Transcript Slide 1

16 June 2004
INVESTMENTS IN PRIVATE EQUITY:
THE ROLE OF PENSION FUNDS
Presentation by :
GIANNIS PAPADOPOULOS
Managing Director,
Attica Ventures
1
The aim of VC investments
High returns
Risk spread
2
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
3
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
4
Common features of both PE and Pension funds
Pension
Funds
PE
Control over
investments
YES
YES
Return on capital
YES
YES
Investment
spread
Risk spread
YES
YES
YES
YES
Long-term focus
YES
YES
5
Comparison of Pension fund investment options
EU
GREECE
Stock
Exchange
Bonds
YES
YES
YES
YES
Real Estate
YES
YES
YES
YES
YES
NO
Mutual Funds
PE/VC
6
Pension Funds and Private Equity. Why? (1)
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
Stage
European
Private Equity
Return
Morgan
HSBC Small
JP Morgan
Stanley Euro Company
EuroBonds
Index
index
Early stage
Development
Balanced
All Venture
Buyouts
Generalist
4,9
10,3
10,7
9,2
12,9
10,0
-0,1
7,7
-0,2
3,0
-7,1
7,1
-4,2
3,9
-4,1
-1,3
-8,7
0,3
7,4
8,0
6,5
7,3
4,0
7,7
All Private Equity
10,8
-2,3
-5,7
7,2
*Comparisons based on the internal rate of return (IRR).
31-Dec-2002
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
2004
UK
Luxembourg
Ireland
Greece
Netherlands
Portugal
Belgium
Hungary
Italy
France
Switzerland
Spain
2003 average
2002 average
1.26
1.49
1.53
1.75
1.76
1.81
1.82
1.86
1.86
1.89
1.95
1.96
1.97
2.03
(1=most favourable,
3=least favourable)
8
Pension Funds and Private Equity. Why? (3)
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.
Conclusion: Investment in PE reduces instability and improves the risk profile in an
investment portfolio.
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 growth
Increase in competitiveness
Increase in profits
Wealth distribution
Robust pension
funds
12
Capital raised in Europe per investor category
(1999-2003)
Corporate investments
Ν#A 6.70% Capital Markets 0.70%
Private Investors 6.20%
8.00%
Academic institutes 1.20%
Government Agencies 6.70%
Fund of funds 11.50%
Banks 24.40%
Insurance companies
12.50%
Insurance
Pension Funds
Funds
22.1%
22.10%
13
Capital raised in Greece per investor category
(1999-2003)
Corporate investmentsCapital Markets 0%
8%
Academic institutes
0%
Fund of funds 24%
Private investors 11%
Government agencies
4%
Insurance companies
4%
Insurance
Funds
Pension
Funds
0%
0%
Banks 50%
14
A tentative overview .....
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.
15
Investments in VC as % of GDP (2003)
16
Tentative conclusions....
Europe:
Greece:
1. PE: a well-developed institution
2. The role of pension funds is primary
3. Developed markets / competition
1. PE not developed as an institution
2. Pension funds still seeking their role
3. Under-developed markets / competition
17
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
positively)




Structure and incentives for creating PE funds
Legal regime governing mergers & acquisitions
Entrepreneurial environment
Corporate taxation(35% compared to 28% in the EU)




Lack of entrepreneurial incentives
Role of the State
Competition
Policy priorities
Greek economy development model
Idiosyncrasy and culture
(developing
18
The 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.
20
Learning a lesson from history.....
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.
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.
22
The actions needed
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.
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).
24
ATTICA VENTURES – Investment Team
Wide ranging
professional experience
(VC, consulting, finance,
retail, corporate
management).
Network of business
contacts and excellent
knowledge of the Greek
market
Complementary
academic backgrounds
25
Managed fund:
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
26
Investment criteria
People
Capable and collaborative managers with levels of commitment to the firm
1
Successful background in the sector
Clear development strategy
Strategy
Alternative development plans - scenarios
2
Products or services that meet real market / consumer needs
Developing market, or market “in the making”
Synergies with other companies or strategic partners
Returns
Full financing framework
Return proportionate to risk and investment stage
3
Clear link between investment and overall portfolio
Visible exit routes
www.attica-ventures.gr
Akadimias 34, GR-10672, ATHENS
Tel.: +30 210 3637663
Fax: +30 210 3637859