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Small-Cap Stocks and Significant Investor Visas: A Investment Siren Song?

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New Visa Rules
Australia’s two-year-old Significant Investor Visa (SIV) underwent recent changes meant to enhance its control on property investment. International investors, particularly those from China, are in a prime position to take advantage of the opportunity to invest in small companies eager for foreign capital. The SIV has the added advantage of acting as a kind of business visa for Australia, allowing foreign investors to qualify for residence without having to make direct property investments.

The Effects

Small-Cap Funds
Among financial analysts, these changes engender an overarching concern that the influx of business talent looking to take advantage of SIV’s will ultimately stress small-cap stocks. In much the same way that increased demand caused property prices to skyrocket, the thought is that small-cap companies will see a marked increase in investments. Small-cap funds are easily overwhelmed, and targeted investment from foreign sources may push the fund valuations too far. The SIV requirement is of 40% of the initial $5 million investment goes into small-cap and venture capital (VC) funds. Essentially there is no way around overloading small-cap funds, and there is inherent risk in stressing the market.

The Stock Market
Experts estimate that new investments could be in the billions. Financiers are concerned, however, that the influx of investments is more than the Australian market can handle. With the SIV requirement that investors direct 40% of the initial investment to small-cap and VC funds, there is the threat of non-compliance. That is, small-cap funds must place 80% of managed assets into companies with market capital totals less than $500. Such companies comprise one-fourth of the ASX Small Ords index, which trades at 16 times its earnings and has been down 18% since 2010. The high trading and drop in value equate with increased risk for investors. Compared to the S&P/ASX index, which returns close to 14% on investments, the ASX Small Ords index is a less attractive option. But it is the only option for those seeking a SIV.

Compared to Other Countries
Unlike other countries, the rules to qualify for an SIV in Australia are still attractive to foreign business talent. In the United States, foreign investors face a two-year waiting list. Canada, meanwhile, limits the number of visas offered—a paltry 50—and demands a C$2 million initial investment in venture capital. The United Kingdom raised the investment stakes to 2 million British pounds, doubling the amount needed to qualify for a business innovation and investment visa.

In Summary
Although Australia aimed to tighten the requirements to qualify for a SIV, the potential returns for foreign investors are appealing. A business innovation and investment visa remains an attractive option to foreign investors, particularly Chinese investors. Chinese investors look to the SIV as a way to begin the process of declaring Australian citizenship, seeing the move as a way to secure a better lifestyle. Also, being granted a business visa for Australia allows Chinese investors to avoid the sweeping anti-corruption movement in China. The SIV affords Chinese investors the ability both to protect and to grow their assets.

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