INVESTMENTS IN PRIVATE EQUITY:

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16 June 2004
INVESTMENTS IN PRIVATE EQUITY THE ROLE OF
PENSION FUNDS
GIANNIS PAPADOPOULOS Managing Director,
Attica Ventures
Presentation by
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The aim of VC investments
High returns Risk spread
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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

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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

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Common features of both PE and Pension funds
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Comparison of Pension fund investment options
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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

31-Dec-2002
Comparisons based on the internal rate of return
(IRR).
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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 RD, mainly for expenses
• Greece comes 4th in the PE investment environment
  evaluation among EU countries

(1most favourable, 3least favourable)
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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.
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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

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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

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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
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Pension Funds 22.1
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Capital raised in Greece per investor category
(1999-2003)
Pension Funds 0
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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.

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Investments in VC as of GDP (2003)
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Tentative conclusions....

1. PE a well-developed institution
2. The role of pension funds is primary
3. Developed markets / competition

Europe

• PE not developed as an institution
• Pension funds still seeking their role
• Under-developed markets / competition

Greece
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Reasons for PEs 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
  (developing positively)
• Structure and incentives for creating PE funds
• Legal regime governing mergers acquisitions
• Entrepreneurial environment
• Corporate taxation(35 compared to 28 in the EU)
• Greek economy development model
• Lack of entrepreneurial incentives
• Role of the State
• Competition
• Policy priorities
• Idiosyncrasy and culture

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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 funds value may be invested in
  non-listed shares, after obtaining permission
  from the Hellenic Capital Market Commission.

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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.

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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.

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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.

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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.

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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).

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ATTICA VENTURES Investment Team
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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
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Investment criteria

• Capable and collaborative managers with levels of
  commitment to the firm
• Successful background in the sector
• Clear development strategy
• Alternative development plans - scenarios
• Products or services that meet real market /
  consumer needs
• Developing market, or market in the making
• Synergies with other companies or strategic
  partners
• Full financing framework
• Return proportionate to risk and investment stage
  

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People
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Strategy
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Returns
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www.attica-ventures.gr
Akadimias 34, GR-10672, ATHENS Tel. 30 210
3637663 Fax [phone]