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Informal equity investment
Industry Commission information paper
This paper was released on 22 April 1997.
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Thousands of small and medium-sized Australian firms are being assisted by private investors who put up their own funds as equity capital, according to an Industry Commission information paper released today. These investors - commonly known as business angels- also often provide valuable assistance in running the business.
To date, little information about these informal equity investments has been available. It is estimated in this paper that by mid 1996 business angels had invested around $1 billion in small and medium enterprises (SMEs). Some 7,000 firms were recipients, and the average sum involved was around $150,000.
Investment of this type is a very important source of equity for SMEs in the United States, and appears to be increasing in Australia.This is suggested by the rapid development of introduction or matching services which assist SME operators seeking capital to meet suitable investors.
Informal equity investment is of particular interest because many SMEs face difficulty in accessing equity or loan finance through formal capital markets. Also, operators of SMEs often find that they do not have the full range of skills required to run their businesses effectively, particularly if they are aiming for strong growth. Informal investment has the potential to ease both these constraints for suitable businesses.
In recent years, the Federal government has subsidised the operation of introduction services, partly because it was expected to take a substantial time for such services to become well established and self-financing. However, a range of introduction services has now been established in Australia and some private sector services are already performing well. It appears that SMEs from now on will have a choice of introduction services, even in the absence of subsidies. The paper concludes that there is no need for future subsidies to introduction services.
The paper also notes that informal investment could be hindered by inappropriate government regulation. Presently, Australian regulations may restrict some actions by business operators and introduction services in assisting firms to find investors. However the relevant authorities are already moving to change these regulations,while still supporting other important objectives such as invest or protection.
Background information
02 6240 3330
Preliminaries
Cover, Copyright, Foreword, Contents, Glossary, Overview
1 Introduction
1.1 Background: SMEs and finance for growth
1.2 Scope of investment considered
1.3 Structure of the paper
2 Informal equity in other countries
2.1 Venture capital and the 'equity gap'
2.2 Informal direct investment in other countries
2.3 Public policy and SME finance in other countries
2.4 Business introduction services
2.5 Summary and comments
3 Estimates of angel investment
3.1 The size of business angel investment in Australia
3.2 Features of business angel investment
3.3 Summary and comments
4 How informal investment is working
4.1 Investors and business operators
4.2 Business introduction services
4.3 Summary and comments
5 Policy issues
5.1 Informal investment and SME policy issues
5.2 Business introduction services
5.3 Regulation of fundraising by SMEs
5.4 Concluding comments
Bibliography
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