New Industries Fund
Frequently Asked Questions
FAQ
Below are some answers to commonly asked questions about the
New Industries Fund.
Please click on the questions, or download the PDF documents with responses.
If you have further questions or would like to discuss the New Industries Fund, please contact us.
How does AxleTree approach ESG and the SDGs? These terms are quite often used interchangeably which can lead to a misunderstanding of investment priorities and monitoring. The AxleTree NIF focuses on sustainability which is the broadest classification here. We utilise the United Nations’ 17 Sustainable Development Goals to provide a framework for this, and we are particularly interested in nderstanding the trade-offs between objectives. In our assessments we reference the UNDP’s SDG Impact standards for Private Equity Funds. Because we are focused on the application of technology to these, we are naturally focused on those SDGs and related KPI’s concentrated around waste, water and energy. This is not to say we disregard other aspects; but these are not the areas of intended direct impact.
Does the AxleTree NIF sacrifice Return for Impact? No. There is also an element of philanthropy involved in many impact investment opportunities, while the AxleTree NIF expects to make normal commercial returns as well as material impact. For many objectives, government policy may be a more appropriate mechanism for achieving the SDGs, as may be investment (but not necessarily primarily in technology), which while we strongly support it, is outside the mandate of the fund.
Is the AxleTree NIF an Impact Fund? How is this measured? Most investment funds describing themselves as “Impact” have a focus on a specific SDG or a subset of that (e.g. climate change adaptation strategies in Micronesia), and a very specifically defined Theory of Change i.e. how their investment will help achieve the goal. The AxleTree NIF is a broad-based fund and does not set specific targets for the fund overall e.g. Greenhouse Gas Abatement per $ invested. We will set specific impact targets for individual investments (rather than the portfolio), across all material SDGs and relevant KPIs, and seek a measurable, material NET positive impact on sustainability, hence we will attempt to monetise impacts where feasible, in seeking a common measure to assess the trade-offs. These expected sustainability outcomes are combined with the base case financial profile that is expected to deliver them, to form the basis for our investment case Balanced Scorecard. As well as trade-offs we will also be conscious of double counting i.e. where we invest in two parts of a supply chain with overlapping scope of impact measurement. In addition, many Impact funds invest in areas which are still evolving such as nature-based investment or nature tech which are among other things highly dependent on Government Policy, which is only in its early stages of development (e.g. biodiversity Credits) or non-existent. Nor are these necessarily as technology focused as AxleTree’s target investments. Early investors in these sectors may do very well, or they may not. We will however be watching developments closely and it is anticipated that these areas may in the future come under consideration by AxleTree as they mature.
How does the AxleTree NIF approach reporting? Do reporting requirements influence investment decisions? AxleTree is determined that its commitment to ESG does not become simply a box ticking exercise to drive “ESG Scores”, which is a concern in many jurisdictions, but that it is meaningful and value enhancing. As a result, we will meet the continually evolving reporting requirements of our investors and of the jurisdictions in which we and our investees operate, but this is not the primary driver of our investment decisions, which are risk-appropriate returns and material contribution to Sustainability. The nature of our business means that we will be primarily focused on environmental impacts and trade-offs. The Energy Transition, in particular, will mean that we must closely monitor short and long-term social impacts as well, and we will always seek to use our position as investors to improve social outcomes for stakeholders in our investments. Good governance is a non-negotiable requirement. We take the position that to be a truly viable long-term investment, the investment must by definition be sustainable. This view does not preclude us from taking transitional opportunities, so long as we recognise these as such, and that they contribute to an economically, socially and environmentally sustainable transition, even if not part of the long-term solution (e.g. net zero liquid fuels). In exiting investments, we will also give consideration as to whether the sale may result in the dilution or loss of the sustainability benefits expected to be recognised over the original investment analysis horizon. AxleTree expects to become a signatory to the Principles for Responsible Investment (PRI) as soon as it is practical, as well as continuing its active engagement (moving to membership) with the Australian Sustainable Finance Institute (ASFI).
How does AxleTree invest ? The general rule is that we are, in the long-term, taking equity risks. These may be structured through a mixture of appropriate instruments, such as shares, preference shares, a partnership interest, an interest in an inincorporated JV, etc. We can and will invest in any form of convertible instrument that suits the profile of the asset and our risk appetite. We will consider straight debt only in conjunction with some form of equity exposure, e.g. we could use shareholder loans where we need to access cash flow that exceeds distributable profits, or where we need to keep our ownership percentage below 50%. However, we may use convertibles, or options, to put ourselves in a position where we can move to control if that becomes a requirement. If possible we will avoid being in the position of being both a secured creditor and an equity holder. Our preferred position is to control 15-50% of the equity, based on this being the common threshold for entitlement to a Board seat, whether or not we chose to take that up.
How does AxleTree decide which companies to invest in? Our default expectation is to invest in companies that meet our criteria for sustainability, maturity and financial performance. We will use any of the investment forms described above. Mostly we will invest in companies working with technology-based solutions that are moving into full-scale production or service. We expect these companies will have demonstrably sustainable and scalable revenues with profitable unit economics but may not yet be achieving full operating profit. Though a poor guide, using common vernacular, these could be roughly Series C but may be earlier or later. Our approach includes the intention to make follow-on investments to support sustained value growth for successful investee companies. When companies possess market access, operational resources, or other compelling assets we may invest to fund their acquisition of key enabling technologies. This might take the form of funding the acquisition of the rights or ownership of the technology, or it might be to acquire complementary businesses/competitors, e.g. an industrial waste processing business acquiring a university spin-out to enable new or better capabilities. When companies possess the enabling IP but lack market access, operational resources, or other key enabling assets, we may invest to fund acquisitions of complementary businesses, e.g. a roll up and consolidation of small-scale solar installation businesses. Investing in a start-up company in Australia will be considered to exploit a technology already proven in another market or, to acquire a technology that can directly enable value growth for our portfolio companies. Whenever we invest in a company we may choose to lead or to construct an investment consortium and will always have a clear strategy to bring our ownership back to target levels.
How does AxleTree invest in technology? This refers to our investments in which the primary focus of the funded effort is developing and proving up the technology. The legal form of the investment will be as described above. These investments may follow various evolutions, including: • The company in which we invest is only ever the owner of the IP, collecting fees/royalties, providing product support, and continuing to develop the technology. • Our investment is to acquire the rights to exploit certain technologies, most often that would be on the basis of a regional territory license. This may be through investment in the company that owns the technology, e.g. invest in the series C of the international owner of the technology in exchange for the Australasian rights or, through an investment in the Australasian operating company that is acquiring the rights, or we may choose to acquire the rights directly. • Acquire good technologies from companies that have failed for reasons other than the quality and potential of their product. This will only ever be done when we have an existing portfolio company capable of exploiting the technologies, or when we have a well developed high-confidence plan for the successful commercialisation of the acquired technologies.
What types of technology does AxleTree we invest in? Technology can be any of: • Supporting IT, such as energy management or trading systems. • Environmental capability enabling: site rehabilitation, turbine maintenance services, etc. • A process which produces a raw or intermediate material for consumption in production of an end product e.g. rare earths processing, e-waste, or plastics recycling. • Production of a component of the plant used in the process, e.g. an anode for hydrogen production, specialised chips, magnets, PV panels, turbine blades. • Manufacture and assembly of a final product, e.g. battery or wind turbine.
What types of projects does AxleTree invest in? This is involvement in a discreet productive unit utilising relevant technologies. For example, additional equity for construction of a new production plant, or a demonstration project, may be prohibitively dilutive, or take us over our ownership threshold. We may instead take a direct JV interest in the plant itself. It may also be desirable at times for an investee company to take an interest in a project to ensure that its technology is deployed, e.g. a solar panel manufacturer taking equity in a solar farm. It may be preferable for all partners for us to step into this equity position on their behalf. As the Fund grows and matures, there may be opportunity for direct investment in larger greenfield and brownfield projects deploying technologies unrelated to our portfolio companies. This is likely to be too dilutive to returns in the early years of the Fund. Examples could include utility scale power stations, clean fuels and fertiliser plants, water treatment plants, recycling plants, etc.
Why an evergreen fund and not a close-ended, fixed term structure? The AxleTree NIF is investing in a theme, that is the long-term application of technologies to support a more sustainable future, and not a style of investment such as traditional venture capital or LBO/turnaround premised Private Equity, where entry and exit points are clearly defined and for which such structures were originally developed. Our entry and exit points will be determined by the risk-return trade off at any given point in time, overlaid with considerations of portfolio balance and the continuing ability to make material contributions to sustainability outcomes. With an Evergreen structure, we can focus on the risk return trade-offs of a particular asset at any point in time and in its technology life cycle, maximising investor value. The structure also recognises that despite the long term momentum for sustainable investment, that it is a significant transition in approach. This means that we will be subject to (relatively) short-term reversals in government policy particularly in the energy sector), continued technological change, and broader market downturns. With the overall investment thesis of sustainability remaining intact, the structure allows us flexibility to ride out the troughs rather the being forced to sell long-term assets at a discount; or to distract the attention of management through the raising of new, secondary funds. Exits and new raisings can be based purely on portfolio balance, value and the pipeline of opportunities.
Why so big for a first fund from a new Manager? Application of technology to sustainability issues is highly capital intensive – we will be investing in manufacturing/processing capacity and/or deployment of technologies on commercial demonstration projects; or even in utility scale projects where this ensures the deployment of our portfolio company technologies. Any of these types of projects may have total capital costs in excess of AUD100M, and high levels of debt may not be initially sustainable. We expect to be making investments in the AUD5-25M range, so the target size also reflects the desire to achieve meaningful diversification. This is unlike, for example, software development, where scalability is dependent on variable resources (developers, sales and marketing, support) or trading platforms; or where the company is merely the licensor of the technology. Similarly, Impact Funds outside of those sectors where technology is critical, may benefit from relatively small investment, with access to working capital and training resources being a primary obstacle for many social enterprises; allowing smaller sized funds to be effective in delivering the desired outcomes. Software development will be vital to support the transition to a more sustainable World as well, but not without the physical assets for it to assist in managing.
How is your Performance Benchmark set? How is Performance calculated? The benchmark return for the Fund will be a blend of: • S&P ASX Infrastructure Index (30%) • S&P ASX Emerging Companies Index (30%) • S&P Australian Private Equity and Venture Capital Total Return Index (40%) • Plus 3.0% p.a. AxleTree has constructed a benchmark to reflect the risk profile/maturity of its target portfolio, with an additional premium to compensate for: • lack of initial liquidity, • heavier level of political risk compared to the underlying portfolios in the benchmark components, • to amortise the entry fee. These indices are publicly available other than the S&P Australian Private Equity and Venture Capital Total Return Index which is a subscription service, and which AxleTree will make available to the Trustee. The evergreen nature of the fund makes a fixed upfront return target inappropriate. This benchmark is in turn used to determine the Manager’s rights to receive a performance bonus on the one hand; and the right for investors to terminate the Manager for under-performance, on the other. The fund’s actual performance is calculated as an Internal Rate of Return using the opening Net Asset Value of the fund as a inflow, the closing Net Asset Value as an outflow, and accounting for all cash flows in and out of the fund, whether capital or income, during the calculation period.
How is the Manager’s Performance Bonus calculated? Is this paid on Unrealised Gains? Is it paid simply for the “clawback” of previous underperformance? The Manager is entitled to receive a performance bonus equivalent to 20% of the annual return above the benchmark return. This is paid in the form of B Units rather than cash, which are not transferrable, distributions attributable to them must be reinvested in additional B units, and which convert to A Units only after 4 years from issue date. The bonus structure recognises the evergreen, open nature of the fund, where for accurate measurement of performance, equity between new and existing investors, and price signalling when liquidity measures are adopted in the future, requires inclusion of unrealised gains in the performance measure. The performance bonus aligns the managers interests with those of investors, while ensuring that the benefit of unrealised gains does not immediately fall to the manager, but rather relies on valuations being maintained in the medium to long term. The Performance Bonus structure includes a high watermark mechanism that ensures that the Manager does not benefit from any outperformance which is simply the recouping of earlier under-performance. A bonus is only payable if target returns have been met for the period since the later of inception or the last bonus payment, to the calculation date.
How are assets valued? The evergreen nature of the fund requires annual independent valuations of assets for accurate measurement of performance, equity between investors, and price signalling in the future. Most assets acquired will be reaching the stage of positive cash flow and will be suitable for Discounted Cash Flow valuation. These valuations will be verified annually by independent parties. Assets which are pre-operating cash flow will be held at cost; publicly traded assets will be marked-to-market. Comparable market transactions may also be considered. Investments must stand alone as financial investments regardless of impact on sustainability; but must also demonstrate positive net sustainability. Hence the base case model will take the form of a balanced scorecard, defining both expected financial outcomes but also sustainability outcomes to be achieved by those cash flows.
How do I get my money back? The NIF will be required to distribute all taxable income on an annual basis. It will also have the option to make returns of capital at it’s discretion. Investors will have the opportunity to reinvest distributions. Units are freely transferable although where associated undrawn commitments exist these will need to be to a creditworthy party. The Manager will use its Best Endeavours to assist any investor seeking to sell its units. Existing investors will have pre-emptive rights to purchase these. After 5 years a Unit Holder may request a proposal to list the fund which would be subject to 75% Super Majority vote. The manager may also recommend alternative liquidity mechanisms such as through online trading platforms. After 10 years the Trustee may consider providing a redemption facility.
Are AxleTree's fees competitive? AxleTree believes that ongoing management fees and the performance bonus are competitive. Typical ongoing management fees for Venture Capital and Private Equity generally start at 2% of FUM. AxleTree’s lower fee structure recognises some economies of scale, with the more mature investments being more of the nature of Infrastructure Assets. The performance bonus of 20% above benchmark is in line with Private Equity norms, and lower than what would be expected in Venture Capital. This fee also covers all of the trustee and administration costs. The Management Expense Ratio cap of 4% covers both fees and other direct expenses of the fund; in particular, it captures approved due diligence expenses not able to be capitalised into a successful investment. The Manager is at risk for expenditure above this amount. The 7% Subscription Fee (4% cash to Axletree and 3% reinvested in B units) may seem high. AxleTree is a start-up manager and as such has additional expenses beyond those required for subsequent funds once the Manager is established. If the fund were totally reliant on external placement agents AxleTree believe that success fees of 5-6% cash would be payable, and indeed some will be used for this purpose. This is for the benefit of all investors in ensure the fund meets its closing target and can obtain the spread and scale of investment it seeks. It also recognises 2 years plus of sweat equity and cash contribution by the management team. The 3% reinvested in B units is at risk, hence the higher total fee, but is important in aligning management interests with those of investors.
Do I have an opportunity to co-invest? Yes. AxleTree encourages co-investment where for portfolio balance it does not wish to provide the full amount of capital available for investment. Where these opportunities become available, AxleTree’s policy will be to first offer these to its cornerstone investors (those committing $25M or more to the NIF), then to the remaining NIF investors and then to other funds that AxleTree may manage in the future, and to its partners in other ventures where a good working relationship exists. AxleTree would normally expect to manage this co-investment under a single asset mandate in which case the co-investment would be counted towards NIF Funds Under Management in calculating the marginal management fee.
If you have any further questions or want to discuss the New Industries Fund, please contact us today.