Greg Bright, Investor Weekly, 23 August 1999
UNSOLICITED approaches for investment in individual projects, which are a fact of life for fund executives, are likely to increase in frequency and must be handled with care, according to a leading development capital manager.
An executive director of Gresham Partners, Les Fallick, told seminars of the Fund Executives Association Ltd (FEAL) last week that trustees and executives of Gresham's super fund clients had advised that they received regular unsolicited requests for "investment assistance".
The requests came from a variety of sources, ranging from sensible approaches from local businesses or employer members of funds to backyard investors who have built "a perpetual motion machine in their garage or, these days, a you-beaut internet/e-commerce business".
Fund executives also said they faced "real danger" when attending social functions where "everyone has an investment idea that needs only a couple of million" to get it off the ground.
Fallick, who is well known to large super fund trustees and executives due to his former position as manager of Development Australia Fund and an organiser of the Conference of Major Superannuation Funds, said that very few funds had developed a systematic approach to handle these sorts of approaches.
"Our view is that, with the increasing public profile of super and super funds, the number of such approaches will steadily increase," he said.
"Accordingly, an ad hoc approach to such inquiries will become increasingly unsatisfactory. In addition, as public-offer status becomes more common, how funds handle such approaches will become part of their overall customer responsiveness profile."
Fallick told the meetings of FEAL members in Melbourne, Sydney and Brisbane last week that they should have a policy to respond to these approaches which showed the fund in a good light, assisted appropriate applicants to find investors and created improved "deal flow" for the development/venture capital sector in which the funds might invest.
Fallick suggested that not only should fund executives determine how they would respond to approaches, but also to build the preferred response into staff training, so that everyone knew how the fund sought to deal with them.
He advised that it was not a good policy to just say 'no'.
"My recommendation is that you indicate that the decision to commit some of the fund's capital to a particular investment is handled by various types of external fund managers and seek to redirect the inquiry to an appropriate manager.
"As a note of caution, when you pass on an inquiry you are making a suggestion, not a recommendation. You are not advising the inquirer, merely providing information. Beware of liability issues here.
"You also need to beware that some people may use the information you provide to go to a fund manager or venture capitalist and say 'fund X told me to come and see you' or 'fund X told me you invest in my kind of company' or even, as I have had put to me, "fund X said you would give us some of their money for our project'."
Fallick said that there were several sources available to from which to find names for redirection purposes, including a directory published by the Australian Venture Capital Association Ltd and a privately published Australian Venture Capital Guide. There were also the development capital managers which the fund might use.
If a fund executive wanted to go beyond that and select the most appropriate manager for the project, Fallick suggested that seed capital was usually provided by business angels or family and friends, start-up capital by smaller venture capitalists and expansion or management buyouts by larger firms such as Gresham, AMP, Macquarie or Catalyst.
Fallick said unsolicited approaches to a fund were logical and inevitable, so an ad hoc response regime was not in the best interests of the fund, was not good PR and did nothing to facilitate the better operation of investment markets in Australia.