Fund manager cautions SMSFs on venture capital investment
A private equity manager has urged SMSFs eyeing private equity investment to focus on mid-sized, established companies, with earlier start-up companies typically the most risky segment of the market.
Speaking to SMSF Adviser, Vantage Asset Management managing director Michael Tobin said while the small to mid-market segment of private equity, which generally includes companies in the $50 million to $500 million enterprise revenue range, has had strong performance in recent years, investing in the smaller start-up segment can come with great risk.
“Investing in venture [capital] can be very difficult in Australia – it’s a real hit and miss game,” said Mr Tobin.
“The segment that’s least risky [on the other hand] is the segment where companies have proven products and services and are already a profitable investment.”
Mr Tobin explained that debt tends to be significantly lower in small to mid-market segment companies; there is less reliance on one or two customers; and companies have a good spread of customers across their customer base.
“We conducted a lot of analysis on this and that particular segment – the small to mid-market has the strongest performing data and it makes sense,” he said.
“The company has been around probably 10 years and just needs a capital injection to be able to compete with competitors to be able to take it through the stages of growth. This is what we have identified as the sweet spot of private equity returns, not only in Australia but globally,” he explained.
By contrast, companies that have only been around for two years, have only one or two customers, and are not making more than $2 million in earnings per year are obviously a greater risk for an investor.
“For an SMSF, investing in medium sized companies instead of earlier start-ups greatly reduces the potential for loss of capital,” Mr Tobin said.