Confidence, markets dive… SMEs to feel credit squeeze first… Free digital business PDF… DIY super in taxman’s sights… Small caps Noni B and Reject Shop strong… Where Besen capital goes… Wage growth slipping, dollar falling

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Consumer confidence and markets dive on sub-prime shakes

Australian markets dropped to their lowest point in more than four months today, as concerns heighten about the impact the shaky US sub-prime market will have on interest rates in Australia and around the world.

The S&P/ASX 200 lost as much as 2.4% this morning before rallying slightly to be down 111.2 points, or 1.9%, to 5853.6 at 11.35pm.

A profit downgrade by US retail giant Wal-Mart, triggered by predictions of a slowing US economy, accelerated selling in markets already on a downward trend because of international financial volatility.

And in a worrying sign that the instability in international financial markets is starting to affect the economy, a key measure of consumer confidence for August dropped by more than 8%.

The Westpac-Melbourne Institute index of consumer sentiment fell 8.1% in August to 110 points, a drop Westpac chief economist Bill Evans says is caused by a combination of financial market wobbles and the interest rate rise by the Reserve Bank of Australia earlier this month.

The number of people who felt it was a good time to buy a house dropped 19.6% in August, while there was a 15.1% fall in the number of people who felt it was a good time to buy a major household item.

Evans says the fall “must be associated with turmoil in financial markets”, although he says it is likely confidence will rebound as the memory of the 7 August interest rate rise fades.

Mike Preston


Business owners vulnerable to credit squeeze

Small business owners, contractors and the self-employed are likely to be the first to feel interest rate pain because of the credit squeeze on international markets, a banking industry expert says.

The lower employment and income security of many self-employed people means they are much more likely to have low-doc loans with the non-bank lenders who are being hit hardest by tighter conditions on international financial markets according to Ian Rogers, the editor of banking and finance publication The Sheet.

This week non-bank lenders such as The Bluestone Group and Rams Home Loans have revealed that they will have to pass on the higher cost of borrowing they now face on international markets to consumers via higher interest rates.

Rogers says most mortgage providers are probably already facing a similar credit squeeze which they will have to pass on to consumers in the near future.

Even though low-doc loans are much less risky than the sub-prime mortgages that are defaulting in increasing rates in the US, they are still higher risk than conventional mortgages. This means international banks looking to avoid financial risk are increasing lending rates to financial institutions exposed to the low-doc sector.

The effect, Rogers says, is that many non-bank lenders are facing higher costs that they will be unable to absorb for long.

“The big retail banks have a much more diversified balance sheet, but non-bank lenders have to pass through costs more quickly to remain liquid and profitable, and that means increasing interest rates,” he says.

Mike Preston


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DIY super high on tax office hit-list

The trustees of DIY super funds, many of whom are SME owners, are set to come under increased scrutiny from the tax office.

Tax Commissioner Michael D’Ascenzo singled out self managed super funds in his most recent monthly update, saying that the tax office plans to increase compliance activity to ensure that trustees and auditors are following the law.

“We will take action against those who don’t make a genuine effort to comply, or who set out to deliberately avoid their legal obligations,” D’Ascenzo says.

People attempting to access their funds in DIY super funds before retirement will be a particular focus.

“We continue to be concerned about people using their fund to gain illegal early access to superannuation,” he says. “Last year we contacted members of 450 SMSFs who had inappropriately accessed their superannuation. Early access to superannuation shows an intentional disregard for the underlying principle of superannuation.”

For more information on how to make sure your self-managed super fund gets tick from the tax man, see SmartCompany’s story on Super Tax Risk.

Mike Preston


Small cap results: Noni B and The Reject Shop

As the sharemarket takes a hit, small caps are reporting strong results. Discount retailer The Reject Shop posted profit growth of more than a third to $12.3 million in 2006/07, after opening 22 new stores and boosting sales by 18%.

Sales were up from $237.2 million to $280.5 million in the 12 months to 24 June and the company is forecasting earnings of up to $15 million for fiscal 2008. Future earnings growth will come from 20 new stores next year.

Women’s fashion chain Noni B announced sales growth of 7% to reach $123.8 million in 2006/07 and modest after-tax profit growth of 1.2% to $8.2 million, which is at the top end of the estimate given in April. In its release to the market, the company says market conditions have been difficult, especially in NSW.

“At this early stage, we remain cautious about first half performance due to the soft economic conditions in New South Wales, the continuing effect of the drought on rural incomes, and the possible impact of the general election on consumer spending,” Noni B’s managing director Alan Kindl says.

Jacqui Walker


Capital source? Where the Besen family puts its money

Nesher Development Capital, the private investment vehicle of Melbourne-based Daniel Besen, has changed its name to Besen Pty Ltd and moved to Collins Street, Melbourne.

The company is one of several investment companies owned by the well-known Besen retailing family dynasty, which founded the Sussan Group. Sussan now turns over more than $600 million annually and is owned by Daniel’s sister Naomi Milgrom.

For the Besen retail and property family dynasty, the Collins Street address is historically significant. Daniel’s mother, Eva Besen, is the daughter of Sam and Fay Gandel who operated the first Sussan store in Collins Street in 1939.

In 1950 Eva married Marc Besen, whose career eventually took him from hosiery wholesaler to retail and property magnate. Their son Daniel, apart from being a private equity investor, is a lawyer, philanthropist, cultivator of the arts and caretaker of certain historical Jewish interests.

The family members, while maintaining low profiles, are key investors in and developers of Australian businesses. But their operating mandates are somewhat different to those of private equity and venture capital funds managers. For companies looking for capital it is a good idea to understand how the investment company works.

The company, staffed by a team of four, is led by Andrew Post, formerly of CVC Sustainable Investments and Quadrant Private Equity.

Earlier this week, Besen and media-analyst wife Danielle (who sold Melbourne-based fashion house Saba in 2002) sold their interest in upmarket apparel supplier Mimco, which sells luxury ladies accessories through a David Jones concession, a number of dedicated boutiques and online.

Other investments include stakes in online employment portal SEEK, in which Besen was a founding investor, and retail fruit and vegetable juicer Boost Juice. Minor investments include stakes in unnamed ASX-listed small caps, as well as between $2 million and $10 million in domain name and web hosting business SmartyHost.

In tandem with Technology Venture Partners, the same amount has been placed in California-based mobile VoIP developer mig33. One of mig33’s principals is Steven Goh, the technical developer of Perth-based online stockbroker Sanford Securities.

A third recent Besen investment remains under wraps, however Andrew Post was prepared to say it was in the entertainment business. Besen is known to have been involved for a number of years with Victorian dance company Chunky Move, along with Whiporie NSW-based children’s entertainment producer Mememe Productions.

“We’ve been quite active with some investments,” Post says. “We’ve got a deal that we expect to complete this month which is a good sized business, and again we’re investing between the $2 million and $10 million range in expansion capital. We’re in due diligence on another opportunity again of similar size… and part of our portfolio is to just allocate a small amount to some early-stage deals.

Specific sectors aren’t favoured, although resources are sidestepped – Post says the volatile sector is outside Besen’s domain. Besen’s focus on the smaller end of the listed market also remains relatively minor in proportion to total investment.

“It’s a bit different with institutional private equity,” Post says. “For me in assessing a company there’s not a lot of difference in the market sizes in the small-cap area compared to the ones I’m looking at in private equity.

“They’re similar companies – quite often needing expansion capital, high growth, capped at under $100 million or under $50 million, and some are privately held and some are listed.”

Post says that despite his background at CVC Sustainable, that sector was also not in focus. “I actually saw good growth in quite a lot of sustainability,” he said. “The quality of the deal flow, and the opportunities were getting better and better. But it’s still a hard road. It’s still in early stages of the industry. A lot of them are early stage, and my personal investment bent is more to the mid-market.”

Post attributes Besen’s name shift to “a change in the nature of the business”. He says Besen would focus more on private equity and property development, and that Nesher, hatched during the 1990s, was more a reflection of the dot-com era.

Besen is solely backed by Daniel Besen with no funding from other sources. Queried on Besen’s asset backing, Post says: “We don’t disclose it because it’s private… but it’s fair to say the investment range is between about $3 million and $15 million in any one transaction. It’s mostly later-expansion capital.”

Post says the Besen portfolio remained diversified despite strong participation in both retail and property. “Property development is a component, private equity is a component and there are other components as well.”

Post says that although many may consider capital raisings easier for public companies, often the reverse is true. “In terms of valuation it depends really on the company. The listed market can sometimes not understand a company… or it doesn’t appear to understand. And there’s also buying opportunities and shareholders exiting sometimes at discounts to what the value might be.”

Mark Jones
Australian Venture Capital Journal


Wage growth slipping, dollar falling but China retail spending up

Wages increased 1.1% in the June 2007 quarter, according to Australian Bureau of Statistics figures released today.

The result is in line with market expectations and means the annual rate of wage growth has dropped slightly to 4%.

In annual terms, wage growth in wages remains strongest in the mining sector, with a 5.7% increase and health and community services on 4.5%. Wage growth was lowest in accommodation, cafes and restaurants on 3.1% and retail trade on 3.2%.

Today’s wages figures will not be of immediate concern to the Reserve Bank, ANZ economist Riki Polygenis says. “Persistently tight labour market conditions remain a key risk to the inflation outlook and the higher inflation forecasts released by the Reserve Bank on Monday were underpinned by a forecast moderate pickup in wages growth.”

Things are moving fast in China, however, where retail spending was up 16.4% July 2007 compared to the same time in 2006. The increase was above market expectations and will feed into concerns about inflation in China.

And the Australian dollar has continued its sharp downward trend today as currency traders continue to back away from the yen/dollar carry trade that has fuelled much of its recent growth. At 12.36 pm the Australian dollar is worth US83.22c, down on yesterday’s US83.84c close.

Mike Preston



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