Review of Australia’s business, investment and talent visas
– July 2017
Submission from Expat Advisors Community
Responses to the SIV complying investment framework consultation questions compiled from discussion group held on 21st July, 2017 at Level 24, International Tower Three, Barangaroo.
Moderated by Founder, Stacey Martin (ex-NAB Private Wealth SIV specialist), the discussion group consisted of a mix of migration agents from very active in SIV such as Ivan Chait to new to the program, fund managers including BTIM and Sumo Group, and SIV Industry Thought Leader David Chin, Basispoint.Lauren Knight from Austrade was also in attendance.
- Should the VCPE component of the SIV CIF be increased from $500,000 to $1 million? Why or why not?
Response
Consensus from the group was that it should not be increased. Whilst it was flagged at the outset, with the substantial drop in numbers under SIV 2, and the recent announcement of changes to the 457 program it sends a negative signal to the market. Recommendation is to leave as is and make no changes to the program at this time.
Rationale:
-Feedback from migration agents generally is a lack of understanding of the VC sector and that the new complying investment framework is too complicated
-Why increase the amount in VC when the evidence shows a substantial drop in numbers indicating addition of that component has not been well received?
-Recent changes to the 457 programs have provided further uncertainty and regular changes send a negative signal to potential migrants as to whether they are welcome in Australia
-Since the SIV2 changes agents are seeing more enquires in relation to business visa options, and consideration of other jurisdictions including Cypress, Spain and particularly New Zealand
-Note a bigger potential issue is the consideration of changing the English language requirements to be consistent with other visa category’s. The view is that would totally kill the SIV program as most applicants are older and wealthy and not having to learn English is a key attraction of this visa category.
- What would be the likely impact on demand for the SIV if the VCPE component were increased?
Response
Demand has already dropped by in excess of 80% from SIV 1 (1,631 approvals over 2 ½ years) to 193 over 22 months since July 2015). The expectation is whilst there are some applicants that would still be interested, and further education would be useful, is highly unlikely to increase the flow of applicants.
Rationale:
-In Chinese, Venture Capital actually means “risky investment”
-Applicants prefer capital to remain stable and provide a regular income return
-Applicant want to see investment managers track record and this sector is quite opaque.
- Is there sufficient absorptive capacity in the Australian venture capital market to manage this increase?
Response
Many funds who set themselves up to take SIV funds have been bitterly disappointed and have closed already. One of note is Advet who did receive monies and seeing not sustainable transferred those clients across to Vantage.
Rationale:
-VC managers thought if we build products the clients will come, but it is more difficult than that needing to have distribution channels to access Chinese applicants
-David Chin from BasisPoint noted that with those VC managers who have set up funds particularly for SIV have incurred a lot of cost and don’t have the budget to fund trips to China. Very few have seen sufficient number of applicants.
- If the VCPE component increases to $1 million, should the emerging companies or balancing investment components reduce by $500,000 to compensate? Why or why not?
Response
Putting 40% of monies into high risk investment categories is already in contrast with prudent investment principles required in the retail financial services industry in Australia.Therefore should definitely not come from the balancing component. Some participants thought a total of 40% across VC and small caps would be preferable to allow the client to choose however this may not be workable.
- Austrade is also seeking views on better aligning some specific SIV technical settings and invites comments on the following technical matters:
- Emerging companies as ultimate investees:
The SIV emerging companies component is intended to benefit small and emerging Australian companies.
To provide further assurance that the ultimate beneficiaries of this component are small rather than large capitalised companies, Austrade invites views on whether the Instrument should specify the emerging companies investment must not be made in securities that otherwise meet the requirements for this component but where the issuer of those securities invests the proceeds of the issue of those securities in securities that do not meet the market capitalisation requirements for the emerging companies component.
For example, this would mean small exchange traded funds which invest in the securities of large capitalised companies would not be compliant with the requirements of the emerging companies investment component.
Response
This fixes a loophole where the vehicle meets the emerging companies test of less than $500M but invests in large stocks such as BHP. For example, Listed Investment Companies (LIC’s) which are permitted in addition to the more popular managed funds. Concurred this was not in the spirit of the program.
- Derivatives and risk management:
The SIV framework provides complying investments may be made in derivatives only if the investment is made for risk management purposes and is not a speculative investment. Paragraph 7 of theExplanatory Statementto the Instrument notes that complying investments should not be “used speculatively or for hedging market exposure”.
Austrade invites views on whether, to provide greater clarity on the scope of risk management purposes for the purposes of the SIV, the Instrument should specify: that complying investments may only be made in a derivative if the investment is not designed to substantially reduce or completely eliminate the exposure of an investor to the risk of loss from changes in the market price of an investment; and that hedging of currency and interest rate risks is permitted, however capital guarantee products should no longer be considered complying.
Response
BTIM has considered these rules and have structured their new fund accordingly.
- Cash holdings in a fund of funds:
The SIV framework requires no more than 20% of a managed investment fund’s net assets be invested in cash held by Australian ADIs. However, it may be unclear how this requirement applies in a fund of funds structure.
Austrade seeks views on whether the Instrument should specify that complying investments may not result in more than 20% of an investor’s emerging companies or balancing investments being invested in cash held by Australian ADIs; and that investors need to have regard to the balance sheets of the companies in which their emerging companies or balancing investments are ultimately made when determining their cash holdings.
Response
Sumo Group advised they have a tighter cash range to ensure don’t exceed the 20% overall.
- Complex fund of funds and IDPS structures:
The SIV framework permits the use of funds of funds and investor directed portfolio services (IDPS).
However, there is currently no limit on the complexity or number of levels a fund of funds or IDPS structure may have, which can make it difficult to assess the compliance of the structure. Austrade seeks views on whether the Instrument should specify: a fund of funds or IDPS may invest directly in complying investments, or indirectly through another fund or entity that invests in complying investments, but that fund or entity may not invest through another fund or entity.
Response
Fund of Fund and IDPS are common structures in the financial services industry for diversification and administration. We didn’t see any issues as there are appropriate structures to ensure there are not excessive fees for investors.