Australian Investment Council - Opinion

by Yasser El-Ansary *

I don’t know why the Federal Treasurer’s recent calls for business to lift investment and ‘back itself’ has led to some discord within the business community.

The mixed response from some in the business sector has highlighted the precise extent of the challenge we are facing here in Australia – we are not universally focused on the same long-term goals.

The current environment is punctuated by sustained low interest rates and low inflation, and there are no signs that either of those fundamentals will move significantly for a long time. Combined with the downward pressure created by the rapid pace of technological change and innovation, we should all get used to the idea that what we have in front of us now is the new ‘normal’.

Australia can no longer afford to rest on its past successes and rely on the top five per cent of companies to provide innovation growth for our future. We have no time to waste in transitioning and adapting our business models to the highly technological and globalised marketplace we are a part of. We have to do this in order to continue to grow our knowledge-based economy and create jobs for future generations.

Without deeper investment in technology and innovation, productivity and prosperity will continue to decline. And while governments clearly have a role to play in putting in place policy reforms to support growth in productivity, the business sector can get on with the task in many different ways.

If we need reminding of how we have already fallen behind, the latest rankings of economic complexity − a measure of how advanced we are in knowledge as evidenced by the breadth of products and services we export − developed by Harvard University’s Center for International Development, places Australia at 93rd globally, the lowest of all developed economies, and lower than many developing countries.

It is a steep drop of 36 places since 1995, when Australia was ranked 57 th. This measure alone highlights the size of the challenge ahead of us, if we want to build and future-proof a sustainable, high value-adding, economy.

A recent study by the Australian Institute of Company Directors found that while Australian directors recognised the strategic importance of innovation, more needs to be done to prioritise action above talk. The research identified that 57 per cent of the directors surveyed said innovation was never, or only occasionally, on the board’s agenda. We should all be alarmed at that finding.

There is no question that some parts of the economy have started to put their money behind greater levels of investment in innovation by Australian companies. Much of this is coming from the private capital sector, which invests billions of dollars into Australian businesses every year. That investment is driven by one ideal – the desire to make businesses more competitive, more productive, and more profitable over the long-run.

Private capital has the added ability to create assets that become new investment opportunities into the future. It is precisely the sort of agile investment we need in today’s modern world.

According to international research house, Preqin, 2018 was one of the busiest years for private equity fundraising in the information and communications technology sector. Billions of dollars of capital are being raised and earmarked for investment into the sector, with the some of the latest data pointing to an increase of 20 per cent over recent years.

At a broader level, in 2018 Australian-based private capital investment funds under management surpassed A$30 billion reflecting the growth in capital available to support investment into businesses across every industry sector of the economy. Across private capital funds, A$11 billion in equity capital is ready to deployed right now − a number that could easily be doubled or tripled with the added availability of debt capital to fund the growth and expansion of businesses at the same time.

More and more businesses are choosing to raise capital from private investors today, rather than through public markets, because of the strategic benefits that come from partnering with venture, private equity and private credit firms. Private capital investors can help unlock the domestic and international growth and innovation opportunities of businesses through active asset management, in a way that public markets simply cannot.

Look for example at the role of venture capital in creating enduring economic benefits over the long-term. Evidence from 20 industries in the United States suggests that venture capital is three to four times more effective than corporate research and development at fostering innovation.

And let’s not forget that at June 2018, the five largest public companies in the US, by market capitalisation, were all venture capital-backed enterprises – Apple, Google, Microsoft, Amazon and Facebook. While in Australia, Canva, Judo Capital, Atlassian and Airwallex all had their beginnings with venture capital.

Successful businesses in today’s economy don’t sit back and wait for the holy grail of tax reform, red tape reduction, or anything else from government. They just get on with it.

* Yasser El-Ansary is Chief Executive of the Australian Investment Council