Australia: Asset management quarterly - Australia

Developments and market trends in Australia

Investing in Australian funds as a way to migrate to Australia

Opportunity

The revised Significant Investor (SIV) and Premium Investor (PIV) programmes are operational in Australia. The SIV programme provides the opportunity for foreign persons to obtain an Australian visa by investing at least AUD$5 million over four years in complying Australian investment funds. Since commencement in July 2015, the funds management industry has been developing or refining existing product offerings to capture this new investor channel.

Norton Rose Fulbright is a leading commercial law firm with experience advising local and foreign investors on investment into Australian real estate, venture capital, private equity, agriculture and other investment opportunities, as well as assisting fund managers in the development of a range of investment products and structures. The firm has been at the forefront of consultations with government and industry stakeholders leading to the development of the new SIV regime, and is advising fund managers on modifications to their existing products to maintain compliance, as well as assisting with the launch of a range of funds, including venture funds and emerging/small companies funds.

Migrant investor applicants must invest a minimum AUD$5 million in the following investment products:

Investment amount Investment product Compliance requirements Additional information
At least AUD$500,000 Venture Capital Limited Partnership (VCLP) or Early Stage Venture Capital Limited Partnership (ESVCLP).
  • Applicant monies are taken upfront in a specified vehicle and held in an escrow arrangement, or as security for a guarantee issued by an Australian ADI.
  • Investments by a fund have commenced within four years from the grant of the provisional visa.
  • Sale proceeds received before the provisional visa ends are to be reinvested in complying funds.
At least AUD$1.5 million Unlisted managed investment scheme or listed investment company (LIC), that invests in emerging companies.

Investments in ASX listed securities of companies that have a market capitalisation of less than AUD$500 million.

Fund may hold cash with Australian ADIs and other cash like instruments (subject to a 20% cap).
Derivatives may be used for risk management and non-speculative purposes.

At any time, the proportion of the fund's net assets held in entities whose market capitalisation has grown above AUD$500 million, must not exceed 30%.

Fund must be operated or managed by an AFS licensed fund manager with a minimum AUD$100 million funds under management in Australia.

Other emerging company investments can be acquired by the fund, subject to fund limits:

  • unquoted Australian securities are to be no more than 20% of the fund's net assets immediately after the time of investment; and
  • securities quoted on a securities exchange operated in a foreign country (subject to a 10% limit).

Must maintain a minimum of 20 investee companies from three months post the fund's inception date.

No further purchase can be made to any individual asset that exceeds 10% of the fund's net assets.

Any remaining portion of the A$5 million may be invested in one or more 'balancing' investments:

Investment amount Investment product Compliance requirements Additional information
Up to AUD$3 million Unlisted managed investment scheme or LIC, that primarily invests in a permitted asset class.

Permitted asset classes are:

  • Companies, A-REITs, infrastructure trusts including their ordinary equity, preferred equity, convertible bonds or corporate issued floating rate notes listed on an ASX.
  • Corporate bonds or notes issued by an ASX entity (or wholly owned subsidiary of the Australian listed entity) or investment grade rated Australian corporate bonds or notes rated by an AFS licensed debt rating agency.
  • Deferred annuities issued by Australian registered life companies. Cannot commence paybacks during the provisional visa period.
  • Retail, office, industrial or hotel real property in Australia.
  • Use of futures, swaps or other derivatives must be used for risk management only.
  • Cash products to be less than 20% of fund's net assets.
  • Operated by a large licensed fund manager (as above).

Fast track approach for premium investors under the PIV regime

The Premium Investor Visa programme (PIV) framework is targeting talented entrepreneurs and innovators and offers a 12 month pathway to permanent residency. A migrant must invest AUD$15 million and will access the regime upon invitation of the Australian Government. Austrade will make nominations on approved criteria based on entrepreneurial skill or talent and ongoing benefit to Australia, and subject to character and integrity checks.

A migrant needs to make an investment by direct investment or investment in an Australian managed fund(s) that invests in one of more of the following:

  • ASX listed assets;
  • Australian government or semi-government bonds or notes;
  • corporate bonds or notes issued by an ASX listed entity (or wholly owned subsidiary of the Australian listed entity) or investment grade rated Australian corporate bonds or notes rated by an AFC licensed debt rating agency;
  • Australian proprietary listed companies;
  • real property in Australia excluding residential property;
  • deferred annuities issued by Australian registered life companies; and
  • approved philanthropic donation.

A philanthropic contribution or a combined investment and a philanthropic contribution by an investor is considered a complying premium investment, if all of the requirements of the Regulations are met. As the term 'philanthropic contribution' is not defined, it gives the government the flexibility to determine what constitutes such a contribution for the purpose of the Migration Regulations.

More information

This article is general in nature and specific legal advice should be sought. Migrants should obtain advice from a registered migration adviser on migration law matters.

The Paris Agreement: Moving from climate conscious to climate compliance

The 'Paris Agreement' was adopted on December 12, 2015 at the COP 21 UN Climate Change Conference (Conference). It may potentially herald the end of the fossil fuel era and a global move towards a low carbon future and renewable energy. This will undoubtedly influence the decisions of financial institutions and fiduciary investors (particularly pension funds) as they become more climate change conscious and sensitive to the risk of stranded assets.

In accordance with the emission targets adopted at the Conference, the Paris Agreement will inevitably result in stranded assets and unburnable fossil fuel reserves – it is just a question of time. This will in the future have a significant impact on the value of Australian reserves and the investors that continue to hold shares in the companies that own them.

As a result, fiduciary investors in Australia should take the time to understand the measures contained in the Paris Agreement and obtain updated, reliable and relevant information about climate risk in light of the renewed efforts to implement global climate regulation. The Paris Agreement increases the risk of stranded assets and the potential for significant adverse financial impact on investment portfolios containing them.

If there was any doubt before, the Paris Agreement has changed the conversation from climate conscious to climate compliance.

Read more – The Paris Agreement

The Paris Agreement signals a new era of global cooperation in addressing climate change. The main pillars of the Agreement are as follows:

  • holding increases in temperature to below 2 degrees Celsius and pursuing efforts to limit temperature increases to 1.5 degrees Celsius above pre – industrial levels;
  • increasing countries' ability to adapt to the effects of climate change and foster climate resilience and low greenhouse gas emissions development; and
  • making finance flows consistent with a pathway towards low greenhouse gas emissions and climate resilient development.

Further, the Paris Agreement recognises the crucial role played by domestic policies and carbon pricing in providing an incentive for emission reduction activities.

Parties to the Paris Agreement will be required to prepare nationally determined contributions and establish domestic mitigation measures aimed at achieving those contributions. The Agreement will be open for signature from April 22, 2016 to April 2, 2017.

What does this mean for Australian investors?

Australia – one of the world's highest per capita emitters of carbon – has agreed to a target of a 26 to 28 per cent reduction in greenhouse gas emissions below 2005 levels by 2030. The Climate Council has stated that, in order to achieve this target, over 90 per cent of Australia's coal reserves must be left in the ground. This means that over the next decade, many of Australia's reserves may be unburnable and these assets are more likely to become stranded.

A recent global survey of institutional investors conducted by Ernst & Young found that two of the biggest concerns for investors are climate change and the growing risk of stranded assets. A key finding of the survey was that 62.4 per cent of investors are concerned about the increasing risk of stranded assets. More than a third of respondents had divested their holdings of a company's shares due to this risk. Interestingly, the Norwegian Government Pension Fund Global – the largest pension fund in the world – has recently undergone its largest ever fossil fuel divestment in response to the growing risk of stranded assets and unburnable reserves.

Stranded assets will become an increasing concern for Australian investors following the adoption of the Paris Agreement. Fiduciary investors should seek information regarding the risk of stranded assets to the companies that form part of their investment portfolios. It is also recommended that fiduciary investors actively seek information concerning the company's environmental performance and whether the company has an internal framework for responding to climate change risks. It has been suggested by Bloomberg that failing to examine the environmental impacts of investments could potentially amount to negligence and a breach of the fiduciary duties of trustees.

Of course, this is a judgment call and will depend on the local laws and the particular circumstances of the investment decision. However, what is clear is that the Paris Agreement has significantly increased the importance of considering the impact of climate regulation on investment decisions, and has increased the investment risk in companies with significant carbon assets.

The unknown is how fast the measures in the Paris Agreement will find their way into Australian law and the laws of the countries in which Australian pension funds are investing. The concern around the impact of such measures on the value of fossil fuel assets and infrastructure may accelerate the divestment decisions of investors out of such assets and increase the risk for those investors who still hold those assets at a time when they are no longer financially viable.

Corporate Disclosure

Of course, institutional investors who are fiduciaries must act prudently, which requires them to make informed decisions that are based on reliable and relevant information about climate risk and stranded asset risk.

The lack of corporate disclosure of climate risks and liabilities has been highlighted by the OECD and is an obstacle for climate conscious investors seeking information from companies about environmental risks. The OECD has noted that investors are currently not provided with sufficient information that is necessary to reflect climate risks in their investment decisions. According to Bloomberg, 14 energy companies are facing shareholder resolutions on environmental policies. The number of shareholder resolutions on environmental policies has increased by 88 per cent since 2011.

In light of the Paris Agreement, fiduciary investors in Australia will have legal obligations to understand the measures contained in the Paris Agreement, and obtain reliable and relevant information about climate risk and stranded asset risk and the potential impact on their investment portfolios over the short, medium and long term.

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