Transcript Pan-European structures for Private Equity & Venture Capital
Pan-European structures for Private Equity & Venture Capital
Georges Noël EVCA Director of Research, Public Affairs & Development
Avco 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 and existing investors increasing asset allocations
Academic approach - TU München
14% EP_9%(26% VC, 26% BO, 28% Eq., 20% Bds.) 12% Equities MSRP(5% VC, 3% BO, 7% Eq., 85% Bds.) 10% 8% BO VC EP = Expected portfolio MSRP=Maximum Sharpe ratio MVP=Minimum Variance portfolio 6% 4% 0% Bonds=MVP(0% VC, 0% BO, 0% Eq., 100% Bds.) 5% 10% 15%
Standard Deviation (
s) 20% 25% 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 Center for Entrepreneurial and Financial Studies Prof. Dr. Chr. Kaserer / Chr. Diller
Investment styles
There are 3 ways to structure investments into Private Equity & Venture Capital: Through Direct Investments Through a PE Fund Through a Fund of Funds
The Private Equity Mix
INVESTORS FUND OF FUNDS INDIVIDUALS & BUSINESS ANGELS CORPORATES advises FUND A FUND B € Management Company Portfolio CO. 1 Portfolio CO. 2 Portfolio CO. 3
Source: EVCA
Three ways of investing in unquoted companies
Through Direct Investments Investors Fund of Funds PE Fund PE Fund PE Fund Company Company Company Company Source: EVCA
Three ways of investing in unquoted companies
Through a PE Fund Company Company Company Investors Fund of Funds PE Fund PE Fund PE Fund Company Source: EVCA
Three ways of investing in unquoted companies
Through a Fund of Funds Investors Fund of Funds PE Fund PE Fund PE Fund Company Company Company Company 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 Class 1989-2003
Fundraising Investments Sources of Funds
Evolution of the Asset Class 1989-2003
50,000 45,000 40,000 35,000 30,000 25,000 Funds Raised Investments 20,000 15,000 10,000 5,000 0 19891990 1991199219931994 19951996199719981999 2000200120022003 Source: EVCA, PricewaterhouseCoopers, Thomson Venture Economics (2003 figures)
Sources of New Funds in 2003
Academic Institutions 1.5% Capital Markets 0.3% Government Agencies 6.8% Other 17.3% Private Individuals 6.0% Corporate Investors 4.8% Fund of Funds 16.4% Pension Funds 19.4% Insurance Companies 8.7% Banks 26.3%
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
St ag e
Early Stage Development Balanced
A ll V ent ure
Buyouts Generalist
A ll Privat e Eq uit y
Source: Thomson Venture Economics
1 Y R
-13.1
-7.2
-5.4
-7.5
1.6
2.4
-0.6
3 Y R
-11.1
-4.8
-10.2
-9.0
1.0
-10.7
-3.8
5 Y R
-1.8
4.6
4.2
2.3
9.6
7.8
7.3
10 Y R
1.3
10.7
12.3
8.3
12.7
14.6
11.9
2 0 Y R
1.9
9.1
9.0
7.2
12.2
9.1
9.9
Top Quarter -European Private Equity Funds Formed 1980-2003 Net IRRs to Investors Investment Horizon Return as of 31-Dec-2003
Stage 1 YR
Early Stage 4.8
Development Balanced
All Venture
Buyouts 2.5
-9.1
-6.5
12.6
Generalist 7.6
All Private Equity 8.4
3 YR
-3.9
-0.3
-5.3
-4.0
9.7
7.9
4.8
5 YR
11.9
28.0
31.9
21.0
44.9
11.9
34.5
10 YR 20 YR
16.3
30.2
45.3
29.9
40.9
18.6
35.5
14.8
19.7
23.9
19.8
30.8
12.9
24.5
Performance Benchmarks
How are these IRR’s compared to public market indices?
Comparators* CLN Index Method Public Market Equivalents Returns as of 31 December 2003
Stage Early stage Development Balanced All Venture Buyouts Generalist All Private Equity European Private Equity
1.9
9.0
9.0
7.2
12.2
9.1
9.9
Since Inception Returns Morgan Stanley Euro
1.8
HSBC Small Company
5.7
7.9
2.7
4.3
-2.9
5.9
0.5
7.5
6.2
6.4
3.8
4.3
4.8
JP Morgan EuroBond s
9.8
9.3
9.1
9.4
9.9
9.4
9.7
*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 25 separate 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 used throughout 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 industry across 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!