INVESTMENTS IN PRIVATE EQUITY: THE ROLE OF PENSION FUNDS THE ROLE OF PENSION FUNDS

GIANNIS PAPADOPOULOS Managing Director,

Attica Ventures

16 June 2004

Presentation by :

The aim of VC investments

High returns

Risk spread

1

Main features of PE/VC investments

Medium to long-term investments (5 years +)

Above average risk

Above average rate of return

Supplementary and distinct form of investment

Investment choice of institutional investors (more than 90%)

Closed-end investment product

Control over investments

Investments in non-listed companies with growth potential

2

Features and rationale of pension funds´ investments

Investment safety

Control over investments

Medium- to long-term investment horizon

Return on capital

High cash levels – investment spread

3

Common features of both PE and Pension funds

YESYESRisk spread

YESYESLong-term focus

YESYESInvestment spread

YESYESReturn on capital

YESYESControl over investments

PE

Pension Funds

4

YESYESMutual Funds

NOYESPE/VC

YESYESReal Estate

YESYESBonds

YESYESStock Exchange

GREECEEU

Comparison of Pension fund investment options5

6 Pension Funds and Private Equity. Why? (1)

StageEuropean

Private Equity Return

Morgan Stanley Euro

Index

HSBC Small Company

index

JP Morgan EuroBonds

Early stage 4,9 -0,1 -4,2 7,4Development 10,3 7,7 3,9 8,0

Balanced 10,7 -0,2 -4,1 6,5All Venture 9,2 3,0 -1,3 7,3

Buyouts 12,9 -7,1 -8,7 4,0Generalist 10,0 7,1 0,3 7,7

All Private Equity 10,8 -2,3 -5,7 7,2

*Comparisons based on the internal rate of return (IRR).

High rates of return The long-term rates of return on investments in VC – PE exceed those of

shares listed on exchanges in the EU and America Better rates of return mean greater potential to cover costs

31-Dec-2002

(1=most favourable, 3=least favourable)

7 Pension Funds and Private Equity. Why? (2)

New favourable tax and legal regime

New structure for venture capital Taxation on non-listed companies: 5% compared to 16.3% in

the EU Tax breaks for investment via venture capital funds Incentives for R&D, mainly for expenses Greece comes 4th in the PE investment environment evaluation

among EU countries Country 2004UK 1.26

Luxembourg 1.49Ireland 1.53Greece 1.75

Netherlands 1.76Portugal 1.81Belgium 1.82Hungary 1.86Italy 1.86

France 1.89Switzerland 1.95

Spain 1.962003 average 1.972002 average 2.03

8 Pension Funds and Private Equity. Why? (3)

Conclusion: Investment in PE reduces instability and improves the risk profile in an investment portfolio.

Reduced risk via spread

In a balanced portfolio, introducing PE investments spreads risk even further.

Statistical data (source: Venture Economic, Salomon, MSCI) show a low correlation between profits and return on investments on Stock Exchanges and investments in non-listed companies (investments made by VC funds).

Small investments in PE Funds compared to overall cash available and spread across many Funds further reduce risk.

9 Pension Funds and Private Equity. Why? (4)

Long-term focus

Investments in PE have a long-term focus, which suits the objective and rationale of pension fund investments.

Common Investment Option

Pension funds, along with banks, are the largest PE investors worldwide (22% and 24%)

Control over investments

PE managers actively and substantively participate in their portfolio companies, monitoring the progress of investments

There is a high degree of transparency and insider information Monitoring market and company highs

10 Pension Funds and Private Equity. Why? (5)

The social surplus of investments in PE

Increase in jobs (90% of portfolio companies increased their staff levels) and in the job growth rate (19% compared to 0.5% for other companies). It is thought that 18% of the UK work force has jobs thanks to PE.

Increase in sales at a rate of ~21% in the UK and EU; corresponding increase in exports.

Increase in profits (77% of PE investees achieved rates higher than competitors).

Increase in competitiveness and support of entrepreneurship (81% of PE investees stated they would not exist without PE)

Increase in direct tax revenues (UK: € 40 billion) and other indirect taxes (VAT, payroll tax, etc.)

Distribution of wealth to more factors of production

11 Pension Funds and Private Equity. Why? (6)

Increase in employment Increase in taxable revenue Business growthIncrease in competitiveness Increase in profitsWealth distribution

Robust pension funds

Capital raised in Europe per investor category (1999-2003)

Banks 24.40%

Government Agencies 6.70%

Private Investors 6.20%

Capital Markets 0.70%

Fund of funds 11.50%

Academic institutes 1.20%

Corporate investments

8.00%

Ν#A 6.70%

Insurance companies

12.50%Insurance

Funds 22.10%

Pension Funds22.1%

12

Banks 50%

Insurance companies 4%

Insurance Funds 0%

Government agencies 4%

Private investors 11%

Capital Markets 0%Corporate investments 8%

Academic institutes 0%

Fund of funds 24%

Capital raised in Greece per investor category (1999-2003)

Pension Funds0%

13

3.6% of European pension fund reserves are invested in venture capital/private equity.

For US pension funds, the figure is 7.5%; for the UK, 3.7%.

22.1% of capital invested in PE in Europe comes from pension funds, namely € 37 billion (for the 5-year period 1999-2003)

The corresponding figures and percentages for Greek pension funds are ZERO.

A tentative overview .....14

Investments in VC as % of GDP (2003)15

Tentative conclusions....

1. PE: a well-developed institution2. The role of pension funds is primary3. Developed markets / competition

Europe:

Greece: 1. PE not developed as an institution 2. Pension funds still seeking their role3. Under-developed markets / competition

16

Reasons for PE´s absence as an investment vehicle

Legal regime-Management rationale of pension funds Complex legal regime Asphyxiating control Interest-free deposits of their reserves until the beginning of the 1990s

Development perspective for PE market in Greece (developing positively) Structure and incentives for creating PE funds Legal regime governing mergers & acquisitions Entrepreneurial environment Corporate taxation(35% compared to 28% in the EU)

Greek economy development model Lack of entrepreneurial incentives Role of the State Competition Policy priorities

Idiosyncrasy and culture

17

18The legal regime on pension fund reserve management

Unclear and overlapping

Numerous laws and ministerial decrees Unclear which apply and which have been repealed It is possible to interpret that pension funds can invest in PE

based on Article 13 of Law 1902/1990: ΄΄.....Likewise they are permitted to purchase and sell all types of shares with

a prior joint decision of the Ministers of National Economy and Social Security and the Governor of the Bank of Greece.

More accurately, through investments via funds incorporated according to Article 12 of Law 1902/90

10% of the fund´s value may be invested in non-listed shares, after obtaining permission from the Hellenic Capital Market Commission.

19 From theory to practice.....

In the winter of 2003 the TSMEDE Pension Fund became the first to decide an investment in a PE fund following a decision by its Board of Directors to participate in the VC fund managed by Attica Ventures.

In March 2004 the ZAITECH fund, a venture capital fund, was set up under the management of Attica Ventures. Its shareholders/investors are Bank of Attica and the New Economy Development Fund (TANEO).

To date it has not been possible for TSMEDE to carry out its investment decision due to the reasons set out above.

Up until the mid- to late-1970s pension funds in America were prohibited from investing in PE. A clarification of the ‘prudent man’ rule by the U.S. Labor Department in 1978 was needed to radically change that picture.

Similar reforms followed in several European countries; in 2003, a total of € 29.1 billion were invested and € 27 billion were raised.

The low inflation environment and competitive regime with its open markets have contributed to the transfer of capital to PE funds since the 1990s and to a further market boom.

20 Learning a lesson from history.....

21 Conclusions

The role of PE in economic growth and development is important and this is also clearly described in the Lisbon decision.

The role of pension funds in PE market development is fundamental.

The momentum for PE market development is positive (2003 saw the second highest level of investments in VC)

PE covers the fundamental objective of investors to achieve high returns with risk spread.

The advantages of investments in PE and the operating regime, particularly with the establishment of VC funds in line with Law 2992/2002, provide incentives for investments.

A change in the legal regime governing PE operations is necessary to allow pension funds´ investment in PE funds.

Further improvement – supplementing the operating regime for various forms of PE funds and identification of policies to achieve a well-rounded PE market.

Implementation of wide-ranging policies to support competitiveness and entrepreneurship.

22 The actions needed

23 ATTICA VENTURES

Attica Ventures is a VC fund management company established in line with the provisions of Article 7 of Law 2992/2002.

Attica Ventures is a subsidiary of Bank of Attica.

Its share capital is € 600,000 (minimum required by law: € 100,000).

Wide ranging professional

experience (VC, consulting, finance,

retail, corporate management).

Network of business contacts and excellent knowledge of the Greek

market

Complementary academic

backgrounds

24 ATTICA VENTURES – Investment Team

Initial capital: € 30 million Duration: 10 years (extendable for another 2 years) Maximum investment per company: up to 15% of the Fund Investment limit per financing round: € 1 million

Expected IRR: 20%

Minimum participation: € 300,000

Investment period: 5 years

Target companies: SMEs as defined by the European Commission

25 Managed fund:

Capable and collaborative managers with levels of commitment to the firm

Successful background in the sector

Clear development strategy

Alternative development plans - scenarios

Products or services that meet real market / consumer needs

Developing market, or market “in the making”

Synergies with other companies or strategic partners

Full financing framework

Return proportionate to risk and investment stage

Clear link between investment and overall portfolio

Visible exit routes

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26 Investment criteria

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Akadimias 34, GR-10672, ATHENSTel.: +30 210 3637663Fax: +30 210 3637859

www.attica-ventures.gr