Executive Interview – David Kent – Executive General Manager, Axiss Australia
(15 June 2004 – Australia) David Kent has been executive general manager of Axiss Australia and Invest Australia’s International Operations since July 2003. Axiss was established by the Commonwealth Government in 1999 to promote and position Australia as a global financial services centre in the Asia Pacific region.
Mr Kent came to the role with significant national and international experience in financial services, having begun his career with Banque Nationale de Paris (now BNP Paribas) and spent 13 years with US investment bank Morgan Stanley. Following a stint in New York, Mr Kent was named managing director of investment banking for Australia, where he played a leading role in setting up and expanding Morgan Stanley’s Sydney operations. During this time, he was team leader in the initial public offerings of Woolworths, Tabcorp and Austar.
After leaving Morgan Stanley, Mr Kent worked in Paris and Washington in the role of senior trade and investment commissioner for Austrade. He is also actively involved in the Australian arts community, being chairman of the Brett Whiteley Foundation and formerly deputy chairman of the Art Gallery of New South Wales Foundation.
Mr Kent spoke with East & Partners executive editor Paul Bartholomew.
David, you’ve been executive general manager for almost 12 months. How have you found the role?
It’s been a challenging and interesting environment. It’s challenging because we’re dealing with a mature market in Australia and because we’ve had an appreciation of the Australian dollar, so one spends less time in making the cost argument alone, which has always been an important thrust but not the only one of "why Australia?".
It’s a mature market because most of the big name players are already here. A lot of the good work that Axiss has done has penetrated the international market place, which is ultimately where our real market is rather than convincing people who are already here. Some of that message has already got out, which I’d like to think is a continuing sign of success but the message still needs to be spread about the virtues of Australia and the attractiveness of the marketplace, and of course, there also comes a natural point of diminishing returns.
In terms of opportunity, there is still more to be done. We would like to expand the concept of Australia as a hub for back office operations such as the custody business or foreign exchange (FX) clearing business, or IT support businesses, and even financial services software. We’ve had a couple of good examples of successes in that area recently.
Given the scenario you’ve just described, have you had to change the approach of Axiss from that of your predecessor in order to tackle the factors impacting the Australian financial services market?
In terms of the early days of Axiss, there was probably more emphasis on front office investment banking, and front office funds management, but we’ve moved a little bit more into the back office, the development of the hub, such as software.
The foundations were very solid and the thrust of the financial centre initiative and the reason for the existence of Axiss remains valid. These include the strategies related to the very attractive funds management environment, the very attractive back office environment, and the very attractive, but competitive, front office investment banking environment. We also have another plank which is developing private equity and venture capital. We’ve been specifically charged with promoting the venture capital limited partnership legislation of the government, which is aimed at attracting foreign participation in the Australian private equity market through the so called VCLP structure.
How much success have you had in this area so far?
Private equity and venture capital is an interesting environment. The fundraising environment is currently very favourable, especially for late stage buyout funds; the exit environment is also very favourable because markets have been liquid and receptive to exit. In terms of the legislation that the government has been promoting, there have been technical difficulties, such as the "unintended consequences", they are to do with things like the permanent establishment issue and various aspects of the partnership laws. Unfortunately, there have been quite a few. Having said that, the government is working on a number of them and we are hopeful that there will be some further policy announcements. I have to stress that Axiss doesn’t make the policy; we make some recommendations and can take the feedback from the private sector and feed that into the government, and it may or may not be acted on. We’re not an industry lobby group, we’re not here to represent the private sector, but we are here to promote the financial centre initiative. One specific success I would point to is the establishment of the Starfish Technology Fund which is the first fund established under the new VCLP structure. Of particular note is Mitsui’s investment in the Fund.
What kind of response does Axiss receive from the private sector? Does the sector see it as a useful organisation?
Yes, in many respects. Let’s take education, which is a less well known part of what we do. We are promoting the quality of the Australian labour force and spreading that message around the world. Most market participants who use Australian labour are already aware of that but it’s not necessarily appreciated offshore and the financial institutions who draw from this pool of labour need to be assured that there are continuing efforts in continuing education in financial services. We work closely with people like the Securities Institute, TAFE Global, CPA Australia, The Institute, The University of NSW and the National Institute of Accountants. We think most of them are appreciative of what we do and want us to continue to work in this area. Several of these organisations have signed or are negotiating alliances, joint ventures or partnership arrangements with Asian partners that have met through our two missions to China and Korea over the past two years.
If we take some of the clients that we’ve worked with in a regulatory and policy sense, because we have a regulatory liaison role here, there are some examples of clients who greatly appreciate the liaison role we play between the private sector side and the public policy side of Canberra. A good recent example is the Chicago Mercantile Exchange.
If we take the private equity side, I think industry associations such as AVCAL are supportive of what we do because any increase in awareness of the job they are doing is relevant. It’s not always true that every private equity organisation would like us promoting the Australian private equity/venture capital market when they have their own individual motivations, but at the end of the day, competition can enhance quality, reputation and liquidity, adds depth to the market, and these are important things for the financial services marketplace in general.
What about investment banking?
I would say we’re not really promoting new investment banks to come to Australia, as anybody of any scale in the world market place is already here. So we look more at working with global investment banks to add functions to existing operations. It’s what we would call brown field rather than green field, ie. expanding the scale and flexibility of additional business functions rather than starting from scratch. In this area we conduct a quarterly Operations Forum where we allow industry participants to compare notes on matters that relate to them as major players in the Australian market place, and most of the multinational names that participate in this group think that we add value to what they do. They also gain valuable market intelligence. Again, the emphasis is adding value whether it is making the why Australia case to a New York or London head office, providing comparative benchmark data – we have excellent research – or facilitating very specific enquiries in regard to relocating technology and operations jobs to Australia. We trust that we are enhancing the arguments.
How much scope is there for encouraging further international activity in the Australian funds management market?
A lot of the large players are here but we could still have more depth. We’re talking to a couple of new entrants to the business and we are hopeful that we might see some of them come here. In pension funds management, investor choice is very important. As the pool of Australian assets grows it’s very important that the mums and dads investors have choice, as the traditional asset classes of fixed income, equities and real estate perhaps shouldn’t be the only choices they have access to. So, that is an enticement for the foreign fund managers to not only tap Australian savings – and that’s certainly not what we are only about. We’re interested in them building a platform and either working in a distribution sense with Australian managers or establishing a business that offers a range of asset class choices to Australian investors, and finally, a funds management hub in Australia.
We would like to encourage funds managers to not only manage the assets and savings of Australian superannuants but also to manage regional assets from Australia. There is a long way to go for us as a country and for us as Axiss to go in that area, the reason being that the Australian market is so intrinsically attractive in its own right that most players are focussed on that rather than the ability to manage assets for Asia from Australia. There are a couple of players who do but unfortunately it’s a smaller number than we would like to have.
Are we doing enough on a regulatory level to encourage foreign companies into Australia?
There needs to be some further tax changes in regard to the encouragement of foreign funds manager participation in the Australian market place, some of which are intended in the current round of The Review of International Taxation Arrangements. Those taxation changes have already been introduced in Parliament but they are scheduled to be subject to the agreement of either the Labor Party or the smaller parties to get them through the Senate. If approved they will be very positive for the Australian funds management industry because it will remove certain FIF and CGT quirks that are a disincentive for foreign funds managers to be offering their product here. For example, there are certain funds managers that are offering Dublin based managed funds to Asia-Pacific clients, rather than Australian managed funds to these investors. We would rather they be offering Australian management than Dublin management.
What about the notion of using Australia as a springboard into Asian markets? Is this an overplayed concept in terms of encouraging people to set up business here?
I think that’s true in some industries. I think that when you come and invest in Australia you look at the fundamentals of Australia itself or Australia and New Zealand perhaps as a consolidated market. Is it attractive? Yes. Is the talent pool from Australia usable in your Asian operations? Often that happens. When I was in France as Trade Commissioner, for example, the head of Alcatel’s business in Asia was an Australian. There are a number of examples of French companies that use Australia as their regional headquarters. The concept of Australia as a regional springboard can mean different things to different people. You may centralise your accounting there but do you actually make the sales to China from Australia and manufacture to China from Australia? No, in fact it’s quite the reverse. Some companies have all their manufacturing in China but are based in Australia.
You have to remember that the Australian economy today is over 70 percent services. Of that 70 percent, around eight percent is financial services so it’s quite a large part and I would argue that it’s in the services sector that there is greatest opportunity for the springboard into Asia. We are undoubtedly an exporter of financial services talent. The head of Deutsche bank in Asia is the former head of the Australian operations; UBS have a lot of Australian executives. I view that as a positive story that we’re exporting that talent because in most cases they will eventually return.
Also, I think it depends on which industry you’re talking about and within those industries which product you’re talking about. We make the case that it is possible in funds management because it is a good product within the financial services sector. Why? Because ultimately it’s about human capital. People make decisions that determine the performance of a given fund, which makes it attractive to continue to collect assets in that fund. So that would be the first and foremost thing I would say to make the case for Australia. Again it comes back to the skilled workforce that we keep talking about and includes our sophisticated funds management market place.
The second reason it can work is technology. Having the management and servicing of assets can easily take place in Australia so for funds management distance doesn’t really matter. A fund manager in Australia can make a decision regarding the Japanese or Hong Kong markets from here and it does happen. The tyranny of distance matters less in today’s fairly open and transparent communications world where companies put out press releases regularly. The only disadvantage of distance is actually meeting face to face with management but most companies have quarterly meetings that you can dial in to, so the funds management analyst can ask the questions of management on the telephone.
How well do we compete with our rivals in the region in financial services?
We compete well with Hong Kong on a cost basis; Singapore is very aggressive and will continue to be aggressive, their government is very directionist in promoting their own financial centre. They don’t have the same sized domestic economy in a country of three to four million compared with a country of 20 million people, which means that we are going to be more attractive than Singapore but we find that the Singaporean government can often lead with giving an investment mandate to a new entrant to their market place whereas typically the Australian government would never do that. The Federal Government does not offer incentives, such as tax concessions or pension mandates, for people to set up offices here. We believe the fundamentals in Australia are strong enough to sustain a long-term successful business, without the offer of incentives.
As far as a competitive threat is concerned, I think India offers the greatest threat in terms of back office services, more so than China in the short term for reasons of language, technology and they are further ahead up the curve.
What does the future hold for Axiss?
We have just been given a further two years of funding in the recent budget. There is plenty to do in the next two years and I remain convinced that we can continue to see banking and finance grow from its current 7.9 percent of GDP to an even higher percentage. Also, the attractive superannuation dynamic will continue to make Australia appealing to institutional and retail fund managers; we have more room to grow in this sector.
If, at the end of the day, the market is fully informed about the relative merits of the Australian marketplace we will have done our job. When I was at Morgan Stanley, I constantly had to try and convince my peers of the merits of Australia. They now have 220 people in Australia and more than half are in middle and back office functions so I think the message is slowly getting out to the influential decision makers at head office.
Mr Kent came to the role with significant national and international experience in financial services, having begun his career with Banque Nationale de Paris (now BNP Paribas) and spent 13 years with US investment bank Morgan Stanley. Following a stint in New York, Mr Kent was named managing director of investment banking for Australia, where he played a leading role in setting up and expanding Morgan Stanley’s Sydney operations. During this time, he was team leader in the initial public offerings of Woolworths, Tabcorp and Austar.
After leaving Morgan Stanley, Mr Kent worked in Paris and Washington in the role of senior trade and investment commissioner for Austrade. He is also actively involved in the Australian arts community, being chairman of the Brett Whiteley Foundation and formerly deputy chairman of the Art Gallery of New South Wales Foundation.
Mr Kent spoke with East & Partners executive editor Paul Bartholomew.
David, you’ve been executive general manager for almost 12 months. How have you found the role?
It’s been a challenging and interesting environment. It’s challenging because we’re dealing with a mature market in Australia and because we’ve had an appreciation of the Australian dollar, so one spends less time in making the cost argument alone, which has always been an important thrust but not the only one of "why Australia?".
It’s a mature market because most of the big name players are already here. A lot of the good work that Axiss has done has penetrated the international market place, which is ultimately where our real market is rather than convincing people who are already here. Some of that message has already got out, which I’d like to think is a continuing sign of success but the message still needs to be spread about the virtues of Australia and the attractiveness of the marketplace, and of course, there also comes a natural point of diminishing returns.
In terms of opportunity, there is still more to be done. We would like to expand the concept of Australia as a hub for back office operations such as the custody business or foreign exchange (FX) clearing business, or IT support businesses, and even financial services software. We’ve had a couple of good examples of successes in that area recently.
Given the scenario you’ve just described, have you had to change the approach of Axiss from that of your predecessor in order to tackle the factors impacting the Australian financial services market?
In terms of the early days of Axiss, there was probably more emphasis on front office investment banking, and front office funds management, but we’ve moved a little bit more into the back office, the development of the hub, such as software.
The foundations were very solid and the thrust of the financial centre initiative and the reason for the existence of Axiss remains valid. These include the strategies related to the very attractive funds management environment, the very attractive back office environment, and the very attractive, but competitive, front office investment banking environment. We also have another plank which is developing private equity and venture capital. We’ve been specifically charged with promoting the venture capital limited partnership legislation of the government, which is aimed at attracting foreign participation in the Australian private equity market through the so called VCLP structure.
How much success have you had in this area so far?
Private equity and venture capital is an interesting environment. The fundraising environment is currently very favourable, especially for late stage buyout funds; the exit environment is also very favourable because markets have been liquid and receptive to exit. In terms of the legislation that the government has been promoting, there have been technical difficulties, such as the "unintended consequences", they are to do with things like the permanent establishment issue and various aspects of the partnership laws. Unfortunately, there have been quite a few. Having said that, the government is working on a number of them and we are hopeful that there will be some further policy announcements. I have to stress that Axiss doesn’t make the policy; we make some recommendations and can take the feedback from the private sector and feed that into the government, and it may or may not be acted on. We’re not an industry lobby group, we’re not here to represent the private sector, but we are here to promote the financial centre initiative. One specific success I would point to is the establishment of the Starfish Technology Fund which is the first fund established under the new VCLP structure. Of particular note is Mitsui’s investment in the Fund.
What kind of response does Axiss receive from the private sector? Does the sector see it as a useful organisation?
Yes, in many respects. Let’s take education, which is a less well known part of what we do. We are promoting the quality of the Australian labour force and spreading that message around the world. Most market participants who use Australian labour are already aware of that but it’s not necessarily appreciated offshore and the financial institutions who draw from this pool of labour need to be assured that there are continuing efforts in continuing education in financial services. We work closely with people like the Securities Institute, TAFE Global, CPA Australia, The Institute, The University of NSW and the National Institute of Accountants. We think most of them are appreciative of what we do and want us to continue to work in this area. Several of these organisations have signed or are negotiating alliances, joint ventures or partnership arrangements with Asian partners that have met through our two missions to China and Korea over the past two years.
If we take some of the clients that we’ve worked with in a regulatory and policy sense, because we have a regulatory liaison role here, there are some examples of clients who greatly appreciate the liaison role we play between the private sector side and the public policy side of Canberra. A good recent example is the Chicago Mercantile Exchange.
If we take the private equity side, I think industry associations such as AVCAL are supportive of what we do because any increase in awareness of the job they are doing is relevant. It’s not always true that every private equity organisation would like us promoting the Australian private equity/venture capital market when they have their own individual motivations, but at the end of the day, competition can enhance quality, reputation and liquidity, adds depth to the market, and these are important things for the financial services marketplace in general.
What about investment banking?
I would say we’re not really promoting new investment banks to come to Australia, as anybody of any scale in the world market place is already here. So we look more at working with global investment banks to add functions to existing operations. It’s what we would call brown field rather than green field, ie. expanding the scale and flexibility of additional business functions rather than starting from scratch. In this area we conduct a quarterly Operations Forum where we allow industry participants to compare notes on matters that relate to them as major players in the Australian market place, and most of the multinational names that participate in this group think that we add value to what they do. They also gain valuable market intelligence. Again, the emphasis is adding value whether it is making the why Australia case to a New York or London head office, providing comparative benchmark data – we have excellent research – or facilitating very specific enquiries in regard to relocating technology and operations jobs to Australia. We trust that we are enhancing the arguments.
How much scope is there for encouraging further international activity in the Australian funds management market?
A lot of the large players are here but we could still have more depth. We’re talking to a couple of new entrants to the business and we are hopeful that we might see some of them come here. In pension funds management, investor choice is very important. As the pool of Australian assets grows it’s very important that the mums and dads investors have choice, as the traditional asset classes of fixed income, equities and real estate perhaps shouldn’t be the only choices they have access to. So, that is an enticement for the foreign fund managers to not only tap Australian savings – and that’s certainly not what we are only about. We’re interested in them building a platform and either working in a distribution sense with Australian managers or establishing a business that offers a range of asset class choices to Australian investors, and finally, a funds management hub in Australia.
We would like to encourage funds managers to not only manage the assets and savings of Australian superannuants but also to manage regional assets from Australia. There is a long way to go for us as a country and for us as Axiss to go in that area, the reason being that the Australian market is so intrinsically attractive in its own right that most players are focussed on that rather than the ability to manage assets for Asia from Australia. There are a couple of players who do but unfortunately it’s a smaller number than we would like to have.
Are we doing enough on a regulatory level to encourage foreign companies into Australia?
There needs to be some further tax changes in regard to the encouragement of foreign funds manager participation in the Australian market place, some of which are intended in the current round of The Review of International Taxation Arrangements. Those taxation changes have already been introduced in Parliament but they are scheduled to be subject to the agreement of either the Labor Party or the smaller parties to get them through the Senate. If approved they will be very positive for the Australian funds management industry because it will remove certain FIF and CGT quirks that are a disincentive for foreign funds managers to be offering their product here. For example, there are certain funds managers that are offering Dublin based managed funds to Asia-Pacific clients, rather than Australian managed funds to these investors. We would rather they be offering Australian management than Dublin management.
What about the notion of using Australia as a springboard into Asian markets? Is this an overplayed concept in terms of encouraging people to set up business here?
I think that’s true in some industries. I think that when you come and invest in Australia you look at the fundamentals of Australia itself or Australia and New Zealand perhaps as a consolidated market. Is it attractive? Yes. Is the talent pool from Australia usable in your Asian operations? Often that happens. When I was in France as Trade Commissioner, for example, the head of Alcatel’s business in Asia was an Australian. There are a number of examples of French companies that use Australia as their regional headquarters. The concept of Australia as a regional springboard can mean different things to different people. You may centralise your accounting there but do you actually make the sales to China from Australia and manufacture to China from Australia? No, in fact it’s quite the reverse. Some companies have all their manufacturing in China but are based in Australia.
You have to remember that the Australian economy today is over 70 percent services. Of that 70 percent, around eight percent is financial services so it’s quite a large part and I would argue that it’s in the services sector that there is greatest opportunity for the springboard into Asia. We are undoubtedly an exporter of financial services talent. The head of Deutsche bank in Asia is the former head of the Australian operations; UBS have a lot of Australian executives. I view that as a positive story that we’re exporting that talent because in most cases they will eventually return.
Also, I think it depends on which industry you’re talking about and within those industries which product you’re talking about. We make the case that it is possible in funds management because it is a good product within the financial services sector. Why? Because ultimately it’s about human capital. People make decisions that determine the performance of a given fund, which makes it attractive to continue to collect assets in that fund. So that would be the first and foremost thing I would say to make the case for Australia. Again it comes back to the skilled workforce that we keep talking about and includes our sophisticated funds management market place.
The second reason it can work is technology. Having the management and servicing of assets can easily take place in Australia so for funds management distance doesn’t really matter. A fund manager in Australia can make a decision regarding the Japanese or Hong Kong markets from here and it does happen. The tyranny of distance matters less in today’s fairly open and transparent communications world where companies put out press releases regularly. The only disadvantage of distance is actually meeting face to face with management but most companies have quarterly meetings that you can dial in to, so the funds management analyst can ask the questions of management on the telephone.
How well do we compete with our rivals in the region in financial services?
We compete well with Hong Kong on a cost basis; Singapore is very aggressive and will continue to be aggressive, their government is very directionist in promoting their own financial centre. They don’t have the same sized domestic economy in a country of three to four million compared with a country of 20 million people, which means that we are going to be more attractive than Singapore but we find that the Singaporean government can often lead with giving an investment mandate to a new entrant to their market place whereas typically the Australian government would never do that. The Federal Government does not offer incentives, such as tax concessions or pension mandates, for people to set up offices here. We believe the fundamentals in Australia are strong enough to sustain a long-term successful business, without the offer of incentives.
As far as a competitive threat is concerned, I think India offers the greatest threat in terms of back office services, more so than China in the short term for reasons of language, technology and they are further ahead up the curve.
What does the future hold for Axiss?
We have just been given a further two years of funding in the recent budget. There is plenty to do in the next two years and I remain convinced that we can continue to see banking and finance grow from its current 7.9 percent of GDP to an even higher percentage. Also, the attractive superannuation dynamic will continue to make Australia appealing to institutional and retail fund managers; we have more room to grow in this sector.
If, at the end of the day, the market is fully informed about the relative merits of the Australian marketplace we will have done our job. When I was at Morgan Stanley, I constantly had to try and convince my peers of the merits of Australia. They now have 220 people in Australia and more than half are in middle and back office functions so I think the message is slowly getting out to the influential decision makers at head office.
Subscribe