australian venture capital association limited

Australian Venture Capital Association Limited

Yearbook 2002

Industry statistics for the year ending June 30, 2002

Prepared by

Australian Venture CapitalAssociation Limited

2002 Yearbook

An Analysis of Australian Venture Capital

Prepared by Thomson Venture Economics on behalf ofthe Australian Venture Capital Association Limited

Note: All figures are in $AUD unless otherwise stated.

Thomson Venture Economics

10/F Gloucester TowerThe Landmark, 11 Pedder StreetCentral Hong KongPhone: (852) 2522-4159Fax: (852) 2530-2920http://www.ventureeconomics.com

Asia team

Business Development Manager:Toh Lark Lim(852) [email protected]

Research Manager:Sol Flores(632) [email protected]

Research Team:Lia Castillo, Ana Chiong, Richie Fernandez, Carlo Gilladoga, Liezl Navarro, Jonnel Porteza,Aldrin Reyes,

Australian Venture Capital Association Ltd.

Level 5, 88 Phillip StreetSydney, NSW 2000Australia

Phone: (612) 9251-3888Fax: (612) 9251-3808

http://www.avcal.com.au

Chief Executive:Andrew [email protected]

Chairman:Justin [email protected]

Deputy Chairman:Patrick [email protected]

Council Representatives:Roger Buckeridge, Allen & Buckeridge Pty LtdPeter Chapman, Accretion Investment Mgt Pty LtdRajeev Dhawan, Colonial First State Private EquityPeter Dowding, Deutsche Bank – DB Capital PartnersPeter Gold, GS Private Equity Pty LtdChris Golis, Nanyang Management Pty LtdQuentin Jones, Equity PartnersJ.P. Kaumeyer, ABN AMRO Capital InvestmentJulian Knights, Ironbridge CapitalJohn Murray, Technology Venture Partners Pty LtdMichael Panaccio, Starfish Ventures Pty LtdGreg Smith, AMP Henderson Global InvestorsSu-Ming Wong, CHAMP Ventures Pty Ltd

About AVCAL

The Australian Venture Capital Association Limited (AVCAL) is the national association that represents theventure capital industry’s participants, promotes the industry and encourages investment in growing businessenterprises.

Membership comprises venture capital firms, investors, banks, incubators, angels, corporate advisors, accoun-tants, lawyers, government bodies, academic institutions and other service providers to the industry.

AVCAL’s venture capital members represent most of the active venture capital firms. These firms providecapital for seed and pre-seed ventures, early stage companies, later stage expansion, and finance for manage-ment buyouts and buy-ins of established companies. There are 51 investor members with $6 billion invested oravailable for investment.

About Thomson Venture Economics

Thomson Venture Economics, a Thomson Financial company, is the foremost information provider for equityprofessionals worldwide. Venture Economics offers an unparalleled range of products from directories toconferences, journals, newsletters, research reports, and the Venture Expert™ database. For over 35 years,Venture Economics has been tracking the venture capital and buyouts industry. Since 1961, it has been arecognized source for comprehensive analysis of investment activity and performance of the private equityindustry. Venture Economics maintains a long-standing relationship within the private equity investment com-munity, in-depth industry knowledge, and proprietary research techniques. Private equity managers andinstitutional investors alike consider Venture Economics information to be the industry standard. For moreinformation about Venture Economics, please visit www.ventureeconomics.com.

About Thomson Financial

Thomson Financial is a US$2 billion provider of information and technology solutions to the worldwide commu-nity. Through the widest range of products and services in the industry, Thomson Financial helps clients inmore than 70 countries make better decisions, be more productive and achieve superior results. ThomsonFinancial is part of the Thomson Corporation (www.thomson.com), a leading provider of integrated informationsolutions to business and professional markets worldwide. The Corporation reported 2001 revenues of US$7.2billion and its common shares are listed on the New York and Toronto stock exchanges

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Table of Contents

Letter from the Australian Venture Capital Association Ltd.......7

Milestones in Australian Venture Capital Industry......................9

Australian Nobel Laureates in Science.....................................11

Some Australian Firsts in Science and Innovation.....................13

A New Era for Australian Venture Capital................................17

How Australia’s New Rules Will Work.....................................19

A Better Outlook for the Economy............................................23

Building up Biotech..................................................................25

Technology Leadership.............................................................27

Australian Venture Capital in 2002:A Perspective.......................29

Australian Fund Performance.....................................................47

Glossary of Terms.....................................................................57

Acknowledgement of Survey Respondents. ..............................61

15 April 2003

Dear Reader,

In December 2002, Federal Parliament passed the Venture Capital Limited Partnership (VCLP) legislation, making 2002 amomentous year for the industry.

The VCLP legislation gives VC Limited Partnerships flow through status for tax purposes, provides CGT exemption for awide class of foreign investors, and creates a strong alignment of interests between the GP and the LPs, by providing thatthe carried interest shall be taxed in the hands of the GP at the discount CGT rate of 24.25%. Funds of Funds can alsobenefit from the same structure.

The VCLP legislation aligns Australia with world’s best practice. AVCAL acknowledges the leadership and courage of theAustralian Government in delivering this legislation, and acknowledges the magnanimity of the Federal Labor Oppositionand the Australian Democrats for their support of the legislation in the Senate.

The numbers published in this, the 2002 Annual Report, are the result of the 4th annual Thomson Venture Economicssurvey. Readers should be aware that these numbers are generated by Thomson Venture Economics on the basis of rawdata submitted by AVCAL members. While AVCAL requires its members to complete the survey, AVCAL is not able toverify the accuracy of the raw data submitted to Thomson Venture Economics. In some circumstances therefore, therecould be statistical anomalies due to incomplete or unverifiable data.

The good news is that the next AVCAL / Thomson Venture Economics survey will be conducted jointly with the Austra-lian Bureau of Statistics, the Federal Government’s Statistician. This will ensure that the quality of the raw data is of thehighest order, as compliance with the Government survey is required by law.

The Australian economy continues to be a stand-out global performer, consistently recording GDP growth of more than3.5% for each of the last 5 years.

There are five reasons why Australia is now top of mind with global investors:

1. Sophisticated private equity infrastructure.

2. Integrity - both Corporate & Government.

3. Transparency – AVCAL moving to adopt world’s best practice Valuation Guidelines during calendar 2003.

4. Critical mass of funds under management.

5. World class entrepreneurship skills.

AVCAL’s 9th annual conference staged in October 2002 attracted a capacity audience of 550 delegates, and featuredprominent international speakers including Herbert Mann (TIAA-CREF), Brooks Zug (HarbourVest), and Jon Moulton(Alchemy Partners).

The Australian venture capital industry continues to build upon solid foundations, and presents a compelling case toinvestors looking for solid returns.

We extend our thanks to Jesse Reyes and his team at Thomson Venture Economics for their continuing support.

Yours sincerely,

ANDREW GREEN

Chief Executive

Australian Venture Capital Association Limited - 2002 Yearbook

Thomson Venture Economics 9

Milestones in the Australian Venture Capital Industry

1975Federal Government reduces international tariffs by25 per cent, in an endorsement of open internationaltrade and investment.

1984Federal Government launches Management and In-vestment Companies (MIC) program, creating newvehicles for risk capital. Over the next seven years,MIC funds raise approximately $400 million.

1984Deregulation of the Australian financial sector andfloating of the Australian dollar, further embracingmarket economics over government regulations andfixed currency exchange rates.

1985Federal Government introduces substantial tax in-centives on research and development.

1987Formation of the national Australian Stock Exchange(ASX), unifying six state stock exchanges.

1990sArrival of large corporate investors into the risk capi-tal sector, including Acer and Intel.

1990First Cooperative Research Centres launched to de-velop and commercialise research in Australia’s uni-versities. In subsequent years, 67 CRCs formed.

1992Federal Government launches Pooled DevelopmentFunds to replace MIC program. In the subsequentsix years, PDFs invest $155 million in 147 compa-nies.

1850Formation of The University of Sydney, followed byformation of major independent universities in eachstate.

1871Sydney Stock Exchange formed. First step in creationof national, open financial markets.

1901Federation of Australia. Creation of a stable democ-racy, unified economy and independent legal system.

1916Advisory Council of Science and Industry created,the precursor to today’s science and researchorganisations.

1937Formation of the Australian Associated Stock Ex-changes.

1949Creation of the CSIRO, the Commonwealth Scien-tific and Industrial Research Organisation.

1970sDevelopment of state investment corporations to di-rect investment into growth sectors.

1970Formation of the first Australian venture capital fund:International Venture Corporation.

1972Formation of the second Australian venture capitalfund: Enterprise Management of Australia Corpora-tion.


Thomson Venture Economics10

1999The Australian Venture Capital Association and re-search company Thomson Financial/Venture Econom-ics launch a cooperative effort to prepare regular re-ports and statistics on the Australian VC sector.

2000Ten business incubators receive funding from FederalGovernment under Building on IT Strengths (BITS)program, which will channel $158 million into tech-nology and telecommunications development.

2000Fifty-five newly created funds formed. A record $1.0billion raised in 12 months to June 30.

2001Federal Government announces $2.9 billion innova-tion action plan to fund new initiatives in education,research and development. Includes $40 million infunding for the extension of the COMET program and$78.7 million for a pre-seed fund for universities andpublic sector research agencies.

2002Federal government legislates capital gains tax exemp-tion for certain foreign investors, including funds offunds, that invest in Venture Capital Limited Partner-ships.

1999Federal Government introduces major capital gainstax reform, roll-over relief, and zero taxation for USand certain other Pension Funds.

1992Creation of the Australian Venture Capital Associa-tion Limited, AVCAL. In the following year, 17 ven-ture funds manage $507 million.

1993Australian Technology Group formed by FederalGovernment to invest in early stage technology com-panies.

1997Innovation Investment Fund program launched tochannel $130 million of government funding into newfunds.

1998Strengthening role for angel investors, with the for-mation of several angel investor networks.

1998AVCAL records growth of venture capital sector to40 funds with $2.7 billion in funds under manage-ment.

1999Federal Government introduces CommercialisingEmerging Technologies (COMET) program to pro-vide $30 million in funding for individuals and early-stage growth firms to commercialise their work.



Sir William Lawrence Bragg

Nobel Prize in Physics, 1915, for the analysis ofcrystal structures by means of X-rays. Shared theaward with his father, Sir William Henry Bragg.

Born in Adelaide in 1890, William Lawrence Braggremains the youngest person ever to win a Nobel Prize.From 1912 to 1914 he worked with his father on thedevelopment of X-rays, leading to the publication ofX-rays and Crystal Structure in 1915.

Sir Howard Walter Florey

Nobel Prize in Physiology or Medicine, 1945, forthe discovery of penicillin. Shared the award withSir Alexander Fleming and Ernst Boris Chain.

Florey, born in Adelaide in 1898, pioneered researchinto the use of penicillin to treat disease during the late1930s. His team’s report in 1940 described the waypenicillin could help to kill sensitive germs in the livingbody, a breakthrough that was vital in treating woundsduring World War II.

Sir Frank Macfarlane Burnet

Nobel Prize in Physiology or Medicine, 1960, forthe discovery of acquired immunological tolerance.Shared the award with Peter Brian Medawar.

Burnet pioneered several areas of research rangingfrom tissue transplants to the identification of virusesand the practice of culturing viruses in living chickembryos. Born in Traralgon, Victoria, in 1899, Burnetresearched at the Walter and Eliza Hall Institute from1923 and remained there throughout his career.

Australian Nobel Laureates in ScienceSeven Australian scientists have been awarded the Nobel Prize for their research in areas such aschemistry, medicine and physics.

Sir John Carew Eccles

Nobel Prize in Physiology or Medicine, 1963, fordiscoveries related to nerve cell membrane. Sharedthe award with Alan Lloyd Hodgkin and AndrewFielding Huxley.

Eccles led much of the research into synaptictransmission in the central nervous system. Bydiscovering the way electric charges are conductedfrom one cell to another, he advanced the treatment ofnervous diseases and the understanding of the kidney,heart and brain. Eccles was born in Melbourne in 1903.From 1952 to 1966 he was Professor of Physiologyat the Australian National University.

Sir Bernard Katz

Nobel Prize in Physiology or Medicine, 1970, fordiscoveries relating to chemical transmission ofnerve impulses.

Katz was born in Leipzig, Germany, in 1911. Hebecame a naturalized Australian in 1941. In 1955,following service in the Australian army during WW2,he joined the National Institute of Mental Health,where he studied the nerve tranmission.

Sir John Warcup Cornforth

Nobel Prize in Chemistry, 1975, for his work onthe stereochemistry of enzyme-catalysed reactions.Shared the award with Vladimir Prelog.

Deaf for most of his life, Cornforth overcame hisdisability to conduct leading research in chemistry. AfterWorld War II, he researched the way enzymescatalysed change in organic compounds, leading tostudies of the structure of steroids and the biosynthesis



Professor Peter C. Doherty

Nobel Prize in Physiology or Medicine, 1996, fordiscoveries on the immune defence of cells. Sharedwith Rolf M. Zinkernagel.

Doherty helped to discover how an immune systemdistinguishes virus-infected cells from normal cells, abreakthrough that led to a better understanding of themechanisms used by the human immune system at thecellular level. This research was begun in the 1970s atthe John Curtin School of Medical Research inCanberra. Doherty was appointed to the WistarInstitute in Philadelphia from 1975-82, to the JohnCurtin School again from 1982-88 and to St JudeChildren’s Research Hospital in Tennessee in 1988.

of cholesterol. Born in Sydney in 1917, Cornforthgraduated from Sydney University with first-classhonours and a University medal despite being unableto hear lectures.



Some Australian Firsts in Science and Innovation1838Pre-paid postage World first issued by NSW PostOffice.1843Grain stripper John Ridley & John Bull, SouthAustralia. Strips grain head from stalk and delivers itinto a bin for winnowing.1850Refrigeration plant Geelong publisher, JamesHarrison, built world’s first mechanical refrigerationplant.1876Stump-jump plough Robert Bowyer Smith fromSouth Australia’s Mallee country developed aplough that could jump over stumps and stones,instead of being caught and damaged by them.1882Stripper harvester Conceived by Hugh VictorMcKay from Drummartin, Victoria when just 17years old. Harvesting machine that can strip, thresh,winnow and bag grain in one continuous operation.1884Box kite Sydney aeronautical inventor, LawrenceHargrave, conducted experimental flights with boxkites, pioneering the way for heavier than air flight.1885Telephane Henry Sutton, Victoria. Forerunner ofthe television.1886Windmill James Alston built the first all-steelcircular windmill as a source of power for liftingunderground water to the surface1889Electric drill Arthur James Arnot from Melbournepatented the world’s first electric drill.1889Radial rotary engine Howard Hargrave devel-oped an engine with revolving cylinders attached topropellor blades and powered by compressed air. Itplayed a major part in the development of aviation inEurope.

1897Differential gears David Shearer, South Australia,built a steam car with a differential inside left rearwheel hub.1898Teleprinter Donald Murray, Sydney, invented theteleprinter for recording messages onto a tape.1903Froth flotation process Charles Potter andGuillaume Delprat, NSW, developed a process forseparating minerals from rock by flotation.1905Thrust bearing A.G.M. Michell invented the tilt-pad thrust bearing which revolutionised thrusttechnology.1906Feature film The world’s first feature length film,more than one hour long, The Story of the KellyGang was made in Australia and screened inMelbourne.1906Surf-lifesaving reel Invented by Lyster Ormsby,first Captain of the Bondi Surf Lifesaving Club. Firstperson to be rescued was Charlie Smith in 1907. Helater became the famous aviator, Sir CharlesKingsford Smith.1907Xerography Professor O.U. Vonwiller at TheUniversity of Sydney developed a dry-copy imagingprocess, the forerunner of Xerox copying.1910Hume pipe Walter Hume invented the spun con-crete pipe, made using a centrifugal process whichexpels the water and makes a dense, strong pipe.1913Automatic totalisator George Julius invented asystem to display odds and automatically calculatedividends for race meetings.1924Car radio The first car radio was fitted to anAustralian car built by Kellys Motors in New SouthWales.



1925Electric record changing salonola Tasmanian EricWaterworth invented the stepped centre spindlelater used in record changers worldwide.1925Pedal wireless Alfred Traeger from Adelaideinvented a simple radio transceiver powered by apedal generator.1925Latex gloves Developed by Eric Ansell. Hiscompany introduced disposable medical gloves in1964. Now world’s largest producer of latex gloves.1928Flying doctor service Dr Kenyon Welsh and pilot,Arthur Affleck began operating the first flying doctorservice out of Cloncurry, Queensland.1930Letter sorting machine Built by A B Corbett, anengineer with Post Master General’s Department inSydney.1934Utility vehicle The utility vehicle, with a front like acar and a rear like a truck was designed by LewisBrandt at the Ford Motor Company in Geelong,Victoria.1935Penicillin Sir Howard Florey grew the moulddetected by Fleming, extracted the penicillin drug,refined and tested it.1946Castors George Shepherd invented the domeshaped castor with an oil trap to keep the workingparts permanently lubricated.1952Atomic absorption spectrophotometer Sir AlanWalsh of the CSIRO invented a precision instrumentfor the high-speed analysis of trace quantities ofmetallic elements in solids or liquids.1953Solar hot water Developed by R N Morse atCSIRO in Victoria.1956T-VASIS visual landing system Developed byAeronautical Research Laboratory, a set of lightpatterns on either side of the runway shows if theplane is on the correct landing approach.

1958Black box flight recorder Dr David Warren fromMelbourne invented the black box voice andinstrument data recorder.1965Inflatable aircraft escape slide Jack Grant fromQantas invented the inflatable aircraft escape slide,which doubles as a raft.1965Wine cask Angoves in South Australia developedan airless-flow method of packaging wine in a plasticbag. Later fitted with dispensing tap by Wynns in1969.1970Variable ratio rack and pinion steering Austra-lian engineer Arthur Bishop developed variable ratiorack and pinion steering now used extensively inworld automobiles.1971Interscan Invented by Brian O’Keefe and Dr PaulWild, the microwave landing guidance system is nowthe international standard for instrument approachlanding.1979Bionic Ear Professor Graeme Clark from theUniversity of Melbourne developed the Cochlearimplant, a device which restores a measure ofhearing to the profoundly deaf.1980Wave-piercing catamarans Developed by PhillipHercus and Robert Clifford of Incat in Tasmania.High speed passenger ferries more efficient andcomfortable.1981Earth leakage circuit breaker. Developed byAdelaide based Gerard Industries.1984Frozen embryo baby The first frozen embryo babywas born at the Queen Victoria Medical Centre inMelbourne.1984Continuous self-cleaning micro filtration Agroup of engineers and scientists led by Dr DougFord invented continuous self-cleaning microfiltration.



1985Gene shears CSIRO scientists, Wayne Gerlachand Jim Haseloff discovered a way of preventingharmful genes in plants and animals from doingtheir work.1985Solar Cells Professor Martin Green breaks theelusive 20% efficiency barrier for silicon solar cells1988Polymer bank notes The CSIRO developed theworld’s first plastic-laminated bank notes, whichprovide enhanced security and longer life.1992Multi-focal contact lens The world’s first multi-focal contact lens was invented by optical researchscientist, Stephen Newman in Queensland.1993Snoring-prevention Res-Med developed amachine that pressurizes the airways, keeping thebreathing passage open.1994Photonics / fiber optics – Simon Poole devel-oped a technique that enabled engineers to over-write a number of different fiber gratings withdifferent refraction indeces on top of one another,in the same section of fiber. It also enabled theinclusion of WDM functions. His company, Indx,was acquired by JDS Uniphase, and wouldspearhead Uniphase’s drive to bring the all-opticaldream into networks around the globe.

1994Non-invasive TB test The world’s first reliablenon-invasive TB test that avoids possible adversereactions was developed by scientists in Victoria.1997Dr Bruce Gray founds SIRTeX Medical – acompany developing the use of Yttrium impregnatedmicro spheres for the treatment of liver cancer.1999Kinetic suspension system Reduces pitch and rollwhile keeping all four wheels on the ground asvehicle traverses rough terrain. Company acquiredby Tenneco (Monroe springs & shock absorbers)1999Relenza anti-flu drug approved for clinical use.Based on groundbreaking work by Peter Colman,then head of CSIRO Bimolecular Engineering inMelbourne, and Graeme Laver from the AustralianNational University. Using X-Ray crystallography,Laver and Colman studied in minute detail anenzyme on the surface of the flu virus and workedout a way to disable the enzyme, preventing the fluvirus from taking hold in the body. Laver andColman shared the 1996 Australia Prize for theiroutstanding scientific work.2000CSIRO’s wireless local area network systempatent (US Patent 5,487,069) is at the core of theIEEE802.11a standard for high-speed wireless localarea networks. This patent describes how to over-come multipath effects that arise when transmittingwireless data at high-speed in indoor environments.The patent, and technology to build a radio modemand medium access controller, was licensed toSydney start up Radiata Communications Pty Ltd,which was sold during 2000 to Cisco forUS$300M.

Sources: The Dictionary of Australian Inventions & DiscoveriesMargaret McPhee Allen & Unwin 1993

The Wizards of OzPeter Spinks Allen & Unwin 1999

TelecosmGeorge Gilder The Free Press / Simon & Schuster 2000



A New Era for Australian Venture Capital

Major reforms have reshaped Australia’s venture capital industry, removing barriers that have keptinternational investors out of one of the world’s strongest-growing economies.

The outlook for Australian venture capital remainsstrong as a result of three factors:

1. The introduction of worlds best practiceVenture Capital Limited Partnerships;

2. The ongoing strength of the Australianeconomy, and;

3. The venture capital industry’s cautiousapproach to investments in private compa-nies in recent years.

These factors have meant that the Australian venturecapital industry has proven resilient over the pastfew years. Investment and capital raising, whilesubdued in the difficult environment, compares veryfavourably with Australia’s offshore counterparts,and the industry remains positive about futureprospects.

Now the challenge is for Australian venture capital toidentify and support a new generation of successfulcompanies, ranging from young technology startupsto substantial buyout opportunities in establishedindustries.

This challenge is all the greater given the volatileoutlook for global markets and the lacklustreperformance of many of the world’s largest econo-mies.

Growth factors

Five factors suggest there are grounds for optimismin Australia.

Australia’s strong economic performance.Australia continues to enjoy steady growth, lowinflation and solid national financial management. The

reforms to the nation’s tax system during 2000 putthe country’s finances in a strong position for thefuture.

Australia’s competitive position. The Australiandollar remains relatively low against major currenciessuch as the US dollar and the Euro. Economicfundamentals encourage export growth, a positiveenvironment for the growth of new export industriesand companies that want to expand into globalmarkets.

Ongoing corporate restructuring. Most ofAustralia’s large companies and government enter-prises continue to evaluate the best growth optionsfor their businesses, including the option of spinningoff some divisions as separate companies. Thenumber of management buyouts (MBOs) has grownand appears likely to continue to grow.

Investment in research. Australia’s total publicand private expenditure on R&D was around $9billion in 1998-99. There is more investment on theway. In early 2000, the Australian Governmentlaunched a series of programs worth $2.9 billionover five years to fund more research, including theformation of two major research centres in the fieldsof information technology and biotechnology.

Government reforms. The Australian Governmentcontinues to encourage the growth of private equityinvestments in order to fuel new growth across theeconomy. Specific policies have created new funds,reduced onerous taxation rules, commercialisedpublic sector research and provided new opportuni-ties for investment.



Those who study the Australian economy havefound positive signs for investment. In November2001, the Organisation for Economic Cooperationand Development (OECD) forecast that Australia’sgross domestic product would grow 3.2 per cent in2002 and 4.0 per cent in 2003. Targets that wehave so far been able to achieve.

This broader economic growth will be supported byprivate equity. There is generally more private equityavailable for investment in Australia than ever before,and there is more investment going into a greaternumber of Australian companies than ever before.

There’s no doubt that several hot sectors – espe-cially biotech, nanotechnology and informationtechnology – continue to inspire entrepreneurs andattract capital. However, there is also increasingactivity in management buyouts (MBOs) wheregood businesses can be expanded with an infusionof capital.

Success stories

Over the years, Australia’s world leading researchhas become the foundation for many highly success-ful companies, some of which now form divisions ofglobal giants. These success stories help to encour-age new companies to achieve global growth.

· Bishop Technology Group. Bishoptechnology is incorporated in 20 per cent of all carsmanufactured worldwide each year. Founded by DrArthur Bishop, the inventor of the variable ratiosteering rack, Bishop Technology remains one of themost advanced developers of steering technology,generating annual revenue of $45 million from 350patents held in 17 countries. DaimlerChrysleracquired 30 per cent of the company in August2001.

· Cochlear. Based on research in Melbournein 1967, Cochlear has come to dominate the globalmarket for implantable hearing devices, with threeout of four people with cochlear implants receivingCochlear’s system. The company was the first to

bring cochlear implants to market. Its sales for theyear to June 2001 grew 53 per cent to $220.1million.

· Indx. This optical networking pioneer wasfounded by Dr Simon Poole to develop new tech-niques in the manufacture of photonics equipment.Indx was acquired by JDS Uniphase three years agoand its Sydney facility now forms the core ofJDSU’s fibre optics product group.

· Radiata. Basing its research on work byAustralia’s main research body, the CommonwealthScience and Industrial Research Organisation(CSIRO), Radiata devised a new way to connectwireless local area networks. The company raisedits first private equity from Broadcom and CiscoSystems in 1998 and was acquired by CiscoSystems for $567 million in late 2000. Thecompany’s Sydney office is now one of the corner-stones of Cisco’s wireless networking business.

· ResMed. Formed in 1989, ResMedexpanded existing university research to become aleading developer of medical devices to treat sleepdisordered breathing. It is one of Australia’s greatestventure capital success stories, generating goodreturns for its early supporters. It is listed on theNew York Stock Exchange and is investing in newresearch and administrative facilities in Sydney. Itsrevenue grew from $US49.2 million in 1997 to$US155.2 million in the year to June 2001, while itsnet earnings grew from $US7.5 million to $US11.6million in the same period.

- Sirtex Medical. Pioneering the treatment ofliver cancer. SIRTeX is developing highly targeteddrug delivery methods for liver cancer through theuse of Yttrium impregnated microcapsules. The initialinvestment in SIRTeX was $3 million, in 1997,providing a nominal valuation of the business ofabout $6 million. SIRTeX listed on the AustralianStock Exchange in 2001. A $271 million takeoverbid was announced in March 2003 – a nearly 70-fold increase in business value over six years.



How Australia’s New Rules Work

International investors are some of the biggest winners from Australia’s venture capital reforms.

Australian venture capital has been transformed by anew set of rules that overhaul the way private equityfunds operate. The changes are being hailed as abreakthrough with the potential to attract significantinvestors – particularly international institutions – toAustralia’s venture capital industry.

Still, investors understand that the devil is in thedetail. That is why international investors such aspension funds are investigating the fine print of theAustralian reforms.

For those outside Australia, one central reformstands out. The overall thrust of the AustralianGovernment’s changes is the introduction of a newstructure for Australian funds: the venture capitallimited partnership, or VC LP. This change bringsAustralian venture capital into line with the structuresused in most other countries, making it much easierfor international investors to know where they stand.

Australia’s new VC LP structure has proven imme-diately attractive to many kinds of internationalinvestors such as pension funds, funds of funds,foundations and endowment funds.

These entities are now considered to be exemptfrom capital gains tax on their investments in Austra-lian VC LPs, provided the investors are resident in adesignated country. The list of designated countriescurrently includes the US, the UK, Japan, Germany,France and Canada, though there are plans for thislist to be extended.

As well, the changes remove barriers for otherinvestors outside Australia. Any individuals or

institutions that invest less than 10 per cent of a VCLP’s capital will be treated in the same way as apension fund – investing without incurring capitalgains tax.

The new approach has had an immediate positiveimpact on the ability of Australian private equitymanagers to attract foreign capital.

“These changes will be enormously beneficial to theventure capital market in Australia,” said JesseReyes, the Vice President of Thomson VentureEconomics, the global venture capital researchcompany.

“We’re confident that these international funds offunds and tax-exempt organisations, which hadpreviously been reluctant to invest in Australianprivate equity because of the unfriendly regulatoryregime in place, will look positively upon thechanges that bring Australia into line with the US, theUK and other developed countries,” he said.

What makes an investor from outside Australiaeligible for tax-exempt status? There are threegroups under which investors can qualify:

1. Funds or entities that are exempt from taxin their home country, provided that country is onAustralia’s list of designated countries – the US, theUK, Japan, Germany, France and Canada. Thisgroup would include pension funds, foundations andendowments.

2. Funds of funds from one of the desig-nated countries.

3. Foreign investors, whether exempt or



taxable, that hold less than ten per cent of the fundsin an Australian VC LP.

“The major advantage of the new changes, givingAustralian venture capital an LP structure, is that itestablishes an internationally recognised investmentvehicle that is used throughout the world,” saysMark Goldsmith, a partner in the Australian law firmof Gilbert & Tobin.

“As a result, investors from outside Australia will befamiliar with the structure being used, helping toremove a potential barrier to attracting foreigninvestment into Australian venture capital funds.”

However, there are strict eligibility criteria forAustralian funds that want to qualify as LP funds.This, in turn, has implications for internationalinvestors that want to ensure they are investing intax-exempt opportunities.

Some of the details of these reforms are yet to befinalised, though there are now some clear guide-lines. To be structured as a VC LP, a fund must:

· Limit its investments to unlisted Australiancompanies or trusts, or to listed Australian compa-nies in the process of delisting.

· Invest only in companies when the value ofthe assets of the company is less than $250 million.

· Not invest in property development, aspecified list of finance-related activities, or passiveinvestments that do not involve regular businessoperations (for instance, where income comes fromrent or royalties).

· Limit its investments to businesses that areprimarily based in Australia at the time of the initialinvestment.

· Not invest more than 30 per cent of itscommitted capital in any single investment.

· Structure its partnership so that no partner –and its associates – owns more than 30 per cent ofthe VC LP, although there may be certain exclusionsto this.

· Structure its fund with an investment timehorizon of 5-15 years.

AVCAL and the Australian Government havediscussed the importance of a balance betweenensuring the integrity of the measures – particularly inpreventing tax-avoidance – and the simplicity of therules, so that the complexity of the tax code doesnot deter investors.

AVCAL and its advisors are working on specificissues related to the VC LP structure that shouldbenefit international investors. Some of these shouldalso benefit domestic investors.

There are many issues emerging, including thefollowing:

· A better outlook for pension funds.AVCAL is working to ensure that domestic superan-nuation funds investing in venture capital are treatedin a similar way to pension funds in other countries.

· Encouraging investment from a broaderrange of countries. The Australian Government hascreated a list of ‘exempt’ countries for private equityinvestment. Investors from these countries are to beentitled to the proposed capital gains tax exemp-tions. These countries are the US, the UK, Japan,Germany, France and Canada. AVCAL believes thislist should be extended.

· Enabling funds to invest in shares.AVCAL believes that there is a need to permitinvestments made by a VC LP in listed companies incertain circumstances. Examples of situations wherea VC LP may hold shares in a listed company couldbe as a consequence of exiting from an investment inan unlisted company by way of an initial publicoffering.



The result of all these efforts is that funds have muchstronger incentives to invest in Australia. The Austra-lian Government has made the climate for privateequity investment more favourable.

There will always be new issues that impact interna-tional funds that wish to explore opportunities inAustralia. AVCAL continues to work on specificchanges to Australia’s tax and regulatory system inorder to encourage new investment.



A Better Outlook for the Economy

Australia’s economy appears set for a $1 billion investment boost from the latest reforms.

The reforms to venture capital in Australia appear setto boost not only the private equity industry but theAustralian economy in general.

One study suggests the new reforms will help attractan additional $1 billion in foreign investment intoAustralia’s venture capital funds.

This study was completed in late 2001 by Econtech,one of Australia’s leading independent economicconsultancies and a specialist in economic modelling,tax consultancy, policy and forecasting.

Econtech believes that the venture capital reforms willgreatly benefit the Australian economy, adding $350million to Australia’s annual gross domestic product(GDP), including the addition of $120 million to netexports each year.

“By increasing the pool of venture capital available inAustralia, this change will help to start young compa-nies, revitalise existing companies and create newjobs,” said Peter Chapman, the chairman of theAVCAL Public Policy Committee and the chief ex-ecutive of Rothschild Australia Capital Investors Lim-ited.

Econtech used a Venture Capital Model (VCM) toprepare an analysis of the effects of the new reforms.The VCM makes widely-used, long-run assumptionsof economic modelling that predicts outcomes that aresustainable.

Analysis derived from this model suggests that thechanges will expand the Australian economy in the fol-lowing ways:

· Attract fresh capital. With the removal ofthe capital gains tax, the cost of capital inventure capital investments will be reduced,and foreign investors will be more likely toinvest in Australia. An increase in foreignventure capital investment in Australia will seefigures double from $1 billion to between $1.7billion and $2.1 billion, reports Econtech.

· Increase capital stock. Econtech estimatesthat the stock of venture capital will increaseby about 17 per cent or $0.9 billion. Thisaddition will come from the foreign-ownedportion, estimated to nearly double from $1.0billion to about $1.9 billion.

· Increase GDP. Because venture capital isused to expand companies, the changes willadd $350 million to Australia’s GDP, accordingto the Econtech analysis. Consumption willincrease by about $40 million, investment by$190 million (in line with the gain in capitalstock) and net exports by $120 million. Astudy by Coopers & Lybrand in 1997 foundcompanies backed by venture capital reporteda 42 per cent growth in sales and a 59 percent growth in profits, compared to 6 per centgrowth in sales and 7 per cent growth in profitsfor top 100 companies.

· Generate industry benefits. The Econtechanalysis found that increased foreign venturecapital investment is likely to have beneficialeffects across a range of industries. Accordingto data supplied by the ABS, the industriesthat presently attract the largest venture capital



investment are manufacturing, property andbusiness services and communication services,and to a smaller extent, the wholesale and retailtrade. It follows that these industries willespecially benefit from increased foreignventure capital investment in Australia.

With increased venture capital investment in Australia,there will be several flow-on benefits for the economy.A rise in capital investment will:

· Create jobs. Venture capital fuels some ofthe strongest job creation in Australia.Companies backed by venture capitalachieved 20 per cent annual growth in staffnumbers between 1992 and 1996, comparedto 2 per cent annual growth at Australia’s top100 companies, according to a study byCoopers & Lybrand in 1997. This is due inpart to expanding businesses needing an ever-increasing number of employees to supporttheir growth.

As a result of these efforts, Econtech argues that thenew venture capital limited partnership structure willhave wide-ranging positive impacts for the venturecapital industry in Australia and for the generaleconomy.

The reforms are expected to nearly double the level ofoverseas investment and generate benefits acrossmultiple industries. Higher employment levels, anexpanded skill base and increased innovation will allbenefit Australia’s living standards in the long term.

· Increase Australia’s skill base. Venturecapitalists assume a mentoring role, providingmanagement advice and business skills thatensure efficient use and allocation of capital toincrease success rates in their investees.

· Encourage innovation. In parallel with otherFederal Government programs, the expansionof venture capital will make new funds availableto commercialise research and developmentnow underway at universities and researchinstitutes. Scientists and new technologydevelopers, deemed ‘too risky’ byconventional investors, are increasinglytargeted by venture capitalists attracted to theirinnovations.



Building up Biotech

An earlier generation of industry pioneers has cleared the way for Australia’s emerging biotech leaders.

Australia’s life sciences industry is investing heavily innew companies and new technologies that will pro-duce commercial products in areas as diverse as agri-culture and medicine.

The country’s biotech research capabilities are strongand new companies are forming quickly. Venture capi-tal is being directed into the industry at a greater rate.As well, Australian life sciences companies are ex-panding into global markets and forming key interna-tional alliances.

Some of the industry’s pioneers have helped to clearthe way for the industry as a whole.

CSL, the former government serum laboratory, is nowa global blood products group. ResMed led the de-velopment of medical devices to treat sleep depriva-tion and now dominates the global market for thesedevices. Cochlear is the world’s leading bionic earmanufacturer and has more than 60 per cent of theglobal hearing aid market. Axon Instruments developsdevices and software used in drug research. Biota cre-ated Relenza, an influenza treatment sold internation-ally by GlaxoSmithKline, and is working on new drugsbased on Australian biotech research.

More importantly for Australia’s venture capital sec-tor, there are significant partnerships underway be-tween relatively young Australian biotech companiesand their international allies. If these alliances succeed,a new generation of biotech startups will join the ranksof Australian venture capital success stories.

Proteome Systems, for instance, works with DowAgroSciences on the impact of proteomics on agri

cultural biotechnology and with Shimadzu Corpora-tion on the development of new scientific instruments.Peptech has licence agreements with Knoll AG andCentocor for technology that neutralises a key proteinthat contributes to rheumatoid arthritis.

Alchemia has an alliance with Dow Chemical to re-search the synthesis of carbohydrates.

Other companies are choosing to expand in a differ-ent way. Bresagen has grown through acquisition afterthe purchase of CytoGenesis, a US company thatspecialises in stem cell and imaging technology. CSLraised $356 million from Australian investors to ac-quire Rotkreuzstiftung ZentrallaboratoriumBlutspendedienst, a foundation of the Swiss RedCross.

With these kinds of alliances being formed, the biotechsector is confident of its prospects. Australia’s biotechindustry has expanded steadily in recent years toachieve $1.1 billion in collective revenue in 1999-2000, according to a survey of public companies inthe Australian Biotechnology Report released by theFederal Government in June 2001.

Australia has 35 core biotech and 25 biotech-relatedcompanies on the Australian Stock Exchange, accord-ing to the Australian Biotechnology Report.

Most venture capital opportunities are emergingelsewhere, though. As a result of the commercialisationof institutional research and the creation of newstartups, the biotech industry now has a total of 190core biotech companies (an increase of 70 over twoyears) and 460 biotech-related companies.



Australian capital is increasingly being used to get lo-cal companies ready for international markets.

Alchemia, for instance, raised funds from Start-up Aus-tralia, Medica Holdings, AMWIN, BioTech CapitalLimited and Rothschild Bioscience to fund thecompany’s development of carbohydrate compoundsthat can be used for drug discovery, drug delivery andcustom synthesis of carbohydrates.

Proteome Systems raised funds from BioTech CapitalLimited, the Queensland Investment Corporation andindividual investors to expand its research intoproteomics and build on its alliances with DowAgroSciences and Shimadzu.

Another company making remarkable progress is Q-Vis Limited, a listed company that was spun out of theLions Eye Institute in Perth, Western Australia. Q-VisLimited is the global leader in the development of solidstate laser vision correction (LVC) technology. Thecompany’s primary activities are its US clinical andFDA regulatory program for its Q-Vis Quantum 213nmsolid state refractive laser.

The Lions Eye Institute is a world-class research fa-cility, with 120 scientists and support staff, under thedirection of the highly acclaimed ophthalmologist, Pro-fessor Ian Constable. Research is carried out in areas

including gene therapy and molecular investigations intoaged related macular degeneration and retinal diseases,the development of the artificial cornea and orbital im-plant and development of refractive lasers for myopia.

A second more recent spin-out from the Lions EyeInstitute is Argus Biomedical Pty Ltd, which is cur-rently completing the requirements for the regulatoryapprovals of AlphaCorTM, the world’s first soft one-piece artificial cornea, and AlphaSphereTM, a soft bio-integrable orbital implant.

State governments are directing resources into this areain order to encourage the rise of new companies.

Illustrating this trend is the $157 million national syn-chrotron facility being developed at Monash Univer-sity in Victoria, which is being funded with up to $100million from the Victorian Government.

Another is a Biotechnology Centre of Excellence toproduce leading innovation in life sciences – an Aus-tralian Government initiative which has encouraged re-search institutes, universities and state governments tobid to host the centre.

The result for Australia’s venture capital sector is anincrease in new opportunities – and the prospects ofpositive returns.



Technology Leadership

Recent achievements signal the bright prospects for Australia’s information technology and telecom-munications sectors.

Australian researchers have produced leading workin fields like quantum computing, software engineer-ing, wireless networking, photonics, network manage-ment, global positioning systems, and mobile telephony.

In some cases, the research has been the work ofAustralian facilities operated by global giants likeAlcatel, Ericsson, Fujitsu, Lucent and Nortel. Yet someof the biggest breakthroughs have also come fromAustralian startups.

One of the best examples is Radiata, a company thatwas acquired by Cisco Systems for $567 million inlate 2000. Radiata developed a breakthrough ‘wire-less engine’ capable of sending data at 54 megabitsper second, a big advance in the implementation ofthe 802.11a wireless standard. Some of the core ele-ments of this work came from the CommonwealthScience and Industrial Research Organisation(CSIRO).

Australian companies like Aurema, Cap-XX, NetMapAnalytics, Open Software Associates, Platypus Tech-nology, QPSX, Redfern Photonics, and Sigtec con-tinue to work on advanced research.

Strong research

The foundation for many of these companies isAustralia’s heritage of leading research.

Australia’s total public and private expenditure on R&Dwas approximately $9 billion in 1998-99. In the 1999fiscal year, information and communications technologywas the largest single area of R&D investment by

Australia’s private sector, accounting for 35 per centof all business R&D.

This investment is being expanded under Federal Gov-ernment programs, including the Backing Australia’sAbility initiative to invest $2.9 billion over five yearsto fund more research. One of these projects is a newInformation and Communications Technology Centreof Excellence to bring together private and public sec-tor research.

One advantage for these research undertakings isAustralia’s rapid adoption of new technology.Australia’s consumption of information andcommunication technologies is the second highest inthe world as a proportion of GDP (behind Swedenand ahead of the US) according to the InternationalMonetary Fund.

In addition, approximately one quarter of labour pro-ductivity gains in Australia in the 1990s can be tracedto the use of information and communication technolo-gies, according to studies by the ANZ Bank andAustralia’s Reserve Bank.

Companies like Computershare, ERG, Integrated Re-search, Mincom, Moldflow, Prophecy International,and Tower Technology have all conquered markets inEurope, Asia, and the Americas.

Private equity investors are now searching for the likelysuccessors to that earlier generation of startups.

Groups such as ABN AMRO, Advent International,Citicorp Equity Capital, Deutsche Bank, GE Equity,Intel Capital, JP Morgan, Rothschild, Tallwood Ven



ture Capital, Telecom Venture Group, Temasek Hold-ings and UBS Capital are investing in Australianstartups.

Most of these global funds and institutions have formedsignificant local operations. They also invest alongsideAustralian venture capital funds.

Some of the most recent investments in Australia con-firm the steady increase in activity and success.

· Astracon raised $50 million from Cisco Systems,Geocapital Partners, Cross Atlantic Capital Part-ners, Telecordia Technologies and the AustralasianMedia & Communications Fund to further developits telecommunications management software in theUS market.

· Cap-XX, a developer of supercapitor technology,raised $34 million in September 2001 from ABNAMRO, Walden International, Acer TechnologyVentures, Innovation Capital, Intel Capital, andTechnology Venture Partners.

· Cards Etc raised $16 million from Citigroup, FirstData Corporation and Monetti for its software topersonalise smart cards.

· NetMap Analytics raised $20 million from Insur-ance Services Office in the US to help relocatethe company, which develops software to analysefinancial transactions, to the US.

· Platypus Technology raised $14 million from theCarlyle Group and JAFCO Investment to developa solid-state memory ‘drive’ and open a US of-fice in New Hampshire.

· Redfern Broadband Networks raised $28 millionfrom Optical Capital Group, Chase H&Q, Allen& Buckeridge and Macquarie Bank to developdense wave division multiplexing (DWDM) tech-nology that promises multi-gigabit speeds for met-ropolitan area networks.

· Redfern Polymer Optics raised $8 million in seedfunding from Redfern Photonics and others tocommercialise its polymer planar and fibre com-ponents and polymer optical fibres.

· Sigtec raised $7.5 million from Nanyang Venturesand Endeavour Capital to develop taxi communi-cations systems and a tiny GPS receiver that couldbe used to pinpoint the location of mobile phoneusers.

Many initiatives are now focusing Australia’s effortson the creation of more companies – and investmentopportunities – such as these. The AustralianGovernment’s efforts, in particular, include the Inno-vation Investment Fund program to foster new ven-ture capital partnerships, the Building on IT Strengths(BITS) program of technology incubators and a morerecent program to start a cluster of seed capital funds.

Another important part of Backing Australia’s Abil-ity is the Federation Fellowship program, which grants15 annual fellowships valued at $225,000 each yearfor five years. During 2001, eight of the winners choseto relocate their research activities to Australia. Withso many expatriate Australian scientists keen to returnhome, these research scholarships could help breed anew generation of technology leaders.



Australian Venture Capital in 2002: A PerspectiveIn 2002 Australia's venture capital industry built

on the rapid expansion of the previous three years.This growth took place despite a weaker globaleconomy and a more uncertain business outlook, andreflects the growing maturity of the industry in the coun-try.

During the Australian financial year finishing on30 June 2002, the total amount of private equityinvested in Australian companies climbed by 13% to$2.3 billion. This is the highest private equity invest-ment figure ever recorded by the Australian venturecapital industry.

Importantly, this upswing came at a time whenventure capital industries in many other countriesaround the world experienced a severe slowdown.However, Australia's economy is not completelydecoupled from the rest of the world.

Although Australia's venture capital industry washit by the same steep downturn in valuations and per-formance observed in the United States and Europe,the damage has been markedly less severe. For ex-ample, between 2000 and 2002 the US venture capi-tal market went from a commitment level of US$105.8billion to $7.7 billion. In the same period Australia'smarket only halved its level of commitment.

Investment Trends

There were signs of an important shift ofemphasis by venture capital managers away frominvestments in biotechnology, communications andmedia, computer hardware and semiconductorstowards industrial/energy and transportation. Mostnotable was the declining importance of investmentsin Internet-specific companies where the number ofnew investments fell from 30 in the year to 30 June2001 to just seven in the following year.

This trend reflects the poor performance of manyof the so-called dotcoms since March 2000 when in-vestments in Internet companies hit their peak value atthe end of a speculative boom. The days when earlystage venture capital investors could earn an internalrate of return (IRR) of 1,126% from companies likeLookSmart, an Internet company founded in Austra-lia and later floated on NASDAQ, may yet return -but not in the immediate future.

Other high technology sectors also suffered. In-vestments in computer-related industries and in bio-technology were considerably lower than in earlieryears. However, recession-proof sectors like the medi-cal and health industries continue to attract large poolsof investment capital.

In 2001 there were signs that Australia’sventure capital industry was moving away frominvesting in companies at a relatively early stage oftheir development. This trend continued in 2002.Investments in companies at the seed, startup andother early stages of investment declined as apercentage of the whole, while managers continuedto pour funds into companies looking to financeacquisitions and expansion.

To some extent this change goes hand-in-handwith the shift away from high technology investmentsas the promise of high-value initial public offerings(IPOs) from that sector diminished. In fact, none ofthe Australian venture capital funds surveyed partici-pated in an IPO during 2002.

Less Capital Raised

In 2002 Australian venture capital funds raiseda total of $810.0 million from investors. While thisfigure represents a fall of almost 28% comparedwith 2001’s $1.1billion, it is nevertheless a goodperformance by international standards and reflectsthe relatively high level of optimism amongst Austra-



lian venture capital investors when compared withtheir overseas counterparts.

Superannuation funds continue to be the largestsingle source of new capital. This is a consequence ofthe way Australians finance their retirement. It is worthnoting that superannuation fund managers only directa tiny fraction of their total funds (typically less than2%) into venture capital. It would only take a smallrise in venture capital allocations for a major change inthe amount of funds flowing into the Australian privateequity industry.



19931994

19951996

19971998

19992000

20012002

Fiscal Year End June 30

0

200

400

600

800

1,000

1,200

Am

ount

of C

apita

l Rai

sed

($A

Mill

ions

)

168 148 137 103

409

262

870

1,0281,123

810

Amount of Venture Capital Raisedby Year

Amount of Venture Capital Raised by Year

For four years in the mid-1990s Australia’sventure capital funds experienced a steady declinein the amount of capital they raised each year.Growth took off in 1997 only to be followed by asharp decline the next year. The end of the 1990ssaw funds take off in earnest with three years ofdouble-digit growth; this was during a period whenworld equity markets raced forward. Since thenthose markets have retreated considerably.

This sudden burst of growth in funds raisedby the Australian venture capital industry reverseddramatically in 2002. During that year Australianfunds raised a total of $810.0 million in freshcapital. This figure represents a decline of almost28% when measured against the previous year.

Although this may be seen as a disappointingperformance compared with the earlier rapidgrowth, it still represents considerable progresscompared with the 1990s. Local capital raisingcompares quite favourably with performanceoverseas.

For example, during the same period USventure capital funds hit a 21-year low, raising justUS$7.7 billion compared with $37.9 billion in 2001and $105.8 billion in 2000. Nevertheless, the steepdecline in raised capital highlights the challengesfacing the local industry.



Average Fund Size In 2002 ($AMillions)

Avg Fund Size

Fund of Funds 253.9LBO 234.2Generalist 126.4Later Stage 84.1Expansion 80.4Early Stage 64.8Balanced Stage 56.6Seed Stage 22.5Mezzanine Stage 15.5Turnaround 9.1

Stage

Average Fund Size in 2002

The generalist category saw its average fund sizejump from $51.7 million in 2001 to $126.4 million in2002. During the same period the fund of funds cat-egory also saw a steep climb from $165.1 million to$253.9 million. This is now the category with the larg-est average fund size in Australia's venture capital sec-tor.

The other substantial category is the leveragedbuyout or LBO fund category. After two years of stronggrowth the average fund size fell slightly from $253.2million in 2001 to $234.2 million in 2002.



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20

40

60

80

100

120

140

160

Ave

rage

Fun

d Si

ze ($

A M

illio

ns)

7060

3746

97

238

151

104

4052

30

78

6067

107

8492

61

Average Fund Size by Year ofFund Formation

Average Fund Size by Yearof Fund Formation

The trend towards ever-larger funds reversedin 2002 in Australia as around the world. Theaverage size of new funds formed in 2002 was $61million, compared to $92 million in 2001 and $107million in 1999. Notably the average size of a newfund in 2000 was $84 million, which was lower thanthe year before but still well above the 2002 level.



Number of Funds by Stage byYear of Fund Formation

Year Later Balanced Seed LBO Generalist Expansion Early Fund of Funds Turnaround Mezzanine1984 1 1 11985 21986 1 2 11987 11988 21989 1 1 11990 2 1 1991 11992 1 1 1993 21994 2 2 1 41995 2 21996 1 5 5 21997 4 1 2 1 2 2 11998 2 3 6 1 7 1 11999 1 7 2 3 2 7 7 32000 1 23 8 1 1 3 14 2 22001 1 15 4 2 10 9 4 22002 4 1 4 5 2 1

Number of Funds by Stage by Year of FundFormation

In most cases the number of funds formed bystage has steadily decreased year-on-year since2000, a peak year which saw 23 balanced funds,for example, established. In the two years since, thetally of such balanced funds formed has dropped tofour, however the number of expansion stage andfund of funds has increased.

Similarly, the number of expansion stage fundsdecreased to four in 2002 from ten in 2001. Fiveearly stage funds were established in 2002 com-pared to nine in the previous year.



Average Size of Funds by Stageby Year of Fund Formation

(in $A Millions)

Year Seed Early Stage Expansion Later Balanced LBO Mezzanine Turnaround Generalist Fund of Funds1984 63.6 75.81985 60.01986 36.81987 46.21988 97.51989 17.4 3.6 49.21990 16.31991 151.51992 104.21993 40.41994 24.2 79.1 31.8 46.21995 55.1 5.91996 65.9 103.9 38.21997 17.4 59.0 30.1 64.1 122.4 14.6 73.01998 29.8 44.8 60.9 92.9 276.0 134.61999 6.3 111.2 108.1 93.1 47.5 213.4 192.1 244.92000 21.2 54.9 54.4 74.1 65.0 550.5 6.3 48.3 975.52001 29.8 112.6 85.1 41.8 390.7 15.5 135.62002 37.8 68.5

Average Size of Funds by Stageby Year of Fund Formation

The slowdown in Australia’s venture capitalindustry is reflected in the changing average size offunds measured by stage by year of formation. Butthe changes were not uniform across the variousstages. For example, the average size of an earlystage fund established in 2002 was $37.8 million,which is considerably higher than the average of$29.8 in 2001. Likewise the average size of bal-anced funds established in 2002 was $68.5 million.



Number of Funds by Sequence byYear of Fund Formation

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Num

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LegendNew Follow-On Sole

Year New Follow-On Sole1984 2 11985 21986 3 11987 11988 21989 2 11990 31991 11992 21993 1 11994 3 5 11995 3 21996 10 2 11997 9 41998 13 81999 15 172000 36 192001 22 252002 4 13

Number of Funds by Sequenceby Year of Fund Formation

A total of 17 Australian venture capital fundswere established in the financial year to 30 June2002. This is considerably down from the 47 fundsestablished in 2001 and well below the peak of 55funds established in 2000.

Of the newcomers in 2002, only four fundswere created to implement new investment strate-gies. The remaining 13 were follow-on funds estab-lished to build on strategies by existing venturecapital funds.

This represents the continuation of an importantchange in direction for the industry. Historically thenumber of new funds has generally been significantlyhigher than the number of follow-on funds. Forexample, in 2000 there were 36 new funds and only19 follow-on funds. However, in 2001 the numberof newly established follow-on funds was greater(25) than the number of new funds (22).



Number of Firms Formed by Year

'80'83

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5

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Num

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5

2

6

3 24 4

13 3

5 6

15

1012

17

27

14

3

Number of Firms Formed by Year

Only three new venture capital firms wereformed in the year to June 30, 2002. This follows asignificant rise in the number of venture capital firmsformed during the late 1990s and into 2001. Theyear’s relative inactivity indicates the industry isreturning to the long-term company formationpattern established before the recent period of rapidgrowth.



Sources of Capital UnderManagement as of 30 June, 2002

(in $A Millions)

LP Type Capital CommittedSuperannuation 2,689.1Banks 826.9Fund of Funds 646.2Principal 638.3Corporations (Non-Pension) 525.6Insurance Co 514.8Families & Individuals 469.1Government 449.0Public/Government Pension Fund 330.3Others 218.7Share Markets 68.2

Sources of Capital Under Management

Following the trend of recent years, superannua-tion remains the dominant source of venture capitalfunds under management in Australia. It accounts for$2.3 billion from a total pool of $7.4 billion. This ismore than one third of all funds currently under man-agement and contributes over three times the amountof the second most important fund source, the banks.Please note that the amounts listed for capital undermanagement are cumulative by definition and do notpertain to the fiscal year July 2001 to June 2002 alone.



Amount of Private Equity Investedby Year

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002Fiscal Year End 30 June

0

200

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1,200

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Am

ount

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LegendNewFollow-On

1993 9 41994 79 21995 84 101996 300 271997 161 291998 235 321999 667 1692000 1,006 4682001 1,273 7662002 1,694 606

Fiscal Year New Follow-OnAmount of Private Equity

Invested by Year

Venture capital funds invested a record amountof private equity in Australian companies in 2002.The total climbed almost 13% from $2.0 billion in2001 to $2.3 billion in 2002. Significantly the valueof new investments jumped considerably from $1.3billion to $1.7 billion while the total funds in follow-on investments fell from $766.0 million to $606.0million.



Number of Companies Invested inby Year

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Fiscal Year End 30 June

0

50

100

150

200

Num

ber o

f Com

pani

es

3 15 14 25 36 4181

140180

122

21 3

119 16

21

67102

122

LegendNewFollow-On

Number of Companies Invested in by Year

The overall number of companies receivingprivate equity investment in Australia declined from282 in 2001 to 244 but this level of investment wasstill well above the amount of investment seen in the1990s. The shift from investment in new ventures toadditional investment in existing investee companiesis clearly seen in the equal split between new andfollow-on investments during 2002.



Year Expansion Public Market Startup AcquisitionOther Early

StagePublic Market Seed

Special Situations Later Stage

VC Partnership

1993 1 2 2 1994 11 2 31995 7 2 3 1 2 31996 15 2 2 4 3 2 3 11997 23 2 6 2 6 1 31998 28 4 4 6 5 1 1 1 31999 42 5 18 9 9 1 92000 111 18 17 25 6 13 1 4 52001 127 28 15 33 4 34 5 8 92002 110 14 16 29 30 16 5 6 5

Number of Companies Invested inby Industry by Year

Even though they still represented the largestsingle investment category overall, there was a moveaway from investment in the computer related andcommunications industries during 2002. There wasalso a fall in the number of biotechnology companies

Number of Companies Invested in byStage by Year

There were notable declines in the number ofcompanies at the various early stages of develop-ment: seed, startup and other early stage. The

Fiscal Year Computer Related Consumer Related Energy Other Biotechnology Communications Medical/Health Industrial Products Other Electronics1993 1 2 1 11994 4 2 7 1 1 11995 2 4 5 2 11996 4 9 1 10 1 2 1 11997 3 9 17 1 4 2 3 11998 6 10 3 18 3 4 2 2 21999 26 15 21 2 14 3 5 32000 59 23 3 26 10 29 12 13 32001 72 28 4 44 23 35 13 12 62002 57 26 6 50 17 27 16 14 3

Number of Companies Invested inby Industry by Year

proportion of companies at the expansion stageremained fairly steady at just under half the total,while the number of companies at the acquisitionstage almost doubled.

Number of Companies Investedin by Stage by Year

receiving venture capital investments. This correlatesto the evidence elsewhere that 2002 was the yearwhen Australia’s venture capital industry steppedback from high technology investments.



Amount of Private Equity Invested inby Stage by Year

Year Expansion Public Market Startup Acquisition Other Early Stage Public Market Seed Special Situations VC Partnership Later Stage1993 2,307.0 3,048.8 7,134.01994 45,339.8 1,730.3 33,224.51995 47,893.5 3,433.9 7,643.3 1,373.6 34,402.1 106.51996 72,594.7 2,287.5 2,823.4 172,944.5 14,287.5 12,340.7 6,968.1 42,690.31997 110,905.2 3,930.8 29,751.6 4,995.6 6,779.1 6,709.8 26,942.31998 71,404.4 5,038.2 9,827.9 146,454.5 11,364.7 654.8 2,092.3 17,901.9 2,181.01999 174,850.2 15,144.6 493,281.3 55,265.3 28,257.3 5,613.1 46,763.42000 715,376.6 121,334.5 215,864.8 135,696.4 15,666.4 42,257.1 7,268.9 119,455.2 101,341.32001 935,307.5 349,189.9 251,220.9 178,200.9 26,166.8 156,945.5 5,732.4 72,488.0 63,484.52002 446,985.4 63,103.8 27,428.6 1,579,403.6 130,894.8 11,485.4 20,523.5 15,575.9 5,400.2

Almost 70% of the $2.3 billion of privateequity invested in 2002 went to acquisition invest-ment stage financing. Expansion stage financing wasthe only other stage of development to register asizable share of the total investment.

Amount of Private Equity Investedin by Stage by Year

Amount of Private Equity Invested inby Industry by Year

Consumer-related industries accounted foralmost half of the private equity invested by venturecapital funds in 2002. This was the first time in manyyears when high technology industries did not take adominant share of private equity investments andunderlines the shift away from the technology sector.

Amount of Private EquityInvested in by Industry by

Year

Some of the notable consumer-related compa-nies involved in acquisitions during the year to June30, 2002 were The Riviera Group, The TavernerHotel Group and Australian Pacific Paper Products.

Fiscal Year

Computer Related

Consumer Related Energy Other Biotechnology Communications Medical/Health

Industrial Products

Other Electronics

1993 2,537.7 2,818.1 3,673.5 3,460.51994 6,056.8 7,448.1 54,791.5 6,922.8 2,307.0 2,768.41995 4,646.0 20,333.6 29,611.4 195.2 5,664.61996 12,491.6 92,200.9 3,457.0 201,934.3 461.4 2,028.4 5,256.4 770.41997 14,260.9 37,320.3 66,963.8 752.4 20,433.0 4,580.3 15,354.0 3,407.31998 12,655.5 41,744.5 2,653.1 135,650.6 2,722.3 13,432.1 404.6 7,249.3 32,505.81999 70,908.1 123,985.8 229,462.5 1,217.4 113,709.0 7,274.2 198,599.8 42,647.72000 333,004.3 161,378.9 32,868.0 273,665.0 53,099.2 215,871.7 49,859.8 178,465.0 41,520.92001 255,943.4 142,067.8 4,134.9 407,075.1 256,757.8 585,031.4 74,296.4 51,705.4 53,080.92002 118,310.7 1,062,901.5 27,872.2 605,420.4 40,880.2 103,556.2 98,873.1 198,026.6 12,722.3



Number of New Investmentsby Industry

from 1 July 2000 to 30 June 2001

Number of New Investmentsby Industry


Internet specific companies declined in impor-tance as a venture capital investment in 2002. In2000, venture capital funds invested in 21 Internet-specific companies. Despite the highly publicisedcollapse of many Internet businesses during 2001,the number of Internet-specific investments climbedto 30 in that year. However, only seven Internetcompanies received injections of venture capitalduring 2002.

Much of the rapid growth in Australia’s venturecapital industry between 1998 and 2001 can beattributed to interest in Internet-specific companiesand the broader information and communicationstechnology (ICT) sector. In addition to the Internetindustry, this sector includes computer software,computer hardware, communications and media, aswell as semiconductors and other electronic indus-tries.

Industry Number of Companies

Agr/Forestry/Fishing 4Biotechnology 10Business Services 2Communications and Media 8Computer Hardware 6Computer Software 18Construction 1Consumer Related 14Financial Services 12Industrial/Energy 15Internet Specific 7Manufacturing 4Medical/Health 10Other 1Semiconductors/Other Elect. 3Transportation 5Utilities 2

In 2000, the broad group of ICT industriesaccounted for more than half of all new investmentsby industry sector. Despite the dotcom crash, theseindustries still managed to account for around 40%of all new investments in 2001. By 2002 the sectoronly represented roughly one third of all newinvestments.

Some observers expected biotechnologyventures to fill the gap. However, the number ofbiotechnology companies receiving venture capitalinvestment fell from 18 in 2001 to 10 in 2002. In2000 there were only five investments in the biotechsector. Investments in the related medical and healthindustries increased from nine in 2001 to 10 in2002.

The surprise performers in 2002 were theindustrial and energy industries, which attracted 15new investments compared with only nine in 2001and seven in 2000.

Number ofCompanies

Agr/Forestry/Fishing 8Biotechnology 18Business Services 10Communications and Media 11Computer Hardware 8Computer Software 18Construction 1Consumer Related 21Financial Services 17Industrial/Energy 9Internet Specific 30Manufacturing 11Medical/Health 9Other 1Semiconductors/Other Elect. 5Transportation 1Utilities 2

Industry



Number of New Investments byStage


Number of New Investments byStage


** Note: The number of companies listed is less than the number of newinvestments since the stages of some companies were not recorded on thesurveys.

Stage Number of Companies

Expansion 52Acquisition 19Oth Early Stage 16Public Market 10Seed 10Startup 9VC Partnership 3Special Sit. 2Later Stage 1

Number of Companies

Expansion 76Seed 31Other Early Stage 24Startup 19Acquisition 11VC Partnership 9Later Stage 5Public Market 3Special Situations 2

Stage

Number of New Investments by Stage

There was a sharp shift in Australia’s venturecapital new investment by stage profile during 2002.

Expansion-stage companies remained the mostsignificant investment stage in 2002.

After having a relatively low profile in recentyears, using venture capital to finance growth byacquisition took on more importance during 2002. Atotal of 19 companies used venture capital money tofinance their expansion by buying other businesses.

In 2002, this development stage accounted for 16%of the total number of companies. During the previ-ous year, acquisition stage companies accounted foraround 6% of the total.

Considerably fewer companies at earlier stagesraised venture capital funds. There were only ninestartups compared with 19 in 2001, and only tencompanies raised seed capital as against 31 in 2001.



Types of Exits (1998-2002)

Types of Exits

Year IPO M&A Bankrupt Other Exit1998 6 5 1 11999 7 5 2 32000 20 4 2 02001 6 4 6 82002 0 3 1 4

Totals 39 21 12 16

** Note:2002 totals are through June 30, 2002

Historically the most popular way for anyventure capital fund to exit an investment is via aninitial public offering (IPO). In 2000, 20 Australianinvestee companies went through the IPO processand a further six investments were exited this way in2001.

No Australian venture capital funds exited theirinvestments using IPOs in 2002. The success of anIPO is often highly dependent on the prevailingfinancial climate at the time of the offer. So the lackof IPO exits can be seen mainly as a reflection onthe state of the world’s share markets and theincreased levels of uncertainty during the period.

Exit activity was markedly lower in 2002, but itwasn’t non-existent. A total of eight investmentswere exited, three were sold off as mergers andacquisitions, and four funds found other exits.

Only one company was exited via bankruptcyin 2002. This is a considerable improvement on2001 when six investments were wound-up thisway. Given the high number of business failures inInternet, information technology and other industriesclosely related to venture capital, this can be re-garded as a positive result for Australia’s venturecapital funds.

The figures in this table are for calendar yearsrather than financial years; 2002 only includes theactivity up until June 30, 2002.



Australian Fund Performance

Overall Fund Performance

Performance benchmarks for Australian privateequity funds formed between 1988 and 2001 showthat over a period of 10 years venture capital fundsshowed a net annual return to investors of 6.4%.Over the same 10-year period the net return toinvestors on private equity investments is 8.8%.Investments in buyouts and mezzanine funds pro-vided a net return of 14.8% over the 14-yearperiod.

Fund Performance by Vintage Year

On the next few pages you will find tables withinformation about Australian venture capital fundperformance over periods up until 30 June 2002. In

most cases the sample sizes examined are relativelysmall. This means that although the tables provide auseful snapshot of fund performance, they should notbe regarded as a complete picture. Please regardthem as indicative only.

Each individual fund’s performance is heavilyinfluenced by the timing of its formation. Some yearsare much better than others. For this reason thetables on the following pages have been organisedaccording to the vintage year being sampled. Notable has been provided for the 1995 vintagebecause the sample size was too small to be statisti-cally useful.



Overall Fund Performance (Vintage Years 1994-2001)Source: Thomson Venture Economics

Source: Thomson Venture Economics

Vintage Years 1988-2001

Internal Rate of ReturnSample Cap. Pooled Upper Lower

From: Size Avg Wtd. Avg Maximum Quartile Median Quartile MinimumInception to 6/30/2001 47 4.0 0.2 11.5 82.6 10.7 0.0 0.0 -50.4Inception to 9/30/2001 49 2.5 0.6 11.1 79.1 11.3 0.0 0.0 -85.4Inception to 12/31/2001 51 -2.8 0.1 9.2 74.2 9.7 0.0 -2.1 -96.9Inception to 3/31/2002 53 -1.7 0.3 8.8 72.1 7.9 0.0 -1.8 -81.7Inception to 6/30/2002 53 -0.2 3.3 8.5 82.2 6.8 0.0 -3.5 -76.6Distribution to Paid-In

Sample Cap. Pooled Upper LowerFrom: Size Avg Wtd. Avg Maximum Quartile Median Quartile MinimumInception to 6/30/2001 47 0.30 0.30 0.42 2.13 0.45 0.00 0.00 0.00Inception to 9/30/2001 49 0.29 0.30 0.38 2.13 0.40 0.00 0.00 0.00Inception to 12/31/2001 51 0.30 0.31 0.39 2.13 0.35 0.00 0.00 0.00Inception to 3/31/2002 53 0.29 0.29 0.39 2.13 0.30 0.00 0.00 0.00Inception to 6/30/2002 53 0.30 0.30 0.39 2.13 0.40 0.00 0.00 0.00Residual Value to Paid-In

Sample Cap. Pooled Upper LowerFrom: Size Avg Wtd. Avg Maximum Quartile Median Quartile MinimumInception to 6/30/2001 47 0.90 0.87 0.86 1.54 1.00 1.00 0.85 0.07Inception to 9/30/2001 49 0.90 0.88 0.87 1.54 1.00 1.00 0.87 0.07Inception to 12/31/2001 51 0.84 0.87 0.81 2.21 1.00 0.98 0.70 0.05Inception to 3/31/2002 53 0.83 0.85 0.82 2.21 1.00 0.97 0.69 0.05Inception to 6/30/2002 53 0.82 0.85 0.81 2.21 1.00 0.95 0.69 0.00Total Value to Paid-In

Sample Cap. Pooled Upper LowerFrom: Size Avg Wtd. Avg Maximum Quartile Median Quartile MinimumInception to 6/30/2001 47 1.20 1.17 1.28 2.50 1.30 1.00 1.00 0.47Inception to 9/30/2001 49 1.19 1.18 1.25 2.50 1.33 1.00 1.00 0.50Inception to 12/31/2001 51 1.14 1.18 1.20 2.51 1.24 1.00 0.98 0.08Inception to 3/31/2002 53 1.12 1.15 1.20 2.54 1.22 1.00 0.96 0.08Inception to 6/30/2002 53 1.12 1.16 1.20 2.72 1.22 1.00 0.95 0.08

Vintage Years 1988-2001

Horizon ReturnsSample Pooled

Size Avg.06/30/2001 to 06/30/2002 53 -1.506/30/1999 to 06/30/2002 53 1.906/30/1997 to 06/30/2002 53 4.9



Vintage Year 1994


From: Size Avg Wtd. Avg Maximum Quartile Median Quartile MinimumInception to 6/30/2001 3 7.7 7.2 6.7 10.3 8.7 7.1 6.3 5.6Inception to 9/30/2001 3 7.4 6.9 6.4 10.0 8.4 6.8 6.1 5.4Inception to 12/31/2001 3 6.6 8.3 5.8 14.0 11.9 9.8 2.9 -4.1Inception to 3/31/2002 3 6.3 8.0 5.6 13.5 11.5 9.5 2.7 -4.1Inception to 6/30/2002 3 2.0 5.0 3.4 6.8 4.7 2.7 -0.4 -3.5Distribution to Paid-In




Vintage Year 1994


Size Avg06/30/2001 to 06/30/2002 3 -16.806/30/1999 to 06/30/2002 3 -7.306/30/1997 to 06/30/2002 3 -0.7



Vintage Year 1996


From: Size Avg Wtd. Avg Maximum Quartile Median Quartile MinimumInception to 6/30/2001 3 14.3 13.6 13.1 17.6 15.6 13.6 12.7 11.8Inception to 9/30/2001 3 13.5 12.8 12.5 16.4 14.6 12.8 12.0 11.3Inception to 12/31/2001 3 11.2 12.0 12.2 13.2 12.6 12.0 10.2 8.5Inception to 3/31/2002 3 10.8 11.4 11.9 13.2 12.3 11.3 9.6 7.9Inception to 6/30/2002 3 9.5 10.8 11.4 13.5 12.1 10.8 7.5 4.2Distribution to Paid-In




Vintage Year 1996


Size Avg06/30/2001 to 06/30/2002 3 0.806/30/1999 to 06/30/2002 3 5.206/30/1997 to 06/30/2002 3 11.5



Vintage Year 1997


From: Size Avg Wtd. Avg Maximum Quartile Median Quartile MinimumInception to 6/30/2001 4 30.0 35.0 32.4 82.6 51.4 18.7 8.6 0.0Inception to 9/30/2001 4 28.3 33.1 30.5 79.1 48.7 17.0 7.9 0.0Inception to 12/31/2001 4 23.4 28.8 25.8 74.2 45.5 9.6 1.2 0.0Inception to 3/31/2002 4 22.5 27.8 24.5 72.1 43.8 8.9 1.1 0.0Inception to 6/30/2002 4 18.9 24.8 21.8 69.5 42.0 7.2 -4.1 -8.2Distribution to Paid-In




Vintage Year 1997


Size Avg06/30/2001 to 06/30/2002 4 -17.006/30/1999 to 06/30/2002 4 26.806/30/1997 to 06/30/2002 4 22.0



Vintage Year 1998


From: Size Avg Wtd. Avg Maximum Quartile Median Quartile MinimumInception to 6/30/2001 6 -2.8 -17.0 -1.6 20.7 11.2 4.5 -6.9 -50.4Inception to 9/30/2001 6 -2.7 -16.8 -1.0 18.7 13.1 4.1 -6.1 -50.2Inception to 12/31/2001 5 5.1 7.7 -0.9 13.3 10.1 6.3 1.2 -5.5Inception to 3/31/2002 6 -0.3 -7.5 0.4 12.3 10.0 3.5 -5.0 -26.1Inception to 6/30/2002 6 0.9 -5.5 1.7 13.2 13.2 3.3 -4.5 -23.1Distribution to Paid-In




Vintage Year 1998


Size Avg06/30/2001 to 06/30/2002 6 7.906/30/1999 to 06/30/2002 6 1.006/30/1997 to 06/30/2002 6 N/A



Vintage Year 1999


From: Size Avg Wtd. Avg Maximum Quartile Median Quartile MinimumInception to 6/30/2001 8 -3.6 -5.9 -3.2 9.1 0.0 0.0 -1.4 -35.1Inception to 9/30/2001 8 -1.2 1.6 1.0 12.6 3.3 0.0 -1.2 -26.6Inception to 12/31/2001 8 7.2 0.5 0.8 70.4 7.3 0.0 -1.0 -25.3Inception to 3/31/2002 8 6.0 0.4 0.6 58.6 5.9 0.0 -0.9 -20.5Inception to 6/30/2002 8 5.6 3.9 3.0 50.0 9.3 0.0 -1.7 -20.3Distribution to Paid-In




Vintage Year 1999


Size Avg06/30/2001 to 06/30/2002 8 9.406/30/1999 to 06/30/2002 8 3.006/30/1997 to 06/30/2002 8 N/A



Vintage Year 2000


From: Size Avg Wtd. Avg Maximum Quartile Median Quartile MinimumInception to 6/30/2001 10 -4.6 -13.8 -10.9 0.0 0.0 0.0 -4.6 -21.3Inception to 9/30/2001 10 -3.7 -11.0 -8.7 0.0 0.0 0.0 -3.0 -16.5Inception to 12/31/2001 10 -29.5 -15.2 -13.5 0.0 0.0 -9.6 -68.4 -86.9Inception to 3/31/2002 10 -26.1 -11.8 -10.6 0.0 0.0 -7.0 -54.6 -81.7Inception to 6/30/2002 10 -23.9 -11.8 -11.8 0.0 0.0 -6.6 -48.7 -76.6Distribution to Paid-In




Vintage Year 2000


Size Avg06/30/2001 to 06/30/2002 10 -12.206/30/1999 to 06/30/2002 10 N/A06/30/1997 to 06/30/2002 10 N/A



Vintage Year 2001


From: Size Avg Wtd. Avg Maximum Quartile Median Quartile MinimumInception to 6/30/2001 7 0.0 0.0 -1.2 0.1 0.0 0.0 0.0 0.0Inception to 9/30/2001 9 -9.5 -3.6 -1.3 0.0 0.0 0.0 0.0 -85.4Inception to 12/31/2001 12 -13.8 -7.5 -3.8 0.0 0.0 0.0 -18.9 -96.9Inception to 3/31/2002 13 -8.0 -4.2 -2.5 0.0 0.0 0.0 -11.6 -67.7Inception to 6/30/2002 13 -1.7 5.0 10.2 82.2 0.0 0.0 -8.4 -47.2Distribution to Paid-In




Vintage Year 2001


Size Avg06/30/2001 to 06/30/2002 13 11.406/30/1999 to 06/30/2002 13 N/A06/30/1997 to 06/30/2002 13 N/A



Acquisition – The obtainment of control, possessionor ownership of a private portfolio company by anoperating company or conglomerate. Acquisitions andinitial public offerings are the two main forms of exitsfor venture capital funds.

Balanced – An investment strategy which includesventure capital investing in portfolio companies at avariety of stages of development (Seed, Early Stage,Later Stage, Leveraged Buyouts). It also includesfunds with no particular stated investment strategy, butwould not include leveraged buyout (LBO) financing.

Capital Under Management – The amount of capitalavailable to a management team for venture invest-ments. It is computed as the cumulative total of com-mitted capital less liquidated funds or those funds thathave completed their life cycle.

Commitment – A limited partner’s obligation to pro-vide a certain amount of capital to a fund.

Committed capital - Pledges of capital to a venturecapital fund. This capital is drawn down over the lifeof the fund

Disbursement – An investment by a venture capitalfirm into a portfolio company.

Early Stage – A fund investment strategy involvinginvestment in companies for product development andinitial marketing, manufacturing and sales activities.Revenues exist, but since this is a capital-intensive stage,profits are minimal if they exist at all.

Expansion – A fund investment strategy which pro-vides capital to companies that have developed prod-ucts or concepts and have developed a customer base.Revenues are growing at an increasing rate, thoughprofits may not exist since expenses are still high.

Glossary of TermsExit – The point at which the venture fund cashes outof a specific portfolio company through an initial pub-lic offering or an acquisition. Also referred to as a li-quidity event.

Exiting Strategy – A fund’s intended method for liq-uidating its holdings while achieving the maximum re-turn possible.

Fund - A pool of capital raised periodically by a ven-ture capital organization. Usually in the form of limitedpartnerships, venture capital funds typically have a ten-year life, though extensions of several years are oftenpossible.

Fund Focus (Investment Stage) – The indicatedarea of specialization of a private equity fund usuallyexpressed as Balanced, Seed, Early, Later, Mezza-nine or Leveraged Buyout.

Fund of Funds – Investments that are primarily madein other venture capital funds rather than directly inportfolio companies.

Fund Raising – The process of obtaining commit-ments from investors to provide capital to a specificfund. The capital is later transferred to the fund oncethe fund is closed and starts investing.

Fund Size – The total amount of capital committedby the limited and general partners of a fund.

Fund Year – The year of fund formation and firsttakedown of capital.

Initial Public Offering – The sale or distribution of astock of a portfolio company to the public for the firsttime.



Later Stage – A fund investment strategy which pro-vides financing for the growth of a company that hasmoved beyond the expansion stage to increase its salesvolume and generate consistent growth. It is consid-ered the last venture capital stage of financing prior toa liquidity event (i.e. an IPO or acquisition of the com-pany).

Leveraged Buyout (LBO) – A fund investment strat-egy involving the acquisition of a product or business,from either a public or private company, utilizing a sig-nificant amount of debt and little or no equity (usuallya ratio of 90% debt to 10% equity). Leveragedbuyouts focus on providing the capital to acquire ma-ture companies, often with the support of thatcompany’s existing management team.

Limited Partners – The investors in a limitedpartnership being managed by a management firm orgeneral partner.

Limited Partnership - The legal structure used bymost venture and private equity funds, usually fixedlife investment vehicles. The general partner or man-agement firm manages the partnership using policy laiddown in a Partnership Agreement. The Agreement alsocovers, terms, fees, structures and other items agreedbetween the limited partners and the general partner.

Liquidation – The sale of the assets of a portfoliocompany to one or more acquirors when venture capi-tal investors receive some of the proceeds of the sale.

Management Firm - The manager of a specific fundor funds. Where the fund is a limited partnership, themanagement firm is the General Partner.

Merger & Acquisition – See Acquisition.

Mezzanine – A fund investment strategy involving sub-ordinated debt (the level of financing senior to equityand below senior debt). Thomson Venture Econom-ics considers this a buyout form of financing along withLBO financing.

Other Early Stage – Early stage financing not in-cluding seed or startup stage financing.

PI (Paid-in Capital) - The amount of committed capi-tal a limited partner has actually transferred to a ven-ture fund. Also known as the cumulative takedownamount.

Portfolio Company – A company which has receivedfunding from a venture capital fund in which the fundcontinues to have a position. Also known as theInvestee Company.

Private Equity – Thomson Venture Economics usesthe term to describe the universe of all venture invest-ing, buyout investing and mezzanine investing. Fund offund investing and secondaries are also included in thisbroadest term. Thomson Venture Economics is notusing the term to include angel investors or businessangels, real estate investments or other investing sce-narios outside of the public market.

Public Market – Private equity financing in publicly-traded companies.

Seed – An investment strategy involving portfolio com-panies at its earliest phase of development to promotea business concept before a company is started. Capitalinvested in companies at this point have not yet fullyestablished commercial operations, and may also in-volve continued research and product development.Because it is the earliest stage of development, it isconsidered the riskiest of the various financing stages.

Startup – This stage provides financing to companiescompleting development and may include initial mar-keting efforts. Companies may be in the process oforganizing or they may already be in the business oneyear or less, but have not sold their products com-mercially.



Takedown – The actual transfer of funds from thelimited partners’ to the general partners’ control.

Trade Sale - The sale of one company’s shares toanother company, perhaps in the same industry sec-tor.

Turnaround – Financing provided to a company at atime of operational or financial difficulty with the inten-tion of “turning around” or improving the company’sperformance.

Valuation - The value of a portfolio company as de-termined by general partners.

Venture Capital – Long-term, hands-on, equity in-vestment in high-potential companies by professionalinvestors. The primary use of venture capital funds isfor the growth of the company’s valuation. ThomsonVenture Economics uses the term to describe the uni-verse of venture investing (see Private Equity). It doesnot include buyout investing, mezzanine investing, fundof fund investing or secondaries. Angel investors orbusiness angels would also not be included in the defi-nition.

Vintage – The year of fund formation as defined byits first takedown of capital which generally corre-sponds to the year of its first investment.



Acknowledgement of Quantitative Survey Respondents

ABN AMRO Capital Investment Australia Pty LtdAllen & Buckeridge Pty Ltd

AMP Henderson Global InvestorsAMWIN Management Pty Ltd

Business Management LtdCatalyst Investment Managers Pty Ltd

Challenger International LtdCastle Harlan Australian Mezzanine Partners Pty Ltd

Coates Myer & Co Pty LtdColonial First State Private Equity Ltd

Crescent Capital Partners LtdCVC Investment Managers Pty Ltd

Deutsche Bank – DB Capital PartnersDirect Capital Private Equity

Equity PartnersES Group Ventures Pty LtdEureka Capital Partners Ltd

Foundation Capital LtdGE Equity

Gresham CEA Management LtdGresham Private Equity Ltd

Gresham Rabo Management LtdGS Private Equity Pty Ltd

Hastings Funds Management LtdInnovation Capital

JB Were Private EquityMacquarie Direct Investment LtdMacquarie Technology Ventures

Nanyang Ventures Pty LtdPacific Equity Partners

RMB VenturesRothschild Australia Capital Investors Ltd

Rothschild Australia Golden Arrow Development FundRothschild Bioscience

Rothschild E-FundStarfish Ventures

Start-up Australia Pty LtdTechnology Venture Partners

UBS CapitalUniseed Pty Ltd

Venture Capital Partners Pty LtdWestpac Private Equity

* A profile of each of these firms can be found at www.avcal.com.au / directory of members / venturecapitalists.

australian venture capital association limited

Economy & Finance

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