With investment opportunities are drying up across Australia, where can investors turn? Are there any profitable ventures left?
With tightening interest rates and shrinking investor confidence, sink or swim seems to be the mantra of the investment world right now. But what if your industry was in line for a $15 billion dollar hit of adrenaline?
That would change things.
The government’s freshly announced National Reconstruction Fund (NRF) is a $15 billion lifeline for manufacturing and industry.
It promises to revitalise our domestic industrial base and transform our economy into a goods and innovation powerhouse. Investors have a new silver lining to believe in. This is a once in a generation investment – one of the largest in our peacetime history – and if you snooze, you lose.
Commercial property pundits should have their ears pricked. Just when capital is retreating on all fronts, you have the federal government eager to pry open its war chest.
So what is the NRF all about?
The National Reconstruction Fund is a crucial financing vehicle for industrial and regional projects. It funnels money into manufacturing prospects through a co-investment model: the government partners up with private investors to fund manufacturing projects, offering financial support to drive business growth.
The government will both advise projects and fund them, opening up network referrals, delivering advice, loans, equity, and capital guarantees. Currently it is angled towards renewable energy, transport, medical science, agriculture, defence, and low-emissions manufacturing. The industries of the future.
That’s where the hints stop, investors have all the jargon and subtext they need. Help Australia build things again, and bring an untapped reserve of taxpayer funded money to your investments.
What does it take to turn on the federal funding tap?
Getting an approval as a business is as much a value judgment as it is a financial assessment.
The fund makes an explicit commitment to entrepreneurial Aussie SMEs facing significant expansion opportunities. Take that as you will. Businesses are eligible to apply for long-term capital investments of between $5 million and $15 million if they have generated annual revenue of between $2 million and $100 million, and can demonstrate three years of profitability.
That’s not all. The NRF will take a maximum stake of 40%, allowing SMEs to maintain control over the business in the long-term. They want the window seat, but are more than happy to let developers fly the plane.
The NRF views investments as partnerships. As a minority equity investor, the $5 billion from the fund is already available, while an extra $10 billion will become available over the next 6 years. In terms of leverage, the NRF targets projects with less than 50%.
For investors, the specifics of the co-funding model have yet to be announced. But you can bet it will be tightly regulated who can contribute and how much. I imagine the preference will be for institutional investors, then large sophisticated and wholesale investors.
Where should investors direct their funds?
Investors should look to advanced manufacturing, clean energy and defence. These are the boom industries that the government is eager to fund.
Defence industry in particular is a prominent engine of economic growth. It is an evergreen and recession-proof space, existing in a vacuum well outside the business cycle. Over the next decade we’re expecting astronomical growth in the industry. Rising tensions in the Asia-pacific, the newly minted AUKUS agreement, and large new defence contracts will require supply to scale up massively. Investing in home-grown defence innovation will be lucrative.
Defence businesses in Shoalhaven such as Air Affairs, Global Defence Solutions, and Opstar are leading the charge in capability expansion. The Shoalhaven area has a gross regional product of $26.3 billion and employs over 160,000 people. It has over $32 billion worth of defence contracts and with over half a trillion dollars in defence funding expected to flow through to Australia, there is a certain and profitable future for capital investments in defence.
Investing in defence projects and businesses with defence contracts will pay dividends. It represents a truly incredible growth opportunity and is just waiting for the right investor to be realised. Investors can expect a certain return on investment, as there will always be a need for new supply of defence goods.
Green energy and production are the other boom sectors that the government is keen to back.
The Clean Energy Council reported that $4.3 billion was invested in renewable generation and storage projects in Q4 of 2022 and that annual investment rose by 17% from the prior year. It’s the highest level in four years and a signal of turning momentum. Investors and developers are getting on board with the government’s plan to electrify the grid.
Currently, renewables make up a 30% share of national power. The government wants to super recharge that to 82% by 2030, underpinned by a $20 billion funding commitment. That is driving a rapid scale up in construction of renewable energy, with Macromonitor predicting a 49% growth in 2022/23.
With renewable energy construction expected to surge over the coming years, there has never been a better time for investors to get their capital behind it. They can generate stronger returns and can fund more ambitious projects with the government as a co-investor. And who could be a better partner than the government? At least you know they’ll cover their share on time.
There are things to consider as an investor.
Large investors will want to act quickly to avoid crowding out, as the government is keen to mobilise superannuation funds. You want to get your foot in the door first so that you can secure lucrative long-term contracts.
This model should sounds somewhat familiar.
Co-investment schemes have been generating strong momentum in the private lending space. The coordination of funds has become more important than ever as credit markets are choked out by high interest rates. Furthermore, institutional investors have long been an engine of growth in private debt.
They dipped their toes in the market and liked what they saw. It is now time for a full scale mobilisation. So don’t get left behind!
How can you make it work for you?
The government is opening up its war chest to rebuild a deficient manufacturing industry and make our goods globally competitive again. It hopes to fund $30 billion in public-private partnerships and it is gearing up for commitment that will span decades.
Australia ranks plum last in manufacturing self-sufficiency. The government wants to correct that with the national reconstruction fund, a bit of a misnomer, given that we are building totally new capability rather than restoring lost capacity. That might be the point. We are making up for lost time with the NRF.
So as an investor, you have a big choice ahead of you. Mobilise your funds and ride the tide of government funded investment, or get left behind.