The chair of Innovation Australia talks to Christopher Niesche about changing the risk averse mindset of organisations and promoting future growth.
In the 1970s, Bill Ferris AC introduced the venture capital industry to Australia. In the 1980s, with business partner Joe Skrzynski, he kicked off our private equity sector. Now he’s hoping to bring about another major change – helping the push to an innovation-led economy.
Ferris is the newly appointed chair of Innovation Australia, which will advise the Government on science, research and innovation. It is the spearhead of the Turnbull Government’s innovation and science agenda, aimed at creating business growth, local jobs and global exports.
The chairmanship is a role Ferris will add to his other responsibilities as founder and co-chairman of CHAMP private equity, as well as his philanthropic endeavours.
Introducing innovation to the economy is as much about cultural change as it is about tax breaks and government policy, says Ferris.
Instead of being afraid of disruption, company boards need to embrace innovation if they want to achieve the sort of growth rates that will ensure Australia’s ongoing prosperity. “We’ve got companies and boards of directors of major public companies that think that if you better last year’s sales by 2 or 3 per cent then that’s okay. Well, it’s not okay,” he says.
“We need this other set of skills on boards that can drive growth and product development and drive in to new markets. The skill set for that is a huge challenge. I don’t have the answer; I just have the impression that risk aversion and the governance stuff is snuffing out the excitement of new growth, new investment and taking risks.”
Ferris is passionate about innovation and said he didn’t have to think too hard when offered the role by Prime Minister Malcolm Turnbull and Industry, Innovation and Science Minister, Christopher Pyne.
“I was encouraged by the Prime Minister and by what he was trying to achieve and also by Christopher Pyne’s enthusiasm and commitment to all of this,” he says.
“Having spent decades in venture capital and private equity dealing with growing companies and being involved, in particular, with the health and medical research sector, I felt that I probably could make a contribution.”
Ferris is blunt when he talks about what’s at stake in the Government’s push for innovation.
“It’s an Australian future that’s at stake, by which I mean future prosperity and future jobs and future way of life,” he says. “If Australia is to return to 4 to 5 per cent GDP growth, I don’t see how it’s going to get there without a very considerable acceleration of innovation.”
Ferris says Australia should be “tremendously proud” of its very high quality research record and prowess internationally in terms of discoveries in disciplines such as health and medical research and the physical sciences. In fact, the country ranks near the top of the Organisation for Economic Co-operation and Development (OECD) tables in terms of quality of research.
Yet as a country, we rank 29th out of 30 in terms of collaboration between industry and academia and as a result Australia isn’t commercialising its breakthrough research. We risk squandering our research infrastructure as so much of our intellectual property drifts offshore or otherwise dies a slow death, he says.
“We should all be asking, why is this happening? Why aren’t we getting this collaboration and how on earth do we fix it?” says Ferris. “And how on earth we fix it sooner rather than later is a great national challenge. It’s certainly a challenge or a riddle that I’m dealing with, and that the board of Innovation and Science Australia is asked to deal with, and that I think all Australians need to think about and contribute to.”
Innovation is a word bandied around a lot these days. When Ferris and his colleagues at Innovation and Science Australia talk about innovation, they mean the commercialisation of research and the entry into new markets. “Research and inventiveness, and often imagination too, are essential ingredients, but by themselves do not produce innovation. Innovation requires the development of products and services from those ingredients and their success in the marketplace,” he says. “My focus is about that.”
Ferris is well placed to lead Innovation and Science Australia. He has worked in Australia’s capital markets for over four decades. He has also been closely involved in research and innovation through his past chairmanship of the Garvan Institute of Medical Research and work on the Federal Government’s Strategic Review of Health and Medical Research in Australia (the McKeon Review, which made its recommendations in 2013).
He grew up in Roseville in Sydney’s north shore and attended Shore School in nearby North Sydney. After finishing his leaving certificate aged 16 he joined the Colonial Sugar Refining Company (CSR) as it was then known and studied an economics honours degree at night at the University of Sydney.
He said he’d always been interested in business – his father was credited as the inventor of the first portable car radio in the 1930s, which he built into a successful manufacturing business, employing more than 700 workers by the 1960s.
After a few years at CSR, Ferris took an MBA at Harvard Business School. While the debate about the value of MBAs arises from time-to-time, Ferris says his experience was invaluable. “Challenging the way one approaches problem solving and the way in which one learns to work with people, and to value teams and networking, was a major learning that has stayed with me,” he says.
Indeed, Ferris remains on the Harvard Business School advisory board and through the Harvard Club of Australia (HCA) the Ferris family supports the HCA’s not-for-profit (NFP) fellowship program, which has over the past 15 years sent nearly 40 NFP CEOs to undertake the business school’s NFP strategy course in the US.
It was while at Harvard that Ferris became fascinated with venture capital. He took all available new business courses and decided there was a case for a venture capital firm to start in Australia. In fact, his second-year thesis morphed into a prospectus for a new business, his first start-up.
If Australia is to return to a 4 to 5 per cent GDP growth country, I don't see how it's going to get there without a very considerable acceleration of innovation.
In August 1970, Ferris launched International Venture Corporation (IVC) – “a very modest name”, he now jokes – and with it Australia’s venture capital industry. It raised less than a million dollars from investors and invested in early stage and start-up businesses, though with less emphasis on disruptive technology than these days. Nonetheless, it was meeting a need that wasn’t being fulfilled in Australia’s capital markets.
“The banks then, and for a long time after, were very ‘bricks and mortar’ focused, real-estate focused and personal-guarantee focused in their lending portfolios so were not particularly interested in supporting venture capital,” he says.
One of IVC’s businesses was Barlow Marine, which ran into financial trouble, so Ferris went in as CEO to turn it around and build it up. “It was an early baptism for me, being on the other side of the desk, in the entrepreneur’s position of running the business. It was a manufacturing and exporting company and it was a new product development-focused business, very exciting in the sailboat fittings business worldwide,” Ferris says. On the back of this manufacturing export success, Ferris was invited by the Government to lead a review with recommendations for improving Australia’s national export performance. This review assisted the formation of Austrade, which Ferris chaired from 1984 to 1993.
Ferris ultimately and successfully sold the Barlow business then founded Australian Mezzanine Investments (AIML) in 1987 with Joe Skrzynski, who remains his business partner in CHAMP Private Equity. AMIL continued to do expansion capital transactions but also did small control buy-out transactions or management buyouts, as they’re also known.
“It was pioneering in the buyout business and pioneering in the sense that our first fund was subscribed by four institutional investors, so it was the first institutionally backed MBO-style fund,” he says. Ferris says this was “brave” of the superannuation investors, but “as luck would have it” the fund produced very good returns, paving the way for a second fund.
“We had to prove that there was a role for institutional investment in private company activity, as opposed to public equities,” he says.
“It’s a mind and risk shift, because with public equity if you want to sell, you ring up your broker and sell out. In private equity you can’t do that, you’re in for the voyage – hopefully a positive voyage, but not always. In any case, you’re in there with your sleeves rolled up to help management make a success of the business, then select a time for all the stakeholders when you think it’s right to sell.”
A pragmatic approach
One of the lessons Ferris says he has learned through his involvement in private equity is to “not to be greedy”.
“We’ve always tried very hard to make sure that we leave the company better than we found it. If we’re going to go into the public markets, we like to be as sure as we can that the stock’s going to go up and not down,” he says.
“Life’s too short if you do it the other way. Just because you might be able to cream the peak of a public market float price knowing that you’re unlikely to see that price sustained – if that’s your motivation for the exit, it may be rational behaviour but it might not be rational in the long-term in terms of reputational respect and reputation for consistent performance.”
The reputation of private equity firms has taken a battering in Australia in recent months, following the collapse of Dick Smith after it was floated by Anchorage Capital Partners, as well as the plunge in Spotless’s share price after it was floated by Pacific Equity Partners in the middle of last year.
Ferris says the current preoccupation with a few poorly performing private equity initial public offerings (IPOs) is understandable “schadenfreude”, but he seems nonetheless frustrated that successful private equity floats receive negligible attention. He points to Ooh! Media, an advertising signage and outdoor media company, which CHAMP floated in late 2014 at $1.93 a share and notes the shares were trading at $4.57 on the day of our interview.
I think private equity has been an easy target and perhaps hasn't done a good enough job talking about what it does achieve.
He cites data from the Australian Private Equity & Venture Capital Association Limited (AVCAL) showing private equity backed IPOs since 2013 have performed “considerably better” than others.
“I think private equity has been an easy target and perhaps hasn’t done a good enough job talking about what it does achieve,” he says.
Acting on opportunity
CHAMP was formed in 2000 when Ferris and Skrzynski saw the opportunity to create a dedicated buyout fund in Australia similar to those already established in the US. “We saw an emerging gap in the capital markets which Australia hadn’t done anything about and which we could again hopefully lead the way, which we did,” he says. Ferris and Skrzynski believed that if they were able to raise funds then investment opportunities would find them. But putting money in this new type of fund required an article of faith from investors.
That faith was repaid when the first CHAMP fund performed well, creating an appetite among investors for subsequent funds, as had happened with the early AMIL funds.
Private equity has become an increasingly important part of Australian capital markets in the 16 years since CHAMP was founded. Ferris says it has also become more professional and sophisticated, to the point where accountants, lawyers and insurance companies all have specialist private equity practices.
“In terms of its role, it’s here to stay, because private capital can do things in the market place that often public markets cannot,” he says.
Ferris says the English invention of the limited liability corporation was one of the great inventions of the western world in terms of capital formation and “enabling stuff to happen”, but over time the separation of ownership and management has increased in public equity companies. “In private equity, ownership and management are absolutely aligned and talking on a daily basis, and with a much clearer alignment of shareholder and manager interests than is possible in the public arena,” he says.
Private equity also has the advantage of time. Investments and decisions are made with a five to 10 year horizon, but in many public companies “it’s more like 10 weeks”.
“Private equity can take a much longer-term view of things that need to be done and therefore has a preparedness to get on with tough decisions and tough medicine in the short term in terms of earnings impacts and so on that public companies don’t have a licence to do, given the way public markets work and the way analysts track the stocks and the way investors expect dividend performance etcetera,” he says.
Instead of being focused on dividends in the way public companies are, private equity companies reinvest their cash to expand their activities and improve their earnings. “When you think about dividends – and this is aggravated by Australia’s much-loved franking credits regime – they are really an admission that the company no longer knows what else to do with the cash because it’s run out of opportunities to self-invest, so it’s returning all the money to the shareholders or buying back shares,” he says.
“That can be rational behaviour but the current and future role for private equity has to be about growth, not only about cost savings or cost-outs.” This view is at odds with the image of private equity in the popular imagination, which is that it’s all about sacking staff and cutting a company back to its bare bones.
“I think it can be what’s needed occasionally. There are companies that become fat and lazy. There are companies that are inefficient. There are companies that don’t work their balance sheet as they should, and they should be cleaned up and called to account. If that looks like stripping and cost cutting for no good reason I think sometimes that’s misperceived, it can be about really concentrating on productivity,” Ferris says.
However, he adds that ultimately there is better money to be made by growing businesses. “The big challenge for all of us in a low-growth economy, whether you’re in public or private equity, is what are you going to do differently from your competitors, what new markets can you find quickly and what are you doing about innovation – that is, new products, and new technologies to drive what might be a pretty ordinary looking business into something that’s more exciting. Therein lies the challenge for Australian business, but also an opportunity for private equity to do a lot more of that,” he says.
The issue at heart
This brings us back to innovation. Ferris says he doesn’t have all the answers and these will differ by each sector’s needs. Business needs to collaborate more with researchers and academia to take advantage of their discoveries rather than see the research infrastructure squandered and the intellectual property drift offshore.
There also needs to be more emphasis on the so-called STEM subjects (science, technology, engineering and mathematics) to help resource innovative businesses in an increasingly digitally driven world. Ferris says this is already underway.
However, overriding all of this is the cultural change that is needed. Ferris says a fear of failure in Australia has held back the rate of progress in start-ups and new experimental investing by established companies. “Unless you can get to a point where the excitement of gain trumps the fear of failure in boardrooms, we won’t make the impact we should in terms of newness and innovation,” he says.
To some extent, government and business leaders will play a role in that cultural change, but Ferris expects that young people will ultimately lead the charge to embrace innovation and push it up through companies. They are excited about new technologies, comfortable with the digital economy and want jobs involving innovation.
Outside of his work at CHAMP and Innovation Australia, Ferris also has a boutique vineyard, JoJo’s Jetty Wines on the Colo River in the Hawkesbury Region north-west of Sydney. Established on a 60-acre property owned by the Ferris family for over 40 years, the vineyard’s wines are available in more than 30 restaurants in London as well as locally.
“The more you sell the more you lose, but it’s a good fun activity,” he says.
He is also a keen sailor and with Joe Skrzynski owns Archina, a 1930s ketch that sailed in the first Sydney to Hobart yacht race. He remains keen on sailing, although the last Sydney to Hobart race he competed in was in the 1990s.
These days he keeps fit by swimming daily at the Bondi Icebergs pool in Sydney.
Ferris is also involved in several philanthropic ventures. Along with his work at the Harvard Club of Australia, he is particularly proud of what was achieved at the Garvan Institute of Medical Research in Sydney during his chairmanship, when the Kinghorn Cancer Centre was built. The centre aims to align world-class cancer research with rapid translation to the clinic to improve outcomes for cancer patients.
“I’m very keen to see it continue its journey to develop bespoke therapies for cancers and other diseases aided by its prowess in gene sequencing technology and analysis,” he says.
Ferris says he has probably underestimated the workload in chairing Innovation and Science Australia.
In fact, it has just launched a global search for a CEO and expects to make an appointment around the middle of the year, which Ferris jokes “should help me get some of my life back”.
“We need a very talented CEO to drive the office of Innovation Australia and we are also about to get some people on the board of Innovation and Science Australia who will really make a difference and who have the experience, the passion and the profile.”
Driving the sort of cultural change the Government is seeking is a huge undertaking, but Ferris appears undaunted. “The encouraging thing is that Australians are inventive and are great adapters of technology,” he says. “We seem to embrace it and revise and develop it, but in terms of actually picking up our own inventions and getting them to the market place first, this is still a big challenge.”
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