Value Capital the EVOLUTION of VENTURE CAPITAL and PRIVATE EQUITY in AUSTRALIA

Value Capital THE EVOLUTION OF VENTURE CAPITAL AND PRIVATE EQUITY IN AUSTRALIA CONTENTS Value Capital THE EVOLUTION OF VENTURE CAPITAL AND PRIVATE EQUITY IN AUSTRALIA MESSAGE FROM THE CHIEF EXECUTIVE 2 EXECUTIVE SUMMARY 3 REPORT SPONSORS 4 THE ACHIEVEMENTS OF VENTURE CAPITAL AND PRIVATE EQUITY The achievements of venture capital and private equity 6 Venture capital and private equity’s role in the economy 9 Venture capital case studies: Seek and Pharmaxis 13 Private equity case studies: Bradken and Pacifi c Brands 14 EVOLUTION OF THE AUSTRALIAN VENTURE CAPITAL AND PRIVATE EQUITY INDUSTRY Venture Capital – The early days 16 – The 1990s 17 – The 2000s 19 – Outlook 20 Private Equity – Birth, boom and beyond 22 – The eco-system develops 23 – The boom and beyond 25 – Outlook 28 APPENDIX: WHAT ARE VENTURE CAPITAL AND PRIVATE EQUITY? What are venture capital and private equity? 30 The difference between venture capital and private equity 30 The VC and PE lifecycle 30 – Fund raise 31 – Identify and develop new technology 31 – Commercialise and build sales 32 – Investments 32 – Improving the investee 33 – Realising the value – the exit process 33 – Capital return to investors 33 Fees 34 ACKNOWLEDGEMENTS 36 Value Capital Value 1 MESSAGE FROM THE CHIEF EXECUTIVE Venture Capital (VC) and Private Equity (PE) in Australia today Later stage PE transforms existing companies with its own brand are multi-billion dollar industries with participation from the of management innovation. It is about providing a particular form world’s most signifi cant investors and practitioners. They are of capital and management insight to particular companies in a industries that have, over the last couple of decades, supported particular time in their lifecycle. It brings management discipline the growth and development of some of Australia’s greatest to the country’s boardrooms, and is widely recognised as having a innovations, and have invested in and strengthened many of strongly positive impact on the way Australian business operates. the country’s best companies. They have a signifi cant impact on Australia’s productivity capacity. PE saw an unparalleled boom between 2005 and 2007. It was propelled from relative obscurity to the front pages. Today, it should Early stage VC gets new companies off the ground, providing a be seen as just another sector of the economy: just one of a number foundation for ideas and innovation that might not otherwise of sources of investment capital, management know-how, and get a chance. VC is the enabler of tomorrow’s economy. Australia strategic expertise available to companies in a particular time and can no longer afford to be simply a beach, farm and quarry. The place in their evolution. Australian economy needs to participate in the world of tomorrow, and VC has a central role to play in this vision of our future. As the economy faces the uncertainty of a prolonged downturn, PE will be a valuable source of investment capital in markets where Australian VC has a core of consistent performers whose it has become increasingly diffi cult to access. Many are optimistic investment returns are comparable with those available anywhere that the times may suit PE. Irrespective of short term challenges, in the world. Many in the industry are realistic about the current the fundamental foundation of the industry – its ability to identify business cycle, recognising it as an inevitable part of economic an investment proposition and develop and extract value – will life. Meanwhile, the country’s advantages as a centre for science remain compelling into the future, and the industry will continue and technology, its stable business and economic environment, to be a crucial resource for the Australian economy. and its attraction as a destination for talented people from across the globe will remain strong competitive characteristics into the Both the VC and PE industries are an integral part of Australia’s future. Nonetheless, early stage VC is facing its own challenges, economy. They provide unparalleled innovative capacity, a with the current economic climate adding a layer of complexity valuable source of investment capital for business, and much to the business of raising and deploying funds and exiting needed management expertise. These factors will ensure that businesses profi tably. VC and PE remain equally important to Australia’s future economy as they have been in the last decade. I’d like to thank Ernst & Young for their fi nancial support and intellectual input into the production of this review. katherine woodthorpe Chief Executive, AVCAL April 2009 Value Capital Value 2 EXECUTIVE SUMMARY Both VC and PE have deployed more than $10.6 billion (excluding leverage), across some 1,135 companies, as at 30 June 2008. These investments have been spread broadly across the country’s geographies and industries. Ve nture Capital Private Equity • Australian VC has been responsible for many of the country’s • The industry boosts the value of its enterprises at double the rate greatest innovative leaps over the past decade. Companies such of its peers in the public markets, with Australian PE amongst as Resmed, Cochlear, LookSmart and Seek were backed by VC the best in the world at improving the value of its investments. and today improve the daily lives of millions of people. • Buyout and later stage PE creates exceptional value for its investors, • Australian VC competes with the best in the world. The country with funds formed between 1985 and 2007 producing a positive is a leading player in the health and biotech industries, in pooled internal rate of return (IRR) of 9.9% as at 30 June 2008. communications and media, and cleantech is becoming an Upper quartile funds had returns of 14.4% or better. increasingly important area. • Later stage PE boosts value through fundamental strategic • Australian VC has benefi tted from a series of Government innovation, investing in the businesses it buys and creating value. initiatives designed to improve the industry’s capacity to raise • PE’s unique way of doing business bolsters Australia’s productivity, capital over the past two and a half decades. Despite this, a growth, employment, innovation, level of opportunity and Government review in 2008 (the Cutler Review) declared that economic stability. the country’s innovation system was in need of an overhaul. • Australia’s PE industry was examined closely by every national • VC, along with many other industries, will continue to be regulatory body in the fi nancial markets and the Senate in 2007, impacted by the global fi nancial crisis. But the foundation and pronounced positive and healthy for the Australian economy. of success in the industry is the commercialisation of sound research and innovation, and this will continue. • The Australian PE industry grew steadily through the fi rst years of the decade, on the back of several years of business development • Innovation is a key opportunity to ‘improve the way things are by a core group of professionals. The last few years have seen the done’ in a downturn and needs to be encouraged for Australia industry experience a signifi cant boom in fundraising while deal to recover more strongly. sizes and volumes also grew markedly. • Much of this activity has come to a halt as the result of the credit crunch and fi nancial crisis but the industry is working its way through the crisis. It is an industry made up of highly skilled, adaptable and fl exible professionals who are well equipped to deal with the consequences of the changing economic circumstances. • The Australian PE industry still has signifi cant amounts of capital to deploy on investments where there is value yet to be realised. Value Capital Value 3 REPORT SPONSORS AUSTRALIAN PRIVATE EQUITY AND VENTURE CAPITAL ASSOCIATION LIMITED (AVCAL) AVCAL was established in 1992 as a forum for participants in the private equity and venture capital industry. AVCAL is the central voice of the Australian industry and its membership includes almost all the domestic, regional and global private equity and venture capital fi rms active in Australia. ERNST & YOUNG Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 130,000 people are united by our shared values and an unwavering commitment to quality. We have a dedicated team of professionals committed to helping our private equity clients and their investee companies achieve their potential. Ernst & Young will address your investment, transaction and portfolio needs to help deliver the returns your stakeholders expect. Value Capital Value 4 THE ACHIEVEMENTS OF VENTURE CAPITAL AND PRIVATE EQUITY PRIVATE EQUITY COMPANIES EMPLOY MORE THAN 100,000 PEOPLE PRIVATE EQUITY COMPANIES INCREASE EARNINGS 2.5 TIMES FASTER THAN PUBLIC COMPANIES VENTURE CAPITAL IS A FUNDAMENTAL CONSTITUENT OF AUSTRALIAN INNOVATION VENTURE CAPITAL COMPANIES HAVE DEVELOPED TECHNOLOGIES THAT HAVE MADE LIFE BETTER FOR COUNTLESS PEOPLE ACROSS THE GLOBE AND CREATED JOBS AND INCOME FOR THOUSANDS OF EMPLOYEES AND INVESTORS Value Capital Value 5 THE ACHIEVEMENTS OF VC & PE The achievements of VC and PE Australian VC and PE has grown from a nascent industry with its roots in small, early stage investments into a vibrant and signifi cant sector of the economy. In fi scal 2008, Australian VC and PE invested $2.4b in new and follow-on company investments both domestically and overseas before leverage. Of this amount, 28% of capital was deployed by VC and early expansion funds and 72% by PE investors. The industry

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