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Europe: Story of a mature market
Marie-Annick Peninon-BernardPublic Affairs and Strategy director
EVCAAVCA, November, 2006
Agenda
1. EVCA - The European Private Equity and Venture Capital Association: presentation and history
2. Three decades of Private Equity in Europe
3. Future trends of the EU market
I - EVCA - The European Private Equity and Venture Capital
Association:
Presentation and history
Presentation of EVCA
Originally founded on the initiative of the European Commission
Established in 1983 and based in Brussels
Represents the European PE/VC sector and promotes the asset class both within Europe and throughout the world
Over 950 members, mainly European PE/VC fund management companies Institutional investors (pension funds, insurance companies, ...) Professional advisors (lawyers, placement agents, investment
bankers, ...) National Private Equity and Venture Capital associations
Background to EVCA’s FoundationIn 1980, the European Commission (DG XIII) set up a pilot scheme following an
analysis of ‘Barriers to Industrial Innovation’ in Europe.
This pilot scheme had to decrease the lack of financing to new technology-based firms and to encourage cross-border operations.
At the end of 1980, in total 7 companies had joined the scheme.
When the EC noticed in mid-1983 that many more companies had wanted to join, it set two subsequent meetings. The interest shown during those meetings resulted in the set-up of a European-level association, which would later carry the name EVCA.
EVCA was provisionally set up on 31 August 1983, without an established staff nor office.
EVCA’s Inauguration
On 9 November 1983, EVCA was inaugurated with 36 full members and 7 associate members.
The European Commission gave financial support to EVCA in its three first years. This support covered the cost of hiring a Secretary General and staff, and, of course, an office.
Even after the 3-year period, EVCA continued to work closely together with the EC (Venture Consort Scheme)
EVCA initially stood for ‘European Venture Capital Association’ and was established as an international Scientific Association.
EVCA Programmes Venture Consort Programme:
Launched in cooperation with the EC in 1985 Its goals were to increase financing for SMEs involved in new technologies through the formation of cross-border syndicates of venture capitalists
European Seed Capital Fund Scheme: Launched in 1988 and terminated in 1995, the scheme’s goal was to encourage private investment into innovative, technology-based young firms
NIS Venture Capital Programme:Part of the Phare-Tacis Programmes with an aim to develop venture capital in the former Soviet Union and Central and Eastern European Countries by providing training courses and networking opportunities for venture capital operators
Private Equity Support Programme for CEE: Pilot programme launched in 1993 by EVCA financed by EU’s Phare programme, focussing on strenghtening the private equity capital infrastructure in Central & Eastern European countries
Presentation of EVCA
The Association’s aim: Create a more favourable environment for equity
investment and entrepreneurship
Its strategic priorities: Actively raise awareness to improve knowledge and
understanding of the European Private Equity/Venture Capital industry
Reinforce and develop professional standards for the industry
Strengthen the industry across Europe by maintaining a strong and relevant community of shared interests for European PE/VC practitioners
Members as of December Yearly and as of 11 October 2006
050
100150200250300350400450500550600650700750800850900950
1000
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
11/1
0/06
Full Members
Associate Members
National Associations
Direct members involvement
Via EVCA’s seven operating committees, led by industry specialists
Investor Relations
Professional Standards
Conferences and Member Services
Tax & Legal
Venture Capital
Buyout
National Associations
In addition, a series of task forces and working groups on specific issues (CEE, Awareness of the industry,…)
EVCA key services
Professional standards
Public & Regulatory affairs at EU level
Statistical research: activity and performance
Economic & Industry analysis with academics: Corporate Venture, Fund of Funds surveys, Tax & Legal Benchmark
Conferences & networking events: Investors Forum, Symposium, Venture Capital Conference
Professional development and training
Publications
Help Desk
EVCA’s messages
The “virtuous cycle” of the PE/VC investment A high level of ethics: the professional standards
Private Equity in the global economy
Repayments+ Capital gains
Commitments
Divestment
Pensions Savings
Savings and Pensions
Investment
Private Equity Funds
High-growth companies
Institutional investors(Insurance companies,
pension funds, banks…)
Private Equity Funds
Institutional investors(Insurance companies,
pension funds, banks…)
Saving accounts, Pension plans,
Insurance contracts…
Single fund structure
Young innovative companyHigh Growth Markets
Pension Fund Directive Solvency II
Entrepreneurship
Economic and social impact of European PE/VC
Since 2000, over 48,000 companies financed, employing 6 million people
Creating 1million jobs
Close to €200 billion of equity invested
EVCA Professional Standards….
EVCA believes that transparency is a key factor in the success and growth of PE/VC and has developed the highest Professional Standards
The most advanced professional standards of any alternative asset class and unique when compared with other regions and in particular with the US
They constitute a key success factor for the European PE/VC industry and help achieving its major long term goals:
Build a stable, long term relationship with institutional investors and regulators
Increase overall transparency and trust in the asset class
Protect industry against over-regulation.
Professional Standards Framework
LimitedPartner
GeneralPartner
PortfolioCompany
ReportingGuidelines
GoverningPrinciples
ValuationGuidelines
IFRS – US GAAP consistent
CorporateGovernance
Codeof
Conduct
II - Three decades of Private Equity & Venture Capital in Europe
Looking back
Today
Trends: global expansion
Looking back
The early days in the 80’s
A cottage industry Fundraising & investment levels were very low: < € 3bn p.a.
and largely dominated by the UK Venture oriented, but only a handful of technology oriented
managers (more traditional financial backgrounds) Small teams, local or regional focus and proprietary deal flow Only a few US based forerunners investing in Europe Most EU money originating from captives (banks or insurance
companies) and public money
Lack of entrepreneurship in EU vs. US
Looking back90’s
1990-1996: money raised < €5bn p.a. - growing but still a niche industry –- biggest fund worldwide
$1.4bn - growing sophistication brought in by investment banks,
consultants, lawyers, auditors, …
1997-2000: money raised, increased 6folds to €30bn+ p.a.
- Explosive growth – due to the hype of “new economy” - Shift to independent funds- Fast growing buyout segment, corporate Europe restructuring
- Emergence of entrepreneurship- Emerging markets: CEE, Asia
Looking back
00’s
2001: dotcom bubble bursts - write-offs & loss of confidence
2002-2005:
- Industry levels at €30bn p.a. - Asset allocation growing (4-5%)- Domination by buyouts (return driven)
- Emergence of big US buyout funds in Europe- Auctions and stapled finance
- VC: low level of money raised, investments and performance gap
- High level of competition combined with low interest rates levels driving up valuations (10x EBITDA) and debt levels (5x EBITDA)
Looking back
Value creation tools & processes
Buyout
80’s Financial engineering
Cash flow management
90’s Buy & build strategy
M&A expertise
00’s Operational improvements
Industrial expertise
Venture
Expansion financing
Financial & strategic expertise
Technology investments
Tech-entrepreneurs
US - VC model adopted by the large funds
…from financiers via strategists to industrialists…….
Today: Industry structure in Europe
1 100 GPs / 2 000 LPs -> $800bn AUM Industry growth over 10 years: CAGR 21% p.a. (AUM) Market is maturing: 300+ Fund-of-Funds, Secondary, Mezzanine,
Turnaround, Quoted, Corporate venture, Secondary buyouts LP preferences: BO in EU and VC in the US
Biggest funds: BO €14bn vs. VC €0,5bn BO: more global – VC: more local
Emergence of brands & “PE-institutions” Large diversified international teams Club deals & syndication Standardization of Terms and Conditions
Few home runs driving returns (BO + VC) Top funds heavily oversubscribed (BO)
Trends: global financial investment expansion2005 (Preliminary)
$93.4 Trillion1969
$2.3 Trillion
U.S. Equity30.7%
All Other Bonds15.6%
Private Equity0.1%
All Other Equities12.8%
Dollar Bonds22.3%
U.S. Real Estate11.6%
Cash Equiv.6.9%
U.S. Equity, 16.9%
Private Equity, 0.3%
U.S. Real Estate, 6.2%
Cash Equiv., 4.1%
High Yield Bonds, 1.0%
Dollar Bonds, 24.5%
All Other Bonds, 21.5%
Emerging Mkt Debt, 2.9%
All Other Equities, 18.0% Emerging Mkt
Equities, 1.8%
Source: UBS Global Asset Management / Adams Street Partners NVCA Annual Meeting 2006
PE activity levels, confirming a new record in ‘05
€ billion
Source: EVCA/Thomson Financial/ PricewaterhouseCoopers
8
20 20
25
48
40
28 27 28
72
710
15
25
35
2428 29
37
47
6 79 9
30
20
141113
4
0
10
20
30
40
50
60
70
80
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Funds Raised
Investments
Divestments Not too much capital
overhang
68% of investments in 2005 related to buyout deals, vs. 70% in 2004
Pension funds taking the lead in fund raising (24,8%), followed by banks (17,6%), funds of funds (13,1%) and insurance companies (11,1%)
Stage distribution by % of amount invested
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2001 2002 2003 2004 2005
Buyout Replacement Capital Expansion Start-up Seed
2005 European Private Equity SurveyConducted by Thomson Financial and PricewaterhouseCoopers on behalf of EVCA
Satisfactory exit conditions
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
2000 2001 2002 2003 2004 2005
in €m
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
Number
Rank Value# of Deals
Source: EVCA/Thomson Financial / PricewaterhouseCoopers
Divestments – Breakdown by Type
0
20,000
40,000
60,000
80,000
100,000
120,000
2000 2001 2002 2003 2004 2005
in €m
0
100
200
300
400
500
600
700
Number
Proceeds# of Deals
M&A Activity, Europe*
IPO Activity, Europe*
Source: Thomson Financial
*Public and private deals
9.5% 11.0%14.1%
17.5% 18%
4.1%2.9%
6.0%
3.9%4.3%
14.5%8.4%
15.9%
21.3%
23.4%
18.4%
13.1%20.2%
3.9%
3.8%
22.8%30.0%
11.6%9.7%
4.7%
4.4%
7.0%
6.2%
5.3%9.1%
2.0% 6.6%
5.6%
4.8%4.5%
22.6%23.7%20.4%
30.9%33.9%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2001 2002 2003 2004 2005
Trade Sale
IPO
Sale of Quoted Equity
Write-Off
Sale to Another Venture Capitalist
Repayment of Shares/Loans
Sale to Financial Institution
Other
European Private Equity Funds Formed 1980-2005Net IRRs to Investors, Investment Horizon Return as of 31-Dec-2005
Stage 1 YR 3 YR 5 YR 10 YR 20 YR
All Venture 36.5 1.7 -3.0 6.4 6.4
Buyouts 31.7 9.1 6.1 14.3 13.7
Generalist 52.4 2.2 -4.3 9.6 8.6
All Private Equity 33.8 6.3 2.0 11.4 10.4
Source: Thomson Financial/EVCA
Short term and long term indicators show an improving performance
Private equity continues to deliver a strong performance
Evolution of Private Equity and Public Market comparators10-year rolling IRR for 2000-2005
-10
-5
0
5
10
15
20
2000 2001 2002 2003 2004 2005
IRR
%
Morgan Stanley Euro Equity
HSBC Small Company
J P Morgan Euro Bonds
European Private Equity
Updated Benchmarks 31-December-2005Source: Thomson Financial / EVCA
NB: 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.
III. Future trends of the EU market
Market evolution in 2006
Looking forward Some challenges
EU market evolution in 2006 (e)
Estimation of activity levels for 2006:
another excellent year
2006 2005
Fundraising 75-80 € bn 72 € bn Investments 45-47 € bn 47 € bn Divestments 20-24 € bn 20 € bn
Buyout funds as main drivers of fund raising and investments
An expanding global investment focus(Respondents by Region/Continent)
Not expand
47% Expand53%
U.S. Respondents
Not expand
48% Expand52%
Americas (non-US)
Not expand
70%
Expand30%
Middle East/ Africa Respondents
Not expand
44%Expand
56%
APAC Respondents
Not expand
34%
Expand66%
European Respondents
Comment: Overall, 56% of global respondents will expand their global investment focus. European respondents show the strongest increase at 66%.
Source: Deloitte/EVCA
Percentage of GPs expanding their European activity (all respondents split by continents)
Other78%
Europe22%
U.S. Respondents
Other76%
Europe 24%
Americas (non-US) Respondents
Europe 12%
Other88%
Asian Pacific Respondents
Other64%
Europe 36%
Middle East/ African Respondents
Other27%
Europe73%
European Respondents
Comment: Europe is now perceived as a preferred destination by 30% of global respondents who intend to expand their activities. This is outpaced as an international expansion target only by Asia at 43%.
Source: Deloitte/EVCA
* predominant reason - the firm was already invested internationally Missing bars indicate the reason is not applicable for the specific region
0%
10%
20%
30%
40%
50%
60%
Adequate dealflow in
existingmarkets
Contractualrestrictions
Lack ofpartner
capacity
Legalrestrictions
Size of funddoes not allow
for crossborder
investing
Superiorreturns areavailable in
our localmarket
Other *
Europe U.S. APAC Middle East/Africa Americas (excluding U.S.)
Primary reasons for investors not to expand their international investment focus in the next 5 years (all respondents)
Source: Deloitte/EVCA
Looking forward in EU Rising interest from limited partners for PE
- Increase asset allocation (because of, among others, demographic pressure on pension funds)
- New limited partners coming to the market
Rising public awareness- More scrutiny from press, governments and public at large,
not always with a clear understanding of the business model
- More communication with the different parties
Increase professionalism in a more mature industry- Institutionalization of large players into “alternative asset
managers”
- Growing secondary market and market liquidity
- Differentiation in market niches
Overregulation or market distorting regulation due to the development of the financial sphere including PE/VC
EU Enlargement (25 Member States, soon 27). Discrepancies in PE/VC markets development
Globalisation (US, India, China…) Changing macroeconomic factors such as interest rates
Rising competition levels within BO and VC markets Value contribution as key to performance Avoid me-too strategy (for both LPs and GPs)
Attracting and retaining talent (fund managers or entrepreneurs - with industrial knowledge & experience)
GPs: generational changes ongoing
A growing interest from individual investors
Some current challenges in EU