“A new species has been discovered in the financial services industry which is peculiar to Australia. Whilst it may look the same as a number of other species, it has mutated quickly with some distinct differences….. It is in fact a PDF.”

Pooled Development Funds Tax effective catalysts for the Australian Venture Capital Industry ?

The Australian, 14 October 2000 Expanded Habitat “Venture Capital no longer the domain of rich fat cats and institutions. Individual investors are now getting a look in”. The Australian, 14 October 2000 HOW ? WHY ?

Govt - part of the PDF food chain “Governments around the world now recognise that by fostering innovation there is a positive flow on in economic activity”

Industry Overview ~ Australia THE ECONOMIC IMPACT OF VENTURE CAPITAL SURVEY TOP 100 AUSTRALIAN COMPANIES, 1991 - 1996 Source: 1998 Pricewaterhouse Coopers

PDF Genre 1. Seed - business angels, private investors capital 2. “Start ups” - generally <10% of funds 3. Early stage expansion - i.e local expansion 4. Later stage expansion - i.e listing, National, Global

Environmental Stimulus - Tax Breaks For the Entity 15% tax on capital gain 25% tax on interest income Franking credits at company tax rate For Shareholders Investing in a PDF * NIL tax on capital gain * Losses not tax deductible * Nil tax on dividend income (franked or unfranked) * Franked dividend income may be treated as accessible to gain advantage of franking credits to offset other income

Superannuation funds investing in PDF’s DIY Funds - 5 or less members No tax rebates available for the tax paid by the PDF Larger super funds - 5 or more members May apply for a tax rebate of the 15% (paid by the PDF - to allow parity with overseas venture capital funds paying nil CGT - courtesy of the Ralph report). Eg. Complying super funds Life assurance companies Pooled super trusts Registered organisations ie. trade unions and friendly societies Complying ADF’s

Limitations of the Species Permitted Must invest in Australian businesses Must invest in new issued ordinary shares - convertible notes and debt instruments must have PDF Board approval Must invest approximately 10% of investee paid up capital 65% of capital must be invested within 5 years Not permitted Retail Property development In companies with assets > $ 50 m < 30% in any one company Single investor not to hold > 30% of PDF (exceptions banks, life offices)

Watershed legislation New Legislation - July 1, 1999 Watershed legislation improves efficiency and attractiveness for fund managers and investors Refer working model

Investment and Exit Process REALISATION B 1yr 2 3 4 5 6 7 8 9 10yr C D E F A G I Investee Companies H J Investment Realisation provides progressive liquidity A B C D E F G H I J Period

Working Model - Fund Size $20 million Return of Capital to Shareholders by way of share buy back $ $7m Profit $ $ $ NTA $1 Gross NTA $1.35 $3m $4m $5m $10m out Soft. Co. Manuf. Co. IT. Co. Bio. Co. A B C A Exit 6 mth 12 mth 18 mth Investment Time Line 3 yrs …. 10 yrs

Share Buy Back Gross Profit $ 7,000,000 Tax @ 15% $ 1,050,000 Available for distribution $ 5,950,000 plus original investment $ 3,000,000 NTA $ 1.29 Buy Back of Shares @ $ 1.29 $ 8,950,000  $ 1.29 = 6,937,984 shares or 34.68% of original issued capital bought back

Industry Overview ~ USA VENTURE ECONOMICS’ PRIVATE EQUITY PERFORMANCE INDEX (PEPI) RETURNS FOR INVESTMENT HORIZONS ENDING 31 DECEMBER Source: National Venture Capital Association NVCA and Venture EconomicsC

Industry Overview ~ UK BVCA VENTURE CAPITAL AND PRIVATE EQUITY PERFORMANCE MEASUREMENT SURVEY 1999 SUMMARY OF RESULTS Survey compiled by the WM Company in conjunction with British Venture Capital Association and Westport Private Equity Limited. (Westport).

VC Capital under Management 1999-2000 Committed $4.9b $2.6b value in investment vehicles 46% favour unlisted companies $2.3b uncommitted 569 investee companies

WHY? VC Allocation by Major Super Funds Performance to 30 June, 2000 Australian Equities 11.3% Alternative investments 31.3% Commonwealth Super Scheme Public Sector Super Scheme $1b Australia Post 15% $150m 10% Potentially $1b

Growth in PDF Investment Total invested in VC industry $1.1b $476 m $20 m 1999 2000 99-2000

Cochlear Ltd Biota Ltd Resmed Ltd Vita Life Sciences Ltd Industry Successes Cochlear Ltd Biota Ltd Resmed Ltd Vita Life Sciences Ltd

Government Support for VC Industry Federal Government (i) Innovation Investment Funds $130 m 5 VC Co’s. 2:1 - institutions $70m (ii) Innovation Investment Funds $90.1 m 4 VC Co’s. 1:1 - institutions $90m Government requirement on funds 7% plus 10% of profits Queensland Government National leader in Biotech R &D $33.90 per capita $270m commit to industry over 10 years Employment in Biotech industry alone 7,690 Innovation start up scheme Specialist venture capital unit Business Angels Group

What is the Habitat of the PDF ? Who should invest in a PDF? Master Funds or Pooled Superannuation investors Institutional Funds DIY Super Funds Special Situation Component of a Balance Portfolio High Net Worth Private Investors

Why the Growth in Registered PDF’s 124 total 120 80 92 - 99 2000 2001

Australia Harnessing the Global Trend in Private equity POOLED DEVELOPMENT FUND Biotechnology Information Technology Medical and Healthcare Industrial Energy Harnessing the Global Trend in Private equity within Australia September 2000