Pan-European structures for Private Equity & Venture Capital

Georges NoëlEVCA Director of Research, Public

Affairs & DevelopmentAvco Investorenkonferenz, Vienna

June 23rd, 2004

Agenda

Overview of EVCA

EVCA Strategic Priorities

The Changing Environment for PE/VC

Investment Styles

Evolution of the Asset Class

Overview of European Private Equity Funds

EVCA Public Policy and Research Activities

EVCA

931 members

132 Institutional Investors or Funds of Funds

29 National Associations (NVCA’s)

€140 bn invested (equity value)

Ca. 40.000 investee companies

Over 4m people employed

7 Committees

Over 130 members actively involved in Board, Executive, Committees, Task Forces, Working groups…

EVCA Strategic Priorities

Maintain a strong and relevant community of shared interest for European PE and VC players to strenghten the industry across Europe (Research, Conferences)

Actively raise awareness to improve knowledge and understanding of the European PE and VC industry (Investor Relations, Training, Publications)

Reinforce and develop professional standards for the industry (Guidelines & Best Practices)

Protect the interests of the industry through a pro-active dialogue with policymakers and stakeholders to promote a favourable environment for European PE/VC and entrepreneurship (Public Affairs, Communications)

Changing Environment for PE/VC

Market Outlook

Activity levels & fund raising for PE and VC

Institutionalization, Value creation model

Consolidation

Generational change

Asset class coming of age

Regulation

IFRS 27, Basel-II, Single Fund Structure, Merger Regulation, Pension Fund Directive Implementation, Review of Financial Services Action Plan…

Changing Environment for PE/VC

Private Equity is becoming a mainstream asset class with new Limited Partner’s entering andexisting investors increasing asset allocations

Academic approach - TU München

Assumptions: The investor reinvests the PE-disbursements into the J.P. Govt. Bond Index; Data source: Sample I, 1972-2003

The maximum Sharpe Ratio portfolio has a 5% VC and a 3% buyout share

4%

6%

8%

10%

12%

14%

0% 5% 10% 15% 20% 25%

Standard Deviation (

Exp

ecte

d R

etu

rn MSRP(5% VC, 3% BO, 7% Eq., 85% Bds.)

Bonds=MVP(0% VC, 0% BO, 0% Eq., 100% Bds.)

Equities

BO

VC

EP_9%(26% VC, 26% BO, 28% Eq., 20% Bds.)

Center for Entrepreneurial and Financial Studies Prof. Dr. Chr. Kaserer / Chr. Diller

EP = Expected portfolioMSRP=Maximum Sharpe ratioMVP=Minimum Variance portfolio

Investment styles

Through Direct Investments

Through a PE Fund

Through a Fund of Funds

There are 3 ways to structure investments into

Private Equity & Venture Capital:

FUND B

FUND A ManagementCompany

INVESTORSFUND OFFUNDS

INDIVIDUALS & BUSINESS ANGELS

CORPORATES

Portfolio CO. 1

Portfolio CO. 2

Portfolio CO. 3

The Private Equity Mix

advises

€

Source: EVCA

Three ways of investing in unquoted companies

Investors Fund of Funds

PE Fund

Company

Company

Company

Company

PE Fund

PE Fund

Through Direct Investments

Source: EVCA

Three ways of investing in unquoted companies

Investors Fund of Funds

PE Fund

Company

Company

Company

Company

PE Fund

PE Fund

Through a PE Fund

Source: EVCA

Three ways of investing in unquoted companies

Investors Fund of Funds

PE Fund

Company

Company

Company

Company

PE Fund

PE Fund

Through a Fund of Funds

Source: EVCA

Investment styles

Each of the 3 possible investments strategies has it’s own risk profile

Level of risk involved by investment vehicle

Source: The Risk Profiles of Private Equity, Weidig and Mathonet, January 2004

Investment styles

Probability of a total loss

Direct investment: 30%

but through a

Fund: very small

Fund-of-Fund: 0% and even only a very low probability of any loss

Evolution of the Asset Class1989-2003

Fundraising

Investments

Sources of Funds

Evolution of the Asset Class 1989-2003

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

198919901991199219931994199519961997199819992000200120022003

Funds Raised

Investments

Source: EVCA, PricewaterhouseCoopers, Thomson Venture Economics (2003 figures)

Sources of New Funds in 2003

I nsurance Companies

8.7%

Fund of Funds16.4%

Banks26.3%

Corporate Investors

4.8%

Pension Funds19.4%

Private Individuals6.0%

Other17.3%

Academic Institutions

1.5%

Capital Markets0.3%

Government Agencies

6.8%

2003

Source: EVCA Survey of Pan-European Private Equity and Venture Capital Activity 2003

Conducted by Thomson Venture Economics and PricewaterhouseCoopers

European Private Equity Funds Formed 1980-2003

Net IRRs to Investors Investment Horizon Return as of 31-Dec-2003

Stage 1 YR 3 YR 5 YR 10 YR 20 YREarly Stage -13.1 -11.1 -1.8 1.3 1.9Development -7.2 -4.8 4.6 10.7 9.1Balanced -5.4 -10.2 4.2 12.3 9.0All Venture -7.5 -9.0 2.3 8.3 7.2Buyouts 1.6 1.0 9.6 12.7 12.2Generalist 2.4 -10.7 7.8 14.6 9.1All Private Equity -0.6 -3.8 7.3 11.9 9.9

Source: Thomson Venture Economics

Top Quarter -European Private Equity Funds Formed 1980-2003

Net IRRs to Investors Investment Horizon Return as of 31-Dec-2003

Stage 1 YR 3 YR 5 YR 10 YR 20 YREarly Stage 4.8 -3.9 11.9 16.3 14.8Development 2.5 -0.3 28.0 30.2 19.7Balanced -9.1 -5.3 31.9 45.3 23.9All Venture -6.5 -4.0 21.0 29.9 19.8Buyouts 12.6 9.7 44.9 40.9 30.8Generalist 7.6 7.9 11.9 18.6 12.9All Private Equity 8.4 4.8 34.5 35.5 24.5

Performance Benchmarks

How are these IRR’s compared

to public market indices?

Comparators*CLN Index Method

Public Market EquivalentsReturns as of 31 December 2003

1.9 1.8 5.7 9.89.0 7.9 7.5 9.39.0 2.7 6.2 9.17.2 4.3 6.4 9.412.2 - 2.9 3.8 9.99.1 5.9 4.3 9.49.9 0.5 4.8 9.7

Early stageDevelopmentBalanced

Since Inception Returns

StageEuropean

Private Equity Morgan

Stanley Euro HSBC Small Company

J P Morgan

EuroBonds

All VentureBuyoutsGeneralistAll Private Equity

*Comparators are Internal Rates of Return (IRR). IRRs for public market indices are calculated by investing the equivalent cashflows that were invested in private equity into the public market index. Then an equivalent IRR is calculated for each index.

Calculations based on methodology proposed by Coller and published by Long and Nickles.

Source: Thomson Venture Economics

EVCA’s Public Policy Priorities and Public Affairs Activities

EVCA is working on an on-going basis to achieve a real Pan-European homogeneous market for Private Equity and Venture Capital.

EVCA’s Public Policy Priorities and Public Affairs Activities

EU Institutions are supportive of Private Equity and Venture Capital

Political commitment to support PE/VC through measures such as the Risk Capital Action Plan (RCAP), the Financial Services Action Plan (FSAP), and the Lisbon Process (focusing on sustainable growth, innovation, R+D…)

EVCA works with policymakers through research-based constructive dialogue: raising awareness of key issues providing evidence seeking mutually acceptable solutions.

Main Policy Issues for the PE / VC Industry

The political support for PE/VC across the EU is often

not reflected in national legal and/or fiscal realities, or

the administrative burdens faced by the industry.

EVCA Benchmarking of Tax and Legal Environements

for PE/VC highlights the fragmentation of the

EU marketplace

Corporate Governance

PE/VC acts as a vector to enhance and improve

Corporate Governance Standards in investee

companies, and SMEs in particular.

EVCA has established a Task Force which will work to

further contribute to the highest standards of

transparency and information for private investors.

EVCA Policy Actions

Current:

EVCA White paper of policy priorities EVCA Benchmarking of Tax and Legal Environments for

PE/VC Contribution to the EU Spring Council (Lisbon Process) On-going issue based dialogue with policymakers Policy Meeting, November

Future:

Better regulation, ongoing impact assessment (IAS/IFRS) High growth market Single Fund Structure Increased access to finance Better support for Entrepreneurial growth

Single Fund Structure

Currently, PE/VC funds that invest in the EU have to be structured around approximately 25separate tax and legal systems:

– Difficulties for international investors to find suitable fund structures to invest in and avoid the risk of double taxation.

– Fund managers are often face complex tax and legal requirements, reducing their ability to focus on the commercial requirements of managing and growing the underlying investee companies.  

The situation in Europe contrasts with the US where one vehicle and one structure can be usedthroughout the country.

• Between 1996 and 2002, the domestic portion of the total money raised by the industry reduced from almost 72% to 50%.

• At present, almost ¾ of investments are undertaken in the same country in which the management company is located.

• A Single Fund Structure is another step towards the creation of an integrated European financial market, to attract international money and to facilitate cross-border investing.

EVCA Research Activity

Annual:

Annual Survey of Pan-European PE & VC Activity (EVCA,TVE,PWC)

Corporate Venturing Activity Survey Investment Benchmarks Report (EVCA, TVE)

Quarterly:

Quarterly Private Equity Activity Survey (EVCA,TVE,PWC) Private Equity Fund of Funds survey

Monthly:

Barometer

In process:

Survey on the Role of Private Equity Buy-outs and Buy-ins of Family-owned Firms

Professional Standards

EVCA is at the forefront of professional standards for alternative asset classes/asset management-type industries:

Valuation guidelines Reporting guidelines Governing principles

The standards used by the vast majority of the industryacross the EU; standards now becoming globally accepted.

EVCA - Working together with Europe ’s National Associations 

The collaboration between EVCA and AVCO.

Austria

Excellent co-operation between EVCA and AVCO

The action plan for an optimal new fund structure in Austria is strongly supported by EVCA

EVCA ’s Tax & Legal Benchmark reinforce AVCO ’s own goals and actions.

AVCO & EVCA strive for the same high quality Investor Relations principles & guidelines.

Conclusion

The PE/VC industry is growing maturing:

increased professionalism

Comparatively higher rates of return than public

markets

Key driver for European economic growth and

development

EVCA

Vielen Dank für Ihre Aufmerksamkeit!