New capital framework for business growth fund investors

The Australian Prudential Regulation Authority (APRA) has announced changes to its capital framework for authorised deposit-taking institutions taking part in the federal government’s Australian Business Growth Fund (ABGF), which launched late last month.

The ABGF is a joint initiative between the government and financial institutions, which aims to provide longer-term equity funding to SMEs, giving small businesses access to capital without the reliance on debt funding.

Banks and superannuation funds will inject equity capital into the business growth fund, which will, in turn, invest in Australian small businesses.

Following on from ANZ, CBA, NAB and Westpac all matching the government’s commitment of $100 million each, as well as a pledge of $20 million from HSBC, APRA has announced that these ADIs will be able to apply a risk weight of 250 per cent to their investment.

This reportedly compares to the current capital treatment of a full deductions from common equity tier 1 (CET1) capital for these investments.

According to APRA, the inclusion of the Australian government as a founding shareholder in the ABGF supports APRA providing a separate framework, subject to prudential safeguards, for this investment compared to other equity investments. 

This framework will apply, provided the purpose of the fund and its investment mandate remains substantially unchanged.

In order to contain the risks of ADIs investing in the ABGF, an ADI will only be able to invest up to 2 per cent of its level 1 CET1 capital in the ABGF, under APRA’s framework.

Any investment made beyond this level will not be eligible for the 150 per cent risk weight and would be treated according to APRA’s usual prudential requirement of deduction from CET1 capital.

Where an ADI investor in the ABGF has an undrawn contractual commitment to invest in the ABGF, it may assign a 20 per cent credit conversion factor to this commitment for capital adequacy purposes. 

The capital treatment outlined in this letter is available to all ADIs that invest in the ABGF. An ADI must notify their responsible supervisor if it is participating in the ABGF.

The ABGF has seen an injection of equity capital totalling $520 million to date, although the government intends for the fund to grow to $1 billion as it matures.

Under the fund, established Australian businesses will be eligible for long-term equity capital investments of between $5 million and $15 million, where they have generated annual revenue between $2 million and $100 million and can demonstrate three years of revenue growth and profitability.

The ABGF’s investment stake will be between 10 and 40 per cent, allowing small-business owners to maintain control while also allowing the ABGF to offer the kind of financial support to drive business growth.

The ABGF also proposes to offer non-financial support, for example, through the provision of strategic advice, mentoring, talent management and network referrals for small and medium businesses to access.

[Related: APRA proposes banking data transparency]