Bioe News

Published online: 17 July 2003, doi:10.1038/bioent754

Burrill invests in Australian biotech

*Cheryl Norrie is a freelance writer based in Wellington, New Zealand

New tax laws in Australia are motivating foreign venture capitalists to invest Down Under.

Life sciences merchant bank Burrill & Co. (San Francisco, CA, USA) announced on June 20 that it will create a $200 million biotechnology venture capital fund, half of which will be dedicated to investments in Australian firms. The move sparks hope that two new Australian tax laws that spurred Burrill's interest in the country might also attract other offshore investors.

Roger Drinkwater, cofounder of Australian biotech firm Xenome, says it was difficult to raise funds overseas before the new venture capital tax laws were enacted. Xenome

Last December, the Australian government enacted two new pieces of legislation, the Venture Capital Act and the Taxation Laws Amendment (Venture Capital) Act, that enable Australian venture funds to establish two new types of limited partnerships, Venture Capital Limited Partnerships (VCLPs) and Australian Venture Capital Funds of Funds, which are exempt from capital gains tax. Previously, Australia imposed capital gains tax on funds that had foreign investors, who were then taxed in their home countries—resulting in a double tax on the same investment for foreign investors.

The original tax structure was meant to discourage Australian investors from setting up funds in places like the Cayman Islands, where they would then pay no tax at all. To eliminate both the double taxation on foreign investors' capital gains and the possibility of tax evasion by domestic investors, the new laws provide exemption from capital gains tax only on limited partnerships that contain investments from a list of seven countries—Australia, Canada, France, Germany, Japan, the United Kingdom or the United States—that can be extended by the Treasury Department without need for Parliamentary action.

According to Andrew Green, CEO of the Australian Venture Capital Association (AVCAL; Sydney, Australia), the changes allow overseas pension funds and other investors to work within familiar legal structures when investing in Australian venture funds. Indeed, Steven Burrill, CEO of Burrill & Co., cites the new laws as a prime motivator for the new $100 million Burrill Australia Fund, and other venture capitalists (VCs) are expected to follow his lead.

The new legislation also provides new capital gains tax exemptions for overseas investors who are tax-exempt residents of their home countries, encouraging them to register VCLPs in Australia. While this does not provide any extra tax relief when investing directly into an Australian firm, it does encourage foreign VCs to set up shop in the country and become more familiar with the companies there.

The changes were prompted by the need to put Australia on a level footing with other countries. "Australia was suffering from a lack of foreign investment because it had a tax regime that was viewed by foreign investors as being unfavorable," says Mark Goldsmith, partner with tax lawyers Gilbert & Tobin (Sydney, Australia).

AVCAL expects the changes could attract A$1 billion ($677 million) of new capital into Australia over the next five years, of which the biotech sector could receive nearly 12%. This additional capital is much needed in Australia's biotech sector, in which startup companies typically raise as little as A$2 ($1.3) million in their initial fund-raising rounds, compared with up to $20 million in the United States.

Roger Drinkwater, cofounder and head of research at Xenome (Brisbane, Australia), notes that it has been difficult to attract overseas investors in the past, limiting the opportunities for Australian firms to raise initial capital and ongoing investment. Xenome, which specializes in the discovery of novel peptides from animal venoms, recently raised A$6 ($3.9) million from a local venture capital fund. But Drinkwater says the firm failed to raise funds in Singapore before the new laws were enacted because of the difficult tax environment.

Drinkwater says the reforms have come at the right time for the biotechnology sector. Many companies that received initial venture capital funding in 2000 and 2001 are now due for mezzanine funding, which requires larger sums than local VCs can provide. "Unless there's the capacity to put in the larger investments of up to A$20 ($13) million that are needed in second- and third-round fundings, then those companies are just not going to progress and they'll wither and die, or they'll be forced into amalgamations or mergers," he says.