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!