Tapping the super pool: venture capital investments for self-managed funds
With the exceptional growth rates of self-managed super funds (SMSFs) over the last decade, the sector now has over a million members and controls the largest share of Australian superannuation at $495 billion (as at 30 June 2013).
For startup enterprises, this is potentially an extensive pool from which to draw investment. So, can an SMSF invest in startup businesses?
In short, an SMSF is free to invest in anything that its trustees feel will allow the fund to grow its pool of investment assets for its members’ retirement.
However, there are some restrictions. This is because at the core of all SMSFs is a principle known as the sole purpose test.
In essence, this means the fund needs to be maintained for the sole purpose of providing retirement benefits to its members, or to their dependants if a member dies before retirement.
As a consequence of this, there are some rules that the ATO puts in place regarding investment that must be considered by SMSFs looking to invest in small unlisted companies (or trusts).
- The in-house assets rule places some restrictions on funds from investing in companies or trusts that are related parties of the fund.
- A related party would be a company in which the members of the SMSF and/or their associates have control.
- SMSFs can invest a maximum of 5% of their monies in in-house assets.
Acquisition from related parties:
- If a related party of the SMSF owns shares in a small private company, the SMSF cannot buy them off that related party.
- Exception is where the asset is an in-house asset, but this would restrict the investment to 5% of the fund, and the purchase would have to be on an arm’s length basis.
Additionally, an SMSF trustee must have in place an investment strategy for the super fund. This is a written document that outlines how the trustee plans to invest the fund’s money to ultimately provide the members with a retirement benefit. When the trustees put in place this strategy they need to give consideration to:
- Members’ risk profiles – to what extent are the members comfortable with investment risk.
- Diversification – the composition of the SMSF’s investments as a whole, including the extent to which they are diverse or involve exposure of the SMSF to risks from inadequate diversification.
- Liquidity – will the fund have adequate access to cash in order to meet its obligations, such as pension payments when they fall due.
As a result, while an investment into a startup may be appropriate for some SMSFs, the trustees need to consider what level of exposure should be in this area given they can be long-term, higher risk investments which may not offer liquidity for an extended period.
Ultimately, SMSFs are so popular because they allow control over how their retirement monies are invested. It is therefore up to trustees to consider their objectives and preferences, and invest in a way that they feel comfortable.
For those looking for an exposure to the higher growth that may come from startup businesses, this is an option, provided a measured approach is taken and trustees are careful not to breach the investment rules.
Darren Withers is head of strategy advice at the Elston Group.