Transcript Presentation on Venture Capital

FINANCE CLUB
Presentation on Venture
Capital
April 7 2003
Tanya Roberts / Omar Ali
FINANCE CLUB
What is Venture Capital?
• Generally – investment in private (ie unquoted) companies.
• Specifically:
- Growth / Acquisition Funding (inc. start ups)
- MBOs / MBIs / IBOs / LBOs / SBOs ……..
- Private Placement
- (Turnarounds)
• General criteria are the same – growth and the management to deliver
the growth
• How do VCs make their money?
- Profit Growth
- Leverage
- Selling well
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Market Trends
Since Inception (European Point of View):
More than €125 billion has been raised for
investment in Europe's most promising growth
companies since private equity emerged in Europe
in the 1980s. In 1999 alone, €25.1 billion was
poured into more than 11,000 investments.1
The Last Couple of Years:
The European and American VC markets have
witnessed a substantial decrease in fund raising, an
increase in divestments, and a dry-up of the capital
markets as an exit strategy. Nonetheless, large
buyouts are fuelling the investment climate and
keeping the market active. Essentially, an economic
downturn is not necessarily a bad thing for the
private equity market. It offers the opportunity to turn
around bargain companies.
1
European Venture Capital Association
2
Venture Economics – Thomson Financial Group
US VC Market2
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So what’s it like?
• Analysis – so don’t worry about the numbers! It’s the
management who matter….
• Fierce Competition Marketing, Marketing, Marketing...
• BUT – it’s about long term relationships
The Good Bits:
• Variety / Responsibility / Long term view
The Bad Bits:
• Peaks and troughs / Tough decisions
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The UK VC Market (www.bvca.co.uk)
It’s tough……
LBOs: Alchemy / CVC / Cinven
Mid Market Private Equity :
UK Regional Specialists: 3i / LDC / Bridgepoint….
Sector Specialists: Graphite / Apax
The Best of the Rest: ABN / HSBC / Permira…..
Venture Capital :
Small funds / specialist divisions within the main firms
The European VC Market (www.evca.com)
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Types of PE/VC Funds
Industries:
There are numerous industry focuses within venture capital and private equity.
The largest sector investments over the last year in the US, for instance, have
been the following1:
1)
2)
3)
4)
5)
software
telecommunications
medical devices
biotechnology
network and equipment
Geography:
Funds are often organized by having a specific geographic region constraint in
regards to making investments.
Size of Funds:
Funds vary in size; anywhere from €50 million to €5 billion. Nonetheless,
originators of funds normally seek at a minimum €100 million.
1
PWC Money Tree
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Structure of PE/VC Funds
General Partners (GP):
Are the managers and originators of a fund. It is rare that GPs put their own
capital into the fund and thus, seek management fees and carried interest within
the fund structure. The industry standard for carried interest is 20%.
Limited Partners (LP):
Are the actual investors that commit capital to the fund. Investors tend to be
mainly institutions (financial intermediaries) such as, Pension Funds, Insurance
Companies, Investment Banks, etc. Since LPs actually supply the fund with
money, they are usually rewarded with preferred returns and a “catch-up” clause
(repayment of 100% capital before other dividends are to be distributed.)
Time Periods:
• Investment Period – is the amount of years that the fund will utilize to make
portfolio investments. The industry standard is between 3 to 5 years.
• Fund Life – is the amount of years that fund exists for. The industry standard is
10 years to 12 years with maximums reaching 20 years.
Note: See Next Slide for Further Detail
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Industry
standard’s for
investment
periods. Fund
lives are 3
and 10 years,
respectively.
Fund Requirements
Timing
Fund Start Date
Fund Investment Period - (Years)
Fund Life - (Years)
January 1, 2004
3
10
Fund Size
Cash Needed for Fund - (Equal to Total of Portfolio Investments)
Capital Structure of Fund
Equity - (Committed Capital)
Debt - (Borrowed Capital)
Total
US$, 000s
200,000
% of Structure
100.00%
0.00%
100.00%
Debt Financing
Loan Commitment - (US$, 000s)
Amortization Term - (Years)
Grace Period for Principal - (Years)
Net Interest Rate
Management
Fee is applied
on committed
capital.
Preferred
Returns to LPs
and Catch Up
terms and
arrangements.
0
10
0
10.00%
Management Fee Schedule
Management Fee During Investment Period
Management Fee After Investment Period
Additional Fees and Expenses
Offering & Organizational Expenses - (% of Total Capital Needed)
Subscription Fee - (% of Invested Capital)
Third Party Due Diligence Costs - (US$, 000s)
US$, 000s
200,000
0
200,000
Percentage
2.00%
1.00%
Percentage
0.50%
2.00%
0
US$, 000s
1,000
4,000
0
Distributions
Limited Partner Catch-up - (Priority of Distributions)
Preferred Return on Capital to Ltd. Partners
General Partner Catch-up - (Calculated as % of LPs Accrued Preferred Return)
General Partners Carried Interest - (Subordinate to LPs Catch-up & Preferred Return)
Ltd. Partners Interest - (Post Catch-up & Preferred Return)
100.00%
8.00%
25.00%
20.00%
80.00%
Additional
fees that are
applied on a
one-time
basis.
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Useful Websites
European Venture Capital Association: www.evca.com
National Venture Capital Association: www.nvca.org
British Venture Capital Association: www.bvca.co.uk
Italian Private Equity and Venture Capital Association: www.aifi.it
Venture Economics (Thomson): www.ventureeconomics.com
Private Equity Online: www.privateequityonline.com
PWC Money Tree: www.pwcmoneytree.com
The Journal of Private Equity: www.iijpe.com/issue.asp