Venturing into capital raising

Australian Financial Securities (AFS) is a dealer group with a difference, carving out a niche market in financial planning through access to venture capital investments. Nicole Szollos spoke with AFS director Brad McGougan about why the group chose to head down this path.

Australian Financial Securities (AFS) director Brad McGougan has a clear description of how his dealer group is positioned in the market.

"AFS stands in between financial planners and stockbrokers," he says.

McGougan is referring to AFS' hand in venture capital raising, an activity that sits alongside the group's regular financial planning commitments.

"We do the normal day-to-day financial planning, but then also offer investments in higher risk areas and have a high ratio of clients who like the riskier investments," McGougan says.

AFS was born out of mortgage broker firm Australian Finance Group (AFG), a company that started out in 1995 and was a follow on from Mortgage Monitors developed in 1993.

AFS was created in March 1998 when it obtained its unrestricted dealer's licence because of demand from existing clients.

"There were so many different distribution companies and a lot of those people had the need for a proper authority so there was demand on us to supply a dealer's licence," McGougan explains.

And Mortgage Monitors was itself a development from the growth of life insurance group Western Australian Insurance Services (WAIS), the very first group established by McGougan with partners Brett McKeon and Malcolm Watkins in 1990.

Today, the original WAIS partners own 25 per cent of AFS with the remaining 75 per cent controlled by AFS Advisers, a shareholding group consisting of 10 unit holders.

And from these 10 individually owned and operated financial planning group unit holders, AFS draws its 35 proper authority holders who operate under its dealer group structure.

McGougan describes the structure as similar to a cooperative, and says each group has control.

"Each unit holder runs their own business, and we bulk together for bigger projects and also efficiencies and expenses," he says.

The unit holder network has a strong presence in Western Australia, with five out of the 10 groups located in WAIS' birthplace of Perth. The east coast takes the remaining representation with one group in Brisbane and two each for Sydney and Melbourne.

The AFS head office is also Perth-based, and has six staff members including an actuary who takes care of the compliance and auditing. Head office also runs other dealer group duties including training sessions, seminars and tutoring on DFP modules every fortnight, as well composing the AFS recommended products list from Assirt and van Eyk research.

But it is the group's venture capital element that for McGougan, is the extra ingredient to AFS. Venture capital is raising money through investments for groups who have an idea for a project, but not enough funds to carry it out.

"These are people with just an idea, who need a few million to get going," McGougan says.

Over the years AFS has been involved with a range of venture capital raising activities and McGougan says the group is known in the industry for its capital-raising slant and there are no shortages of ideas being presented.

"We get people knocking on our door every day of the week and are approached by all sorts," McGougan says.

Before taking on a venture, McGougan is in charge of researching the proposed idea, doing due diligence on the company and checking the product's marketability.

The AFS advisers are represented at the AFS board level, with two proper authority holders sitting alongside McGougan and co-director Richard Dougherty. And the AFS Adviser Board also has an involvement in the decision making process and votes on the new ventures.

Once a company and idea are chosen, AFS take equity in the group and appoints one of the group's directors to the new company's board to ensure the capital is well spent.

Distribution of the company shares begins and the AFS proper authority holders advise clients on investments in the new ventures. The high level of equity originally held by AFS diminishes as the shares are sold down and capital is raised.

"We take those companies from nothing right through to a float," McGougan says.

Some of the AFS venture capital raising deals over the past few years include a Romanian goldmine and Polish gas field (into which AFS injected $3.5 million), to the development of screenscraping technology and travel agency software.

The screenscraping technology being developed by a group called InvestorCities has received $3.7 million in capital through AFS, and McGougan is chairman of the board. Out of 45 million shares originally owned by AFS, they now hold 10 million.

AFS has also raised $3.5 million for a travel agency software group and hope to float the company in the second half of this year.

McGougan says when the companies are not floated, it is difficult to progress with no liquidity.

"A lot of them are seed companies with only investor money so we need to build them up and raise money, but it is a hard market out there, especially with technology companies," he says.

With an involvement in about 22 individual companies, McGougan is clearly no stranger to growth in the industry and sees a strong future for AFS.

While natural growth with an internal increase of like-minded proper authority holders in the 10 shareholding units is expected, he says the dealer group is ready for more instant growth by expanding the number of unit holders.

"The more unit holders that are on, the more businesses that are involved so the company is worth more," he says.

The AFS Adviser Board has recently been approached to allow another 10 unit holders into the AFS fold and the AFS board is presently waiting for approval. If the advisers agree, McGougan says the next phase is to take the number of unit holders to 20 within the next 12 months with a national focus.

McGougan says if allowed, the new unit holders will most likely come through referrals from the existing groups and from business cultures similar to other units in the group.

"It would be good to get one group in Adelaide, and bulk up Queensland. And we have five groups in Perth so we should have 10 in Sydney. They would have a slant on capital raising and all be self-made business men or women," he says.