

(CalSTRS) reported, on preliminary figures, a decline in

market value of its total assets of 25 per cent to US$118.8

billion. The private equity portfolio, which comprised 12.1

per cent of the total portfolio, had declined in value by 27.6

per cent.

Chief executive Jack Ehnes said that during the year

CalSTRS had acted to manage market volatility and take

advantage of opportunities presented by the economic

meltdown.

He noted that as the prices of listed stocks plummeted,

the value of CalSTRS’ private equity holdings had risen in

proportion within the portfolio, exceeding allowable policy

ranges. CalSTRS had expanded the target asset ranges to

avoid forced sales of holdings at the bottom of the market.

News

Logistics business open for offersNational crane hire and heavy lifting company BoomLogistics (ASX: BOL) has indicated it is open to investmentor merger offers.

The company appears a likely target for private equity aswell as trade buyers.

Boom Logistics is Australia’s leading provider of liftingsolutions and has a large equipment fleet and a nationalnetwork of depots.

The company has effectively invited all offers in responseto a merger proposal from its largest shareholder HarbrewGroup. Through associated entities that include McAleeseInvestments Pty Ltd, Harbrew holds 12.2 per cent of BoomLogistics, a stake that is has built up substantially in recenton-market transactions.

The Mackay-based McAleese Group of companies is oneof the largest privately owned businesses in Queenslandand includes McAleese Transport and Walter WrightAustralia as well as Melbourne companies National Cranesand Australian Cranes & Machinery.

Prior to the Harbrew Group offer, Boom Logistics had beenconsidering an equity raising.

As a result of the economic downturn, Boom Logisticsexperienced a severe downturn of activities in the secondhalf of the 2008-09 financial year, particularly in Januaryand February. The company would have breached theearnings leverage covenant in its debt facility as at June30, however, prior to this date the company was grantedan unconditional waiver on this by its syndicate of lenders.

Boom Logistics has an asset base in excess of $400 millionand net asset backing of 89 cents per share as at June 30.The company says its strong operating cash flows aresufficient to service interest on borrowings, including

NEWS


planned capital expenditure, and to meet all scheduleddebt repayments.

Boom Logistics has forecast 2008-09 results of operatingnet profit after tax (excluding one-off items), about $12million and earnings before interest tax debt andamortisation of about $70 million.

Non-recurring, non-cash goodwill and asset impairments ofabout $39.4 million pre-tax are anticipated along with othernon-recurring costs including restructuring of about $3million.

The company predicts EBITDA of about $65 million for thecurrent financial year, reflecting the uncertainty of theprevailing market and assuming no revenue growth.


Incubator triples its venture capitalDespite the challenging economic climate, incubator ATPInnovations more than tripled the venture capitalinvestment it helped attract to its companies in 2008,raising $20 million compared to $6 million in 2007.

Government grants were also up; $11 million comparedwith $9 million in 2007. Capital from other sources was,however, down as total capital raised amounted to $32million compared with a record $43 million in 2007.

In 2007, however, much of the capital raising wasaccounted for by one company, CathRx (ASX: CXD) –developer of a diagnostic cardiac catheter. CathRx raised$27 million in a share issue.

In 2008 the capital raisings were much more widely spreadwith half of ATP Innovations’ companies attractinginvestment.

During 2008, ATP Innovations’ support was extended toeighteen new companies and five graduated from theincubation program.

So far in 2009, five new companies have taken upresidence in the incubator at the National InnovationCentre in Redfern, Sydney. Ten companies are working withATP Innovations as virtual clients either as they prepare tomove into the Innovation Centre or as a result of movingout as they progress toward graduation. More than 50companies are currently in residence at the incubator; theyrange over life sciences, information technology andengineering technology.

ATP Innovations chief executive Hamish Hawthorn saidcombined company revenue of $40 million ($53 million in2007) remained strong in 2008 supported by significantinternational sale growth.

Investors in ATP Innovations’ companies include its pre-seed investment fund bizCapital and venture capital firms:GBS Venture Partners, ANU Connect, Australian CapitalVentures, Stone Ridge Ventures, Starfish Ventures, CMCapital Investments, Innovation Capital, SciVentures, CVCREEF and Lend Lease Ventures.

ATP Innovations helped found the business angels groupSydney Angels during 2008.


Asia fund raises US$1bnThe Carlyle Group has closed its fourth Asian growth capitalfund, Carlyle Asia Growth Partners IV (CAGP IV) withcommitments of US$1.04 billion.

The new fund, which is more than 50 per cent larger thanits predecessor, is expected to focus mainly on investmentsin China and India but has a mandate to invest across otherkey markets in the Asian region.

The fund has already made its first investment in China,US$20 million in Shenzhen-based high-end women’s fashionretailer Ellassay Fashion Industry Co Ltd. Ellassay has 280retail shops in China and plans to expand into other countries.

Carlyle co-founder and managing director David Rubensteinsaid: “The Carlyle Group raised US$19.9 billion in newcapital last year and this fund close builds on thatmomentum. Asia remains a core focus of our globalbusiness and Carlyle continues to devote more resourcesto China and India.”

Investment Activity

Purchase to end court actionCVC Asia Pacific has agreed to buy the 35 per cent of travelcompany Stella Group it does not already own.

No sale figure has been announced but as part of the saleagreement with Octaviar Limited (formerly MFS Limited),the private equity firm has agreed not to continue a courtaction it launched against MFS in February.

On July 1, the Deloitte administrators to Octaviar Limitedannounced that the company and its subsidiaries OctaviarAdministration Pty Ltd, Octaviar Stella Holdings Pty Ltd andSunleisure Group Pty Ltd had entered into a share and loannote agreement under which Octaviar Limited agreed tosell: all its shares in Global Voyager Holdings [the parentcompany of Stella Group] to majority shareholder, EuropeVoyager NV [the entity through which CVC Asia Pacificowns 65 per cent of the company].

Also to be sold was a loan note that had been issued toEurope Voyager Holdings by Global Voyager Holdings.

As part of the consideration for the sale of the shares andloan note, Global Voyager Holdings and related partiesagreed to release a claim brought in the Supreme Court ofNSW against Octaviar Stella Holdings by Global VoyagerHoldings’ subsidiary Global Voyager Pty Limited. The claimrelated to the initial February 3 2008 sale agreement.

Completion of the deal will depend on regulatory approvalsto be satisfied by the end of August.

Early this year, CVC Asia Pacific (Australia) lodged awarranty claim for $249 million over the purchase of its

NEWS


initial stake in Stella (APE&VCJ, Feb 09). This led to thecourt claim.

Stella’s holding company Global Voyager Holdingsbelatedly reported a $42.7 million loss late last year.

Prior to the initial deal with CVC Asia Pacific, MFS hadforecast the business would generate EBITDA of $210million in the 2007-08 financial year.

CVC Asia Pacific paid more that $400 million for its initial stakein the Stella Group and took on an even larger debt burden.Since then, however, Stella Group has offloaded assetsincluding a large stake in Protea Hotels of South Africa.


UK government backs venture sectorThe UK government has announced plans to commit £150million toward a new venture sector fund of funds, the UKInnovation Investment Fund.

The Department for Business Innovation and Skills, theDepartment of Energy and Climate Change and theDepartment of Health will invest the money alongside theprivate sector.

The government believes its commitment will leverageenough private investment to build the fund up to £1 billionover the next decade.

The fund is part of the government’s Building Britain’sFuture strategy.

Prime minister Gordon Brown said: “This fund will helpbuild Britain’s future by investing in key sectors. It willprovide crucial support for our most promising start-upsand existing small companies just when they need it most.Venture capital finance is the lifeblood of innovation andcrucial to ensuring the commercialisation of thediscoveries coming out of our research base. The fund willboost future UK competitiveness.”

Science and innovation minister Lord Drayson has been astrong advocate for the fund.

He said: “We must safeguard the government’s record

investment in the science and research base over the past

decade. We cannot afford to lose out on the wealth this

investment can yield and we will need this wealth to

continue our sustained investment in research.”

AltAssets website has reported that The UK Innovation

Investment Fund will invest in a small number of specialist

technology funds that have the expertise and track record to

select the right companies for direct investment. This will

ensure the fund will be cost effective and will provide market

returns to private sector investors and the government.

A similar UK High Technology Fund was launched in 1998.

This £125 million fund of funds invested in a number of

specialised technology funds including those managed by

Advent, Amadeus, MTI and Scottish Equity Partners. The

government provided a cornerstone investment of £20

million. The fund manager leveraged an additional £105

million from the European Investment Fund, UK pension

funds and a French bank.

Investment Activity

Local VCs back marketing pushAdelaide and US-based medical device company Signostics

has raised US$4 million in a new round of funding, as

foreshadowed in APE&VCJ (Jun 09).

Investors in the new round include Brandon Capital

Partners, Playford Capital and Terra Rossa Capital. The

company has now raised a total of about US$13 million.

Signostics has developed a palm-sized ultrasound device

for medical diagnosis, the Signos. The device has been

cleared for marketing by the US Food & Drug Authority

(FDA) and the Australian Therapeutic Goods Authority (TGA)

and by European authorities.

The company is already marketing a similar device, the

SpeqView, to the international veterinary market.

Signostics chief executive Dr Neil Bartlett said: “With rising

healthcare costs and healthcare spending being re-

evaluated, our breakthrough technology creates a much

more affordable tool to deliver faster diagnosis at the point

of care. Our products have many applications that are

attractive in many different markets and the additional

capital we raised will help us grow into our key target

segments.”

The company has also appointed four new directors.

The new directors are David Fisher, managing director of

Brandon Capital Partners; Amanda Heyworth, chief

executive of Playford Capital; Des Masters, a former

corporate banking executive and now manager of the

University of Adelaide’s enterprise education programs;

and David Shaw who has 15 years experience in the

medical device industry in the US and is currently affiliated

with Monterey Advisors Inc, a management, operations

and investment consulting firm which focuses exclusively

on the medical technologies sector.

Signostics was established in Adelaide in 2005 and

expanded to the US last year. Marketing of the company’s

veterinary device, the SpeqView, was launched in January

and of the human medical device, the Signos, in May.

Investee News

Milestone for Sunshine HeartCM Capital Investments and GBS Venture Partners investeeSunshine Heart (ASX: SHC) has reported a significantmilestone.

Two patients implanted with the company’s C-Pulse heartassist device in April have successfully completed three-month follow up evaluations at the Ohio State UniversityMedical Center in Columbus, Ohio.

The two patients are to return to hospital for furtherevaluation six months after the implant procedure.

Australian Private Equity & Venture Capital Guide 2009

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By Adrian Herbert

A complete guide to more than 200 sources of private equity and relatedfinancing and support for growth companies. Covers private equity andventure capital, business angel networks, new product development support and unlisted infrastructure funding available in Australia, NewZealand and Papua-New Guinea

Australian Private Equity & VentureCapital Guide 2009 16th EDITION

The Australian Private Equity & VentureCapital Guide (previously the AustralianVenture Capital Guide) is now available.

The 2009 Guide is an invaluable reference foridentifying sources of private equity andventure capital funding in Australia and NewZealand.

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While the Guide includes Australian offices ofoverseas-based managers that invest only inlarge deals, most of the listings are local firmsthat primarily invest in Australian and NewZealand businesses. These managers eachhave their own specific investment rangescovering from less than $100,000 to inexcess of $1 billion. The Guide identifiesthese ranges plus the industry areas andbusiness stages preferred by eachorganisation.

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Sunshine Heart chief executive Don Rohrbaugh said: “Weare very encouraged by the patients’ response with the C-Pulse device. We look forward to generating additional datafrom this study to support our global regulatory strategy.We are particularly pleased to report the companyreceived reimbursement of US$108,000 from the OhioState University for these two patients; the first suchrevenue for Sunshine Heart.”

Five other US university hospitals are also involved in astudy of the effectiveness of the C-Pulse device. Implantprocedures under the study program are expected tocontinue into the first quarter of next year.

The company has said no data will be released until allpatients in the trial have been assessed after six months sotrial data is not expected until September next year at theearliest.

Assuming the trial is completed successfully, SunshineHeart will then seek US Food & Drug Authority (FDA)approval for a larger randomised trial to support asubmission of a marketing application for the device.

Inventor of the C-Pulse, Sunshine Heart medical director DrWilliam Peters, said examination of the patients showedthat the device successfully increased blood flow generallyand to the heart muscle in particular without coming intodirect contact with the bloodstream.

“It is anticipated that C-Pulse will offer patients asignificant improvement in quality of life and with anacceptable risk profile,” he said.

Other major shareholders in Sunshine Heart are California-based health care sector venture capital firm Three ArchPartners and the federal government through the nowdefunct Commercial Ready program.

Sunshine Heart plans to seek a further $5-$8 million in anew capital raising.


Capital raising begins for early stage fundBusiness angel groups in New Zealand have begunfundraising for a joint venture early stage fund.

Their partner in the Halo Fund will be the government-funded New Zealand Venture Investment Fund (NZVIF).

Halo Investment Management Limited chair John McDonaldsaid the angel groups are aiming to raise at least NZ$5 millionfrom individual New Zealand investors new to angel investing.

Angel groups involved in the project, which wasannounced late last year (AVCJ, Dec 08), are ICE Angels,Auckland: Manawatu Investment Group, Palmerston North;Pacific Channel, Auckland; powerHouse Ventures,Christchurch; Sparkbox Investments, Auckland; UpstartAngels, Dunedin; Venture Accelerator, Nelson.

The fund will invest alongside NZVIF’s Seed Co-InvestmentFund.

Mr McDonald said the Halo Fund would enable the newinvestors to partner with New Zealand’s most experiencedangel investors in a diversified portfolio invested acrossnew technology high growth companies in dynamicsectors such as software, life sciences and medicaldiagnostics.

He said the fund would be a passive investment vehicleinvesting only in companies in which the co-investor angelgroups and the NZVIF Seed Co-Investment Fund invest.

“The fund is based on the premise that the best people toguide early stage investments are successful entrepreneursand business leaders, many of whom have experiencedboth early stage business success and failure,” he said.

“It is these active co-investors – representing New

Zealand’s leading angel investors – who will select,

undertake due diligence on, invest in and, ultimately, exit

portfolio companies.”

He said investors would gain access to a wider number of

opportunities than they could reach on their own for a

limited capital contribution. They would still be able to

commit additional capital to specific investments if they

wished.

Total investments of up to NZ$250,000 are expected to be

made through the joint venture; half invested in more than

30 companies over two to three-year seed and start-up

phases and the other half available for follow-on investing.

Angel Association of New Zealand chair Andrew Hamilton

said the fund would be unique internationally.

“We have watched our friends in America, Europe and

Australia developing side-car funds and been fortunate to

receive their advice and guidance. This fund takes that to

the next level by creating a side-car fund which spans most

of the early stage market in New Zealand. This is, to our

knowledge, a world first.”

He added that the angel community was delighted to have

the support and commitment of the New Zealand

government in the project.

People Moves

Venture specialist leaves Access Capital Advisers One of the most experienced advisors in the early stageventure sector, Paul Cheever, has left Access CapitalAdvisers to operate independently.

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Mr Cheever said he maintained a good relationship withAccess but after “nine really good years” the range of hiswork had narrowed and made a split logical. His newbusiness, Paul Cheever Consulting would focus oncommercialisation of innovations particularly in the lifesciences area.

During his time with Access, Mr Cheever advised on thebuilding of Westscheme superannuation fund’s $75 millionventure capital investment portfolio.

During more than 35 years in the finance and investmentsector Mr Cheever has been a key figure in thedevelopment of venture capital investment in Australia. Hebelieves the venture capital model remains viable butrequires increased attention from investors on portfolioconstruction. He says many investors are yet to fullyunderstand the value of building “portfolios of options”over the long term, starting with numerous small scaleinvestments followed by larger investments in smallernumbers of companies as technologies are proven.

Mr Cheever is also a strong advocate of the value to theeconomy of government support for the early stagetechnology sector and has been a strong critic of lastyear’s axing of the Commercial Ready program by thefederal government.

Key roles to which Mr Cheever will now be able to devotemore time include board positions with biotechnologycommercialisation companies IMBcom and Uniseed plusthe federal government’s CommonwealthCommercialisation Institute and the technologycommercialisation investment partnership between StoneRidge Ventures, Westscheme and Murdoch University.

Mr Cheever will also continue to liaise with venture capitalmanagers and Access Capital Advisers in other currentrelationships.

News

Split casts doubt on new direction for fundAn expected change in investment focus of Singaporegovernment sovereign wealth fund Temasek Holdings isnow in doubt with the announcement that former chiefexecutive of BHP Billiton, Charles “Chip” Goodyear will nottake over as chief executive.

Mr Goodyear had been scheduled replace Ho Ching, thewife of Singapore prime minister Lee Hsien Loong, inOctober (APE&VCJ, Mar 09).

The move was expected to shift Temasek’s investmentfocus toward energy and resources.

The fund has about 40 per cent of its assets in financialservices and only about 5 per cent in energy and resources.

Mr Goodyear indicated when he left BHP Billiton in January2007 that he was interested in leading a majorinternational investment fund. He was appointed to theTemasek board in February and named chief executivedesignate in March.

Investee News

Drug developer nears moment of truthGBS Venture Partners and No 8 Ventures Managementinvestee company Proacta has reached an importantmilestone.

The drug development company has begun Phase 2 clinicaltrials for its lead compound, PR104. The trials should indicatethe efficacy of the drug for liver and lung cancer. The trialsare being conducted in New Zealand, Asia, Canada and theUS. Results are expected by the middle of next year.

No 8 Ventures managing partner Jenny Morel describedthis as an “exciting” stage for the New Zealand-founded

business. Proacta still carries out drug discovery work inAuckland although it now has its headquarters in the US.

No 8 Ventures co-led a Series A investment in Proacta fiveyears ago. Ms Morel said the decision to invest had beenbased on increasing evidence that hypoxia (shortage ofoxygen) was an important factor in the resistance of solidcancers to chemotherapy and irradiation. The companyhad been formed on world leading research andintellectual property in this area by scientists at theUniversity of Auckland and Stanford University in the US.

Proacta was set up to develop hypoxia-activated anti-cancer drugs.

Ms Morel said: “The fact that hypoxia is present in mostcancers has been known for some time but no drugs arepresently approved that take advantage of hypoxia as away to treat cancer. Cancer cells that become distant froma blood vessel become hypoxic and are then moreresistant to chemotherapy and irradiation. These may bethe cells in a cancer that are responsible for relapse andspread following these traditional treatments.

“It’s great to see these Phase 2 trials underway with apromising drug like PR104. The scientists at the Universityof Auckland continue to develop novel treatments forcancer based on their understanding of tumour hypoxia.This pioneering work should continue to provide promisingand novel drugs to Proacta for testing in the clinic.

“A second class of hypoxia-activated anti-cancer drugs isalso under development. These drugs also become activewhen exposed to hypoxia in tumours but once activatedthey attack a different target in the tumour than PR104does. Proacta aims to have this second class of hypoxia-activated drugs in the clinic in 2010.”

Proacta says preclinical studies indicated that onceactivated in hypoxic tumour cells, PR104 can flow on to


surrounding tumour cells and also kill these. The companysays this “bystander effect” appears to increase theeffectiveness of PR104 and differentiates the drug frommost other hypoxia targeted cancer treatments.

GBS Venture Partners invested in $2.5 million in Proacta ina Series B round in 2007.

Other venture capital investors in the company includeClarus Ventures, Delphi Ventures, Alta Partners, NewZealand fund Endeavour-iCap and Auckland UniServices.

Global pharmaceutical company Roche is also in investorin Proacta through its Roche Venture Fund.

Performance

Crescent Capital achieves exitCrescent Capital Partners has exited its investment in NewZealand fruit juice company Simply Squeezed with the saleof the business to Frucor, a subsidiary of Suntory of Japan.

No sale price has been disclosed.

The sale is subject to approval from New Zealand’sCommerce Commission.

In October 2006, Crescent Capital acquired 60 per cent ofthe Hawke’s Bay company from founder Steve Brownliewho remained chief executive.

Reports at the time speculated Crescent Capital had paidabout NZ$41 million for its stake. Simply Squeezed wasreported to have annual turnover of more than NZ$20million. The investment was to be used to for expansion.

People Moves

New chair takes up VFMC roleThe new chairperson of the Victorian Funds ManagementCorporation (VFMC), John Fraser, has taken up the role andis believed to be involved in interviewing candidates for thestill vacant role of chief executive.

Mr Fraser is currently chief executive of the Global AssetManagement Business Group of UBS based in London.

Prior to joining UBS, in 1993, Mr Fraser was deputysecretary (economic) with the Commonwealth Treasury.

VFMC provides professional funds management andadvisory services to Victorian public sector funds andauthorities and has more than $30 billion in funds undermanagement; it plays a significant role in developinginvestment strategies for public sector funds.

Informal Venture Capital

Climate ready carbon fibreA number of substantial grants have been made in the$13.4 million third round of the federal government’sClimate Ready Program.

The largest grant is $2.6 million to West Australian-basedQuickstep Technologies for developing a resin spraysystem to mass-produce lightweight carbon fibrecomposite components for the automotive, aerospace andmarine industries.

The system builds on a suite of patented processes andshould dramatically reduce production times and costs.Use of lightweight carbon fibre composite parts in theautomotive industry has been estimated to have thepotential to reduce vehicle emissions by 50 per cent.

The latest 22 grants take to 73 the number of projectsfunded under Climate Ready and represent a total outlay todate of $58 million of the $75 million allocated for theprogram. Grants of $50,000 to $5 million are available buthave to be matched by private sector investment.

Announcing the latest grants, innovation minister Kim Carrsaid the program had so far provided support for 760 jobsas well fighting climate change.

Other third round grants include:

Hexima, Victoria: $1.38 million to develop a geneticallymodified insect control trait in cotton plants. This shouldreduce the need to use pesticides on crops and willtherefore also reduce fuel used for crop spraying. Heximawas granted $250,000 from the Biotechnology Innovationfund in 2002.

Frontline Australia, Victoria: $1.22 million to develop apilot plant for a cold spray technique for producingseamless titanium alloy tubing and pipe. The cold sprayprocess uses high pressure, high velocity gas to apply finecoatings of titanium and alloy powder onto a mandrel. Theuse of powder should reduce the power needs of theprocess by about 30 per cent.

Vecor Australia, NSW: $905,477 to develop a process thatuses fly ash from coal fired power stations to manufactureenvironmentally friendly building materials. Materials thatmay be produced in continuous processes include tiles,currently mainly sourced from overseas.

Phoenix Power Recyclers, Queensland: $500,000 todesign and construct an innovative green and organicwaste separation system that will produce clean dry greenwaste combustibles in a form that will provide high qualityfuel for generating green electricity and green organics forcomposting.

Australian Bee Services, SA: $499,850, to develop amethod to maximise pollination of agricultural crops usingmanaged honey bees. The project is intended tosupplement and improve on wild bee pollination toincrease crop yields and improve quality.

Air Change, NSW: $458,370 to develop a solar-poweredenergy efficient air conditioning unit.

Techlynx Holdings, NSW: $439,355 for development of anAustralian designed liquid petroleum gas (LPG) controller

NEWS


system. The new system is planned to be more efficientthan current systems and to be suitable for all sizes ofvehicles. Greater use of LPG as a fuel will reducegreenhouse gas emissions.

Filsen, NSW: $428,500 to commercialise technology tofusion coat paper, reducing the carbon footprint and costof current paper coating processes.

Investment Activity

Quantenna adds to funding roundSouthern Cross Venture Partners investee QuantennaCommunications Inc has added Switzerland’s leadingtelecommunications provider Swisscom to its Series Cfunding round (APE&VCJ, Jun 09).

In addition to Southern Cross Ventures, other investors in theround include Grazia Equity GmbH of Germany, and US firmsSequoia Capital, Sigma Partners and Venrock Associates.

Quantenna says that to date it has now raised more thanUS$44 million indicating Swisscom has committed aroundUS$2 million. The company previously announced thefunding round had raised US$13.85 million taking its totalfundraising to more than US42 million.

Quantenna is a leading developer of silicon for high-speed,wireless high definition video home networking.

Quantenna president Behrooz Rezvani said thecollaboration with Swisscom illustrated how Wi-Fi wirelesscoverage could be enhanced by using Quantenna’s 4x4MIMO solution with digital beam forming technology.

Informal Venture Capital

Israel co-operation funding available Applications for the sixth round of the $6 million Victoria-Israel Science and Technology R&D Fund (VISTECH) closeon September 17.

The fund was established in 2005 to promote, facilitate andsupport jointly approved science and technology R&Dprojects.

VISTECH offers up to US$500,000 per project to cover up to50 per cent of joint project R&D costs. Should a fundedproject result in successful commercialisation, thepartners are required to reimburse VISTECH but only at therate of 3.5 per cent of the capital per year without interest.Projects that do not result in successful commercialisationwill not be required to reimburse VISTECH.

Areas such as biotechnology, nanotechnology, water,environment, synchrotron and ICT are considered wellsuited for funding consideration.

Further information:www.business.vic.gov.au/BUSVIC/STANDARD/PC_61046.html

News

IT innovation advisers include venture sectorTwo venture capital sector executives have been includedon the federal government’s new Information TechnologyIndustry Innovation Council.

Innovation minister Senator Kim Carr said the advice of the24-member council to the government would be crucial infurthering innovation in Australia’s $98 billion IT industry.

The venture capitalists are Paul Kristensen, executivechairman of Perth-based investment company CapitalTechnologies, and Amanda Heyworth, chief executive ofSouth Australia funds manager Playford Capital.

The chairman of the council is John Grant, managingdirector of Data#3 Limited and chairman of the AustralianInformation Industry Association.

Senator Carr said the council would have the objective ofchampioning innovation through the use of IT. Thegovernment’s planned National Broadband Network wouldbe vital in delivering this smart technology.


New management for early stage fundOne of the first funds seeking to raise capital under thefederal government’s 2007 Early Stage Venture CapitalLimited Partnership legislation has changed management.

The Start Innovation Fund is now managed by BlueSkySecurities Australia Pty Limited, a new entity formed forthe purpose.

The Australian Small Scale Offerings Board (ASSOB)announced on July 10 that it had sold the fund. ASSOB hadbecome the owner of the fund after merging with StartSecurities in August last year.

ASSOB chief executive Paul Niederer said the fund wasseeking to raise an initial $10 million that would enable itto convert its current conditional federal governmentapproval to unconditional approval. Fundraising waslaunched last year with a target of $100 million.

Mr Niederer said the Start Innovation Fund would continueto be “part of the continuum of capital raising servicesoffered by ASSOB” and the company had invested in alimited partnership as a result of the sale.

“It’s the perfect complement to our investor matchingservice, from where some of the deal flow for the fund willbe sourced,” he said.

“We’ll refer suitable companies requiring funding to theStart Innovation Fund and in some cases this could providean exit or liquidity event for some of the early stageinvestors; its good news for everyone – the up-and-comingcompanies, ASSOB, the investors and the fund.”

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ASSOB was formed in 2005 and provides a trading platformfor the securities of growing companies. Before listing on theASSOB, companies are required to engage the services of anaccredited ASSOB sponsor. ASSOB sponsors are typicallyprofessional services firms that advise on capital raising.

Investee News

Cuffe joins Centric boardFormer Colonial First State and Challenger FinancialServices chief executive Chris Cuffe has been appointed tothe board of CHAMP Private Equity investee companyCentric Wealth Management.

Centric Wealth chief executive Michael Pillemer said: “Chrisbrings with him valuable skills. We are fortunate to be ableto benefit from his deep strategic and investment expertiseas we continue to focus on the needs of our clients.”

Mr Cuffe has more than 20 years experience in the fundsmanagement industry including several years as chiefexecutive of Challenger’s wealth management business, aposition he took after stepping down from the role of chiefexecutive of the parent company. Under Mr Cuffe’s control,the Challenger wealth management business wassubstantially restructured and grew from about $3 billionof funds under management to more than $12 billion.

Since mid-2006, Mr Cuffe has carved out a new career inthe not-for-profit sector and is currently an executive ofSocial Ventures Australia as well as a director of Third LinkInvestment Managers (manager of the Third Link GrowthFund) UniSuper and Arkx Investment Management (a fundsmanagement company that specialises in carbonreduction investment).

Roger Davis and Russel Pillemer stood down from theCentric board at the end of June.

Chairman Philip Kelly said the extensive industry

knowledge and experience of Mr Davis and Mr Pillemer(chief executive of Pengana Capital) had been pivotal in thesuccess of the process that led to CHAMP becoming themajority shareholder in Centric Wealth (APE&VCJ, Feb 09).

Former Colonial First State and Challenger FinancialServices chief executive Chris Cuffe has been appointed tothe board of CHAMP Private Equity investee companyCentric Wealth Management.

Centric Wealth chief executive Michael Pillemer said: “Chrisbrings with him valuable skills. We are fortunate to be ableto benefit from his deep strategic and investment expertiseas we continue to focus on the needs of our clients.”

Mr Cuffe has more than 20 years experience in the fundsmanagement industry including several years as chiefexecutive of Challenger’s wealth management business, aposition he took after stepping down from the role of chiefexecutive of the parent company. Under Mr Cuffe’s control,the Challenger wealth management business wassubstantially restructured and grew from about $3 billionof funds under management to more than $12 billion.

Since mid-2006, Mr Cuffe has carved out a new career inthe not-for-profit sector and is currently an executive ofSocial Ventures Australia as well as a director of Third LinkInvestment Managers (manager of the Third Link GrowthFund) UniSuper and Arkx Investment Management (a fundsmanagement company that specialises in carbonreduction investment).

Roger Davis and Russel Pillemer stood down from theCentric board at the end of June.

Chairman Philip Kelly said the extensive industryknowledge and experience of Mr Davis and Mr Pillemer(chief executive of Pengana Capital) had been pivotal in thesuccess of the process that led to CHAMP becoming themajority shareholder in Centric Wealth (APE&VCJ, Feb 09).

Investee News

First patients to receive anxiety drugStart-up Australia investee company Bionomics (ASX: BNO)has been granted approval by the Therapeutic GoodsAdministration (TGA) to start human clinical trials for itsanti-anxiety drug BNC210.

The trials are to take place in Adelaide in two stages. Thefirst will focus on safety, any indication of possible sideeffects and its effect on anxiety. The second stage willmeasure the drug’s action on brain activity.

The first set of trials will take place at the Royal AdelaideHospital under the control of Professor Paul Rolan,Professor of Clinical Pharmacology at the University ofAdelaide.

“There have been no fundamentally new and effectivetreatments for anxiety for decades. Of the treatments wedo have, many patients are burdened by side effects,” saidProfessor Rolan. “BNC210 appears to be entirely novel inits action and remarkably free of the sedation associatedwith other treatments for anxiety.”

Anxiety is a common, debilitating condition that affectsmillions of people and has an estimated market value ofUS$5-12 billion worldwide.

Pre-clinical trials have shown BNC210 should not causedrowsiness or impair memory or motor function. Testshave also shown the drug to be fast-acting.

Bionomics CEO and Managing Director, Dr Deborah Rathjensaid the trials should be completed by the end of the year.

“The clinical trial approval marks a major achievement forBionomics, which in the space of two years, hasprogressed two drug candidates to clinical trial,” she said.


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“The market for anxiety drugs is enormous and BNC210appears to have key features of competitive advantagewhen compared with existing treatments. We are excitedby the prospect that BNC210 may represent an advance inthe treatment of both acute and chronic forms of anxiety.”

Investment Activity

UK firm in outback investmentUK-based private equity firm MG Capital plc has investedabout US$12 million in outback land over the last threeyears to harvest feral goats.

The investment was outlined by MG Capital chairman PeterHannen in an interview with a Bloomberg reporter at therecent World Agri Invest Congress in London.

Mr Hannen did not mention the location of the landholdings but he said suitable land for harvesting goats wasavailable in Australia at low cost.

“Is it an industry or a hobby?” he asked rhetorically. “We’renot losing money. That’s a good start,” he answered.

Mr Hannen noted that Australia exported 27,000 tonnes ofgoat meat last year and said MG Capital expected to buildup to send to slaughter about 50,000 goats a year from itscurrent land holdings.

He said MG Capital expected cash returns from the projectto reach 8-12 per cent over time.

This is a start-up market,” he added. “It’ll be five yearsbefore we know if there’ll be a goat industry.”

Mr Hannen said MG Capital had also invested US$5-US$6million in farming merino sheep for wool in Uruguay whichhad generated post tax returns of 14 per cent in the fiveyears through to May 2008.

The two projects, he said, showed that low rainfallmarginal land had potential for similar returns oninvestment as more productive land.

Investee News

KKR-backed Seven moves on rivalKohlberg Kravis Roberts (KKR) investee Seven Network andentities associated with chairman Kerry Stokes haveincreased their stake in James Packer controlledConsolidated Media Holdings (ASX: CMJ) to more than 19.9per cent as a result of spending more than $260 million inrecent on-market purchases.

Following Seven’s first large purchase, Mr Packer’s privateinvestment company Consolidated Press Holdings andassociated entities entered the market to increase theirholding to 40.8 per cent.

Under takeover law, Seven Network and associates cannotnow buy further large parcels of Consolidated Mediawithout launching a takeover offer, a condition that alreadyapplied to Consolidated Press Holdings and associates.

The move by Seven is widely seen as part of a strategy forit to become a player in pay TV, a long held ambition of MrStokes. Consolidated Media shares ownership of Foxtelwith News Limited and Telstra.

Seven had its own pay TV operation C7 but that failed in2002. Seven then brought court proceedings claiming thatfailure was engineered by News Limited, Foxtel or PBLMedia (owner of the Nine Network) that is now owned byCVC Asia Pacific and CVC Capital Partners. The claim wasdismissed in 2007.

Consolidated Media was the target of a proposed privateequity bid last year when Lachlan Murdoch tried to get USfirms SPO Partners and then Providence Equity Partners toback him in bids for the company.

KKR invested about $735 million in 2006 (AVCJ Dec 06) fora 50 per cent interest in the Seven Network, a deal thatinvolved Mr Stokes substantially selling down his stake. Henow owns about 48.4 per cent.

News

New Zealand urged to keep supporting venture sector A review of New Zealand’s venture capital industry hasrecommended the government should continue its supportof the sector to build on “encouraging but modest” growth.

The review, by international consultancy firm LECG, wascommissioned by the government financed New ZealandVenture Investment Fund (NZVIF).

A final report, co-authored by Harvard Business Schoolprofessor Josh Lerner found:

Venture capital has the potential to contribute verysignificantly to New Zealand’s economic growth, and to thelevel of innovation and efficiency of its young and emergingbusinesses.

Venture capital serves as an important complement topublicly and privately funded R&D, university and CrownResearch Institute research programs.

Developing a viable venture capital industry is a long termtask, and is not easy. It requires prolonged commitmentfrom those involved directly and from policy makers.

Over recent years the growth in New Zealand’s venturecapital activity has been encouraging but modest.

Government should maintain a steady and predictablepolicy with respect to the development of a venture capitalmarket. The global financial crisis will have slowed theability of the NZVIF-backed venture capital funds to growand exit their investee businesses over the medium term.

Venture capital fund managers may find it challenging toraise further funds without government assistance.

Government support is likely to be necessary for at leastthe next generation of funds. If this is accepted, it suggests


the government should be viewing its involvement in thissector for at least another fifteen years (assuming eachgeneration of fund is about ten years).

NZVIF chief executive Franceska Banga said the reportdemonstrated the multiplier effect resulting from thegovernment investment.

“To date the government’s share of investment intoventure capital funds has been around $70 million spreadover six years. That investment has been the catalyst forover $300 million of private investment into promising NewZealand companies.

“The report shows that New Zealand’s venture capitalmarket is growing and our standing based on internationalbenchmarks is improving. I hope the report contributes tothe debate on how to build further progress in thedevelopment of a thriving venture capital industry in NewZealand.”

Investment Activity

‘Upstart’ fund makes first investmentThe Future Capital Development Fund has made its firstinvestment since being recapitalised by a group headed byMelbourne online entrepreneur Domenic Carosa.

The Pooled Development Fund (PDF) has invested$220,000 for 40 per cent of OurWishingWell.com, an onlinegift registry business that enables visitors to contributemoney towards gifts via an innovative virtual gift system.The system handles all major currencies and operatesaround the clock. The company also licenses its technologyon a “white label” basis to other businesses and alreadyhas several other online gift registries using thetechnology.

Chief executive Joseph Renzi says the service is quick andeasy, safe and secure and has been used by more than

33,000 people through OurWishingWell.com over the last24 months.

“This business is one of the most scalable business modelsI have seen and our capital will be used to fund furthergrowth of the business,” said Mr Carosa who is to join theboard.

Our WishingWell.com chief executive Joseph Renzi said heexpected the investment to help ramp up internationalexpansion and also to expand an already successfulwedding product into other gift areas such as birthdaysand fundraising.

With DWS founder Danny Wallis’ company DSAH Holdings,Mr Carosa took over Future Capital Development FundLimited in December last year (APE&VCJ, Feb 09) with theintention of building up a portfolio of online “upstart”businesses. Other major shareholders are Simon Baker, ex-chief executive of realestate.com.au and AndrewAbercrombie, founder of Flexirent.

Through dominet digital Corporation and DSAH Holdings,Mr Carosa and Mr Wallis are also building up a separateportfolio of online investments, the latest acquisition ofwhich was the Ask Any Question SMS service 199-Query.This followed dominet’s acquisition of Australia’s largestAsk Any Question Service, 199-Bongo, from Commquest(ASX: CQU) for $2.35 million in April.

NEWS


FEATURE

BENEFITS OF PRIVATE AUCTIONS

A properly run tender sale process can help private equityfunds achieve the best price and most favourable terms fortheir portfolio investments by generating competitivetension. This article sets out the tender sale process (alsoknown as a private auction) and considers some of the keyissues for the management of the process, divided into thefollowing sections:

• Overview of process

• Pros and cons for sellers

• Successfully hosting and managing a Virtual Data Room

• When can a seller disregard bids?

• Break fees

OVERVIEW OF PROCESSThe tender sale process varies between each transaction,but generally involves the following phases:

• Flyer: The seller distributes a confidential flyer toprospective buyers (which may include other privateequity groups) describing the business for sale.

• Confidentiality Agreement/Non-Disclosure Agreement& Information Memorandum: On executing aConfidentiality Agreement, interested prospective biddersare issued with an information memorandum (IM), whichsummarises all information pertinent to a potential buyer.

• Expressions of interest: Prospective bidders are invitedto lodge non-binding expressions of interest (EOI). Adeadline for lodgement is set by the seller. The EOIs arebased on the bidders’ review of the IM and their

independent research, as bidders are not generallypermitted to conduct formal due diligence at this stage.

• Shortlist of bidders: The seller and its advisers reviewthe EOIs and reduce the number of bidders (generallywithin the seller’s range of selling prices), with the aim ofmaintaining competitive tension whilst keeping thegroup manageable through the remainder of the process.From a risk perspective, the greater the number ofparticipants, the greater the risk that news of the sale willbe leaked to management, customers, suppliers andstaff, which may damage the seller’s reputation.

• Due diligence: Bidders are then invited to conduct formaldue diligence and provided with a draft sale and purchaseagreement (S&P). During the due diligence phase, anonline virtual data room (VDR) is typically kept open andthe seller’s management team will give presentations onthe business and answer bidders’ questions.

• Binding bids: The seller invites the bidders to makedefinitive binding bids. Generally, the seller will requirebinding bids to be unconditional, in particular as to duediligence and finance. A conforming bid will often requirebidders to lodge a full mark-up of the S&P.

• Execution of S&P: Finally, the board of the seller selectsa successful bidder and the S&P is negotiated and signed.

• Variations: Within this general framework there aremany possible variations. To maintain competitivepressure, sellers may:

1. require several rounds of revised indicative bids;

2. continue to negotiate with two bidders right up untilthe S&P is signed;

3. run an IPO process in parallel.

PROS AND CONS FOR THE SELLER

AdvantagesMaximise Competition

The auction process maximises competitive tensionbetween the bidders and generally ensures the bestpossible price for the seller.

Information Control

The seller controls the due diligence process to restrict theamount and type of data disclosed to bidders. The sellermay actually withhold critical information until the finalphases of the process, usually on the basis that it is highlycommercially sensitive (such as schedules of prices orcritical supply contracts). Further, confidential negotiationand due diligence is far less disruptive to the targetbusiness as the bidders are generally prohibited fromapproaching customers, shareholders and employees, whomight otherwise become anxious about the sale.

Time Control

The seller controls the timetable and will often forcebidders to move through the due diligence and negotiationprocess much faster than they would otherwise. A VDRwith a limited open time helps maintain the pace.

Nick Humphrey *


Pressure on Bidders

The competitive process discourages bidders from

amending the S&P unless the changes are fundamental to

their bid. The seller can play off bidders against each other

when negotiating the S&P, delaying commitment to any

particular bidder until key terms have been agreed.

VDR: Access to information

The use of virtual data rooms potentially allows sellers to

engage an unlimited number of bidders from around the

world in the due diligence process. Virtual data rooms

allow sellers to control and monitor bidder access to

documents, permitting exclusion of failed bidders and

wider access to short-listed bidders, often at a lower cost

than a physical data room.

Directors Duties

Obtaining a fair and reasonable price for the business is a

fiduciary responsibility of directors to shareholders. The

competitive process provides support for the seller’s board

of directors (or a fund manager) when presenting the

proposed transaction to the board as the best available

transaction.

International Bidders

The VDR allows a seller to involve offshore bidders in the

auction process. A foreign investor will be likely to view the

target as an entry level vehicle into the local market and its

valuation may reflect a market entry "premium" *, thereby

increasing the potential sale price.

Exit

With the high cost of public exit transactions, many sellers

find that an tender sale is the best option to liquidate their

investment.

DisadvantagesPrice Discount

Bidders may discount their bid price to:

• provide protection against perceived risks arising out thelimited time and information available for due diligence;

• reflect the fact that the terms of the S&P favour the sellerrelative to a private treaty transaction.

Reluctant bidders

Since the likelihood of the bid succeeding is lower(compared via a private treaty deal) and bidders mustexpend significant time and money to participate in theprocess:

• some potential bidders will simply refuse to participate(thus reducing the potential pool of buyers);

• some bidders will only participate if they are grantedexclusivity early on.

Retrading Risk

A key risk for sellers is that after exclusivity is granted thebidder re opens negotiations on price and/or key terms(known as “retrading risk”). To minimise this risk, somesellers require a conforming bid to include a signed versionof the S&P, or they run two bidders all the way through theprocess. The “two finalists” route is demanding andexpensive for all concerned and some bidders may beunwilling to participate.

Limited Market

An tender sale is not suitable in all cases, and particularlynot where there are few potential bidders.

Higher cost

In a tender sale, the seller will be responsible for providingmultiple bidders with access to due diligence material and

responding to their queries. Costs escalate when a seller’slegal representatives and financial advisors negotiate withmore than one bidder, particularly with respect to the S&P.

Confidentiality Risk

Although the IM and accessible due diligence material isprovided to bidders under a confidentiality agreement, it ismore difficult to maintain the secrecy of the proposed salewhere numerous parties and their advisors and employeesare involved. In some cases, a bidder (particularly a tradecompetitor) may only be interested in finding outinformation about the target. The seller won’t necessarilybe able to discover the source of a leak to take action forloss. If not managed effectively, breaches of confidencemay damage the business, particularly if the sale isabandoned.

SUCCESSFULLY HOSTING ANDMANAGING A VDRThis section considers some of the key issues for managinga virtual dataroom (VDR), including time period, security,access rights and procedures.

Time period

From the outset, it is essential that the seller carefullyoutline the scope of the due diligence to be undertakenand set realistic materiality levels before due diligence iscommenced. The seller should open the VDR to potentialbidders for a pre-determined time period (for examplethree weeks) to keep the process moving. A long duediligence process generally translates into higher costs,increased disruption to management and the business andhigher risk of information leaks.

Suggested due diligence folders for the VDR:

1. Corporate

2. Assets (other than real property)

FEATURE


3. Intellectual Property

4. Material Contracts

5. Real Property

6. Employees

7. Superannuation and Pensions

8. Insurance

9. Litigation

10. Related Party Transactions

11. Restrictive Trade Practices

12. Risk Management

Security

VDRs are traditionally secured with a username andpassword for each user together with a policy requiringthose details not to be shared with others. Additionalsecurity options available to sellers limiting each bidder’saccess to an identified computer.

The seller may restrict each bidder’s ability to printdocuments from the VDR. As reviewing documents onscreen can be taxing, it may be fairer to allow bidders toprint non-sensitive documents and to restrict otherdocuments to ‘read onscreen only’. The seller may alsowithhold commercially sensitive documents and releasethem in the later stages of the deal to serious bidders whoseintentions are less ambiguous (the “black box” method).However, if the seller chooses to use a black box, the sellermust correctly represent to bidders the terms andtimeframes for release of the information it contains.**

VDR AND Q&A PROTOCOLThe seller should require each bidder group to execute aVDR and Q&A Protocol (Protocol), setting out the VDRaccess rights and procedures. The Protocol should:

• cover areas such as the form and nature of questionssubmitted;

• require a bidder to nominate one person to be the solecontact for requisitions; and

• reserve the seller’s discretion to vary the Protocol toallow it to make documents and answers available tosome but not all bidders, and to enter and concludenegotiations with any bidder without notice to any other.

WHEN CAN A SELLER DISREGARD BIDS?There are many justifiable reasons why a seller mightaccept a bid which is not the highest priced bid. If this islikely to be the case it is imperative that the seller carefullymanage the sale process.

A dissatisfied bidder may try and argue that terms of goodfaith and fairness are implied in the IM, Flyer andProtocol.*** It is therefore important that the seller ensureall documents are drafted to give the seller maximumflexibility when dealing with bidders, including the ability to:

• make documents, questions, answers and reportsavailable to one bidder and not others;

• answer one bidder’s questions in priority to others; and

• enter into and conclude negotiations with any bidderwithout notice to any other bidder.

It is also important that the seller and its representativesand advisors do not make written or oral representationsto the bidders which might infer that the highest priced bidwill succeed, such as a statement that the sale’s principalobjective is to maximise price, or to verbally imply thatstakeholder interests will result in the bid with the highestreturn winning.

BREAK FEESA potential way to minimise the cost and time risk for aprivate equity fund to bid is for the seller to agree to a

break fee. The seller can run the process with twopreferred bidders up to or as close as possible to anunconditional S&P, having agreed to reimburse the loser forall reasonable costs incurred to that point. This maximisescompetitive tension but minimises the costs of the PE fundto participate in the process.

WHAT IS A BREAK FEE?A “break fee” is a fee the seller promises to pay to a bidderif the bidder is unsuccessful. It is also known as an“inducement fee” in the UK, or as a “termination fee”,“work fee” or “broken deal fee”. Break fees are designed tocompensate unsuccessful bidders for the due diligenceand advisory costs incurred in participating in the biddingprocess.

Break fees have become a commonplace feature of USmergers and acquisitions and many UK private equityhouses require a break fee arrangement before carrying outdue diligence. Whilst Australian private equity market wasslower to pick up on this trend, break fees are now anestablished part of the private equity landscape in Australia.

The quantum of the break fee is generally equivalent to thecosts incurred by the bidder. In the US, however, break feeson bids involving unlisted entities can be as high as 3 percent or 4 per cent of the bid value.

As a general rule, the further that bidders are asked to goin the process without exclusivity, the more reasonable itis to request compensation in the form of break fees if thebidder is ultimately unsuccessful. By leveraging exclusivityagainst risk coverage in this way, bidders gain someprotection.

Break fees have been criticised as potentially deterringcompetitive offers from third parties and as unnecessarilypressuring the sellers to accept a bid without consideringcompetitive offers.

FEATURE


REGULATION OF BREAK FEESBreak fees involving public companies are subject to

review by the Australian Takeovers Panel (but are not

regulated in private deals). The panel has published a

guidance note, setting out the principles determining

whether a break fee will be considered unacceptable. The

panel’s primary concern is to ensure that a takeover takes

place in an efficient, competitive and informed market.

Accordingly all break fees must be disclosed as early as

possible in the process. The panel may disallow a break fee

if it considers the fee to be so large that it unduly pressures

the shareholders to accept the bid. In general:

• the fee can include the bidder’s reasonable third party

costs and reasonable internal costs (and in some cases

the bidder’s reasonable opportunity costs);

• a fee akin to a success fee or a reimbursement of thebidder’s advisers success fees will be disallowed; and

• as a general rule, a fee of 1 per cent of the bid value willbe allowable (“safe harbour”). However in small deals afee of more than 1% may be reasonable, whereas inextremely large deals, 1% may be a substantial sum anddeter competition.

In the Ausdoc Group takeover by ABN Amro, the panelfound that a break fee of 1.87 per cent of the bid value wasnot anti-competitive or unreasonable, where the fee hadbeen agreed after a long public auction process conductedby the target in seeking a buyer for 100 per cent of itsshare capital.

DRAFTING A BREAK FEE PROVISIONIt is important to note that in Australia, a contract whichrequires a party to pay, on breach of the contract, an

amount of money which is not a genuine pre-estimate ofthe loss likely to be suffered, will be unenforceable as thecourts regard the payment as a penalty.

* Nick Humphrey is a partner at Deacons and head ofprivate equity. Nick acts for some of the leadinginstitutions investors and private equity funds inAustralia (AMP, Macquarie, Archer, Investec, ANZ) andhas advised on over a 100 private equity investmentsand buyouts.

Nick gratefully acknowledges the assistance ofBrianna Parbury from Deacons in researching thisarticle.

FEATURE

Footnotes:

* Redmayne D and Mehta S, “Domestic versus Foreign Acquirers: Managing an International Sale Process” 2008 International Mergers & Acquisitions: Creating Value in an IncreasinglyComplex Corporate Environment, Financier Worldwide 2008

** In 2006 the tender sale of the “Cleanaway” business of Brambles Industries Ltd to Kohlberg Kravis Roberts & Co (KKR) aroused the interest of ASIC after Transpacific announced thatit was dissatisfied with the process and was reviewing its options. A “black box” of information was withheld from all bidders in the initial bid stages. Transpacific claimed that it wasrepresented that 2 or 3 bidders would get access to the “black box” before final bids were submitted, that this did not occur before KKR was announced as the successful bidder, andTranspacific was not given a chance to improve its offer. No further investigations were undertaken by ASIC.

*** As was done in Australian Agricultural Co Ltd v AMP Life [2003] FCA 1038.

Resources:

Michael Thompson, Financier Worldwide, ”The auction process: purchaser protection strategies”, February 2004

Paul M Mahoney Jr & Ragan L Ferraro, Boston Business Journal, “Auctions are becoming more prevalent in midmarket deals”, 2004

Robert Seber, The Deal, “Protecting against “retrading” in the private M&A Auction”, December 2003


When Chris Golis wrote the first edition of Enterprise &Venture Capital – a Business Builder’s and Investor’sHandbook about 20 years ago he introduced the concept ofventure capital to many readers, including the reviewer.

I remember wondering whether this seemingly highlytheoretical American model of business development couldbe translated to the Australian environment. But, at the sametime I felt exhilarated by the thought that companies withpotential for high growth could be winnowed out from themany clamouring for investment and then these could befast-tracked through the stages of development generatinghigh returns for investors in the process.

The recent publication of a fifth edition demonstrates both thefact that the concept of venture capital has been accepted andthat on-going education on the subject is a continuing need.

Chris Golis retired from venture capital in 2007 and as aresult a decision was made to add two new co-authors tohelp produce this edition, Patrick Mooney and TomRichardson. This has helped revitalise the publication. Bothhave considerable experience and on-going involvementwith high-growth companies, Patrick as a marketer and Tomas a strategy and corporate finance advisor.

But it must be said much of the subject matter remains thesame as the first edition and so it should. The basic issueswhich prompted Chris to write the book have remainedunchanged for succeeding generations of entrepreneurs.These are that there are only specific types of companiesworth considering for venture capital investment and onlyspecific types of individuals who should seek such investment.And, no, as readers of this Journal well understand but the

wider readership for the book still does not, these are notnecessarily companies based on original ideas or peopleprepared to put the most effort into developing them.

Enterprise & Venture Capital establishes these points in justenough detail before getting down, quite literally, to business.From that point on, it systematically examines the issues thatall entrepreneurs who should be seeking venture capital – thereaders who can gain most benefit from the book – will face.

Telling it like it is, the book points out that there no lack ofinvestment capital for early stage businesses in Australia (thesituation is very different for developing businesses). A bigproblem facing the Australian venture capital community isthat there is a lack of good early-stage investmentopportunities. That is investment ready early stage businesses– “innovative early stage businesses with global potential runby outstanding entrepreneurs and presenting the opportunityfor returns in the order of five to ten times money investedwithin three to seven years,” as the book puts it. Yes, this is atall order but it is what is needed by investors for adequatereturn on risk, i.e. the very real risk that the entire investmentin a particular investment may be lost.

Importantly, the book devotes considerable space tooutlining the process of planning the staging of investmentrequirements, seeking appropriate but not excessiveamounts in each round, achieving the stated objectives andthen seeking further funding from the existing plusadditional investors. As noted, “fundraising never stops” andneither does equity dilution, another fact entrepreneurs finddifficult to accept. However, readers of this book should be

left in no doubt of the advantages of accepting dilution ofownership as corporate value is significantly increased.

Sensibly, the book does not go into extensive detail on writinginitial business plans and preparing accompanying financialanalysis. Plenty of books deal specifically with these topics.Rather it focuses on some essential principles such as whoshould write the plan – the entrepreneur and his or her team.“The business plan is the demonstrable proof of howthoroughly entrepreneurs understand their business. If theycannot write about the business it is unlikely they will be ableto run it.” And what the financial analysis should focus on,basic predictions such as how long it will be before thebusiness should become cash flow positive and in what yearnet profit after tax will exceed $3 million.

A lot more space is devoted to developing an operatingbusiness plan, the dynamic document that keeps thebusiness on track and moving forward plus dealing withventure capital firms, investors and advisors.

Most important of all, the book stresses the importance ofplanning an exit, something that investors will want torecognise when they first consider investing.

Finally, a significant part of the book is devoted to somesignificant Australian venture capital success stories. Asever, there is plenty to learn by example.

Outside Chris Gollis’ former office (now the offices of KestrelCapital) an early prototype of ResMed’s anti sleep apnea deviceis displayed; an appropriate reminder of just what can beachieved with the help of the advice contained in Enterprise &Venture Capital – A Business Builder’s And Investor’s Handbookpublished in paperback by Allen & Unwin, RRP $59.99.

FEATURE

BOOK REVIEW: Enterprise & Venture Capital — A Business Builder’s And Investor’s HandbookAdrian Herbert

• 21 August: Environmental Social Governance Issuesin Finance. Presenters Amanda McClusky and DavidBell of Colonial First State Global Asset Management.Sydney CBD, Macquarie University Applied FinanceCentre. Web: www.mafc.mq.edu.au

• 27-28 August: Modelling and Valuation for Small &Medium enterprises. Melbourne. Macquarie UniversityApplied Finance Centre. Web: www.mafc.mq.edu.au

• 4 September: Advanced VaR Modelling. Sydney CBD,Macquarie University Applied Finance Centre. Web:www.mafc.mq.edu.au

• 9-10 September: Financial Modeling & Valuation.Sydney CBD. Macquarie University Applied FinanceCentre. Web: www.mafc.mq.edu.au

• 14-16 September: US National Association of SeedVenture Funds annual conference. Oklahoma City, US.Web: www.nasvf.org

• 14-15 September: Strategic Risk Management.Melbourne. Macquarie University Applied FinanceCentre. Web: www.mafc.mq.edu.au

• 21-24 September: SuperReturn Asia 2009. LPfocused private equity event. Speakers include TimDraper, founder Draper Fisher Jurvetson; JoeSkrzynski, founding partner CHAMP Group. ICBIConferences. Web: http://www.icbi-events.com

• 23-24 September: Resources Industry InvestmentAnalysis. Macquarie University Applied FinanceCentre. Web: www.mafc.mq.edu.au

• 21 October: Eco Investor Forum 2009. Hilton Hotel,Sydney. New investment forum for environmentalinvestment companies and funds managers. Web:www.ecoinvestor.com.au

• 27-30 October: AusBiotech 2009: MelbourneConvention & Exhibition Centre. Web:www.ausbiotech2009.com.au


SHARES CHART COMING EVENTS

AUSTRALIAN LISTED PRIVATE EQUITY FUNDS Last sale at end of month

Investors/ Month $ Jul-09 Jun-09 May-09 Apr-09 Mar-09 Feb-09 Jan-09 Dec-08 Nov-08 Oct-08 Sep-08 Aug-08

PRIVATE EQUITY ANDVENTURE CAPITAL FUNDS

Acrux 1.19 1.135 1.21 0.58 0.54 0.445 0.54 0.48 0.465 0.68 94 1.15

Authorised Investment Fund 0.03 0.027 0.025 0.034 0.034 0.034 0.034 0.034 0.034 0.057 0.057 0.057

Options Mar 2010 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01

Options Feb 2013 0.013

Biotech Capital 0.2 0.16 0.19 0.19 0.15 0.098 0.085 0.115 0.11 0.1 0.145 0.17

China CenturyCapital 0.085 0.06 0.045 0.042 0.04 0.03 0.021 0.035 0.036 0.04 0.055 0.05

CVC 0.58 0.525 0.55 0.56 0.5 0.35 0.415 0.62 0.72 0.8 1 1.04

Cytopia 0.069 0.073 0.094 0.12 0.13 0.09 0.11 0.18 0.165 0.13 0.16 0.205

Eircom Holdings (ex B&B Capital) 1.15 1.145 1.075 1.155 0.785 1.25

First OpportunityFund 0.44 0.45 0.44 0.4 0.4 0.4 0.4 0.4 0.4 0.5 0.5 0.5

Grandbridge 0.04 0.045 0.041 0.04 0.02 0.02 0.025 0.054 0.045 0.045 0.047 0.047

LinQ Resources 0.6 0.55 0.525 0.49 0.46 0.35 0.35 0.045 0.35 0.42 0.7 1.01

Lion Selection Group 1.36 1.33 1.05 0.98 1.04 0.855 0.635 0.78 0.92 1.23 1.49 1.505

Options Apr 2009 0.01 0.01 0.011 0.017 0.025 0.04 0.11 0.1

Macquarie CAG delisted 3.37

Oceania Capital Ptnrs(ex Allco Equity) 2.6 2.14 2.56 2.55 1.95 2 2 3.52 1.7 1.8 1.95 1.92

Souls Private Equity 0.083 0.077 0.083 0.08 0.085 0.07 0.09 0.1 0.079 0.11 0.125 0.16

Options Dec 2009 0.001 0.001 0.001 0.001 0.001 0.001 0.002 0.004 0.002 0.003 0.005 0.003

Strategic PooledDevelopment 0.14 0.12 0.18 0.17 0.21 0.17 0.17 0.17 0.17 0.17 0.18 0.15

BUYOUT FUNDS

HGL 0.865 0.81 0.86 0.7 0.68 0.67 0.85 1 1.05 1.33 1.51 1.66

FUNDS OF FUNDS

ING PEAL 0.19 0.17 0.29 0.3 0.195 0.21 0.32 0.38 0.5 0.56 0.66 0.77

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