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PDFs lose shine amid economic uncertainty

POOLED development funds have gained more widespread acceptance in the investor community despite the challenging environment of the past year.

The annual review of PDFs by the Pooled Development Funds Regis-tration Board found that there was a reduction in the number of companies applying to register as a PDF, the level of capital raised and the amount invested by PDFs.

It also found a disproportionately low number of PDFs registered in WA.

The total number of PDFs has now fallen for the first time since PDFs were introduced in 1992, to 121 at June 2002 from 125 the previous year.

Just eight companies registered as PDFs during the 2001-02 year. By comparison, 35 were registered in the previous year.

And just five PDFs are WA-based – ADD Venture Capital Limited, Foundation Millennium 2000 PD Limited, Growth Capital Australia Limited, Resource Equities Limited and Sovereign Holdings Limited.

In addition, the level of capital raised across Australia decreased to $48 million for the year. A total of $144 million was raised the previous year and the amount in-vested was $77 million, a reduction from the $110 million of the previous year.

Of the total PDFs only 34 successfully raised any capital at all – 13 for the first time.

“The lower level of investments by PDFs was in keeping with the reduced activity experienced generally in the venture capital market,” the review says.

“Due to the market conditions, the board believes PDF trustees were also likely to spend more time with their investees rather than actively seeking new deals.”

Sovereign Holdings’ Graham Keys believed the changes to the capital gains tax was one of the reasons behind the shift away from PDFs. He said he was currently considering winding up Sovereign because of the difficult economic conditions and because the vehicle was no longer necessary.

Australian Venture Capital Association CEO Andrew Green said the fall in the number of PDFs and the drop in the money raised was in line with market expectations.

“The venture capital market is being hit globally. With the continuing market uncertainty it is a very difficult time,” he said.

Apart from the lack of investor confidence in the sector, the passage of the Venture Capital Bill and the Taxation Laws Amendment (Venture Capital) Bill is expected to take some of the shine off PDFs as an investment vehicle.

The law introduced venture capital limited partners as a vehicle to raise and invest funds. Governed by State laws, the VCLPs are similar to PDFs but are not a corporate entity and come with additional tax advantages.

In 2001-02 investments by PDFs were predominantly targeted at service companies. They received around 45 per cent of venture capital from PDFs. A further 24 per cent went toward manufacturing, 21 per cent to mining, 7 per cent to bio-technology firms and just 2 per cent to the agriculture sector.

PDFs are companies established under the PDF Act that raise capital from investors and use it to take equity in Australian small to medium enterprises.

In return, PDFs and their shareholders are taxed at a lower rate on income generated through PDF activities. The income from investment, whether dividend, capital gains or other income, is taxed at 15 per cent rather than the full corporate tax rate.

Lion Selection Group is one PDF to have successfully invested in the Australian resources sector as part of an international portfolio of investments since 1997.

It has a $2.5 million investment in Austminex NL, a $1.9 million in-vestment in Havilah Resources NL, and about $7.5 million placed with MPI Mines Limited, which last month closed its $7 million initial public offer oversubscribed. Last year the group decided to part ways with Consolidated Minerals Limited.

A further $6.6 million is invested in Sedimentary Holdings Limited, and a further $4 million was placed with WA company Westonia Mines Limited prior to its Australian Stock Exchange Listing in August last year.

Lion Selection last year reported a net profit of $9.5 million and investors have jumped onto the PDF, resulting in a sharp spike in its share price. Over the past two months it has recovered from its low of 83 cents a share to around $1.45 this week. Starting with a market capitalisation of $100 million in 1997, it now has a market capitalisation of $144 million.

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