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Pan-European structures for Private Equity

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Title: Pan-European structures for Private Equity


1
Pan-European structures for Private Equity
Venture Capital
  • Georges Noël
  • EVCA Director of Research, Public Affairs
    Development
  • Avco Investorenkonferenz, Vienna
  • June 23rd, 2004

2
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

3
EVCA
  • 931 members
  • 132 Institutional Investors or Funds of Funds
  • 29 National Associations (NVCAs)
  • 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

4
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)

5
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

6
Changing Environment for PE/VC
  • Private Equity is becoming a mainstream asset
  • class with new Limited Partners entering and
  • existing investors increasing asset allocations

7
Academic approach - TU München
EP Expected portfolio MSRPMaximum Sharpe
ratio MVPMinimum Variance portfolio
  • 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
8
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

9
The Private Equity Mix
INDIVIDUALS BUSINESS ANGELS
FUND OF FUNDS
INVESTORS
CORPORATES
Management Company
advises
FUND A
FUND B

Portfolio CO. 1
Portfolio CO. 2
Portfolio CO. 3
Source EVCA
10
Three ways of investing in unquoted companies
Through Direct Investments
Company
PE Fund
Company
Company
Investors
Fund of Funds
PE Fund
PE Fund
Company
Source EVCA
11
Three ways of investing in unquoted companies
Through a PE Fund
Source EVCA
12
Three ways of investing in unquoted companies
Through a Fund of Funds
Company
PE Fund
Company
Company
Investors
Fund of Funds
PE Fund
PE Fund
Company
Source EVCA
13
Investment styles
  • Each of the 3 possible investments strategies
  • has its own risk profile

14
Level of risk involved by investment vehicle
Source The Risk Profiles of Private Equity,
Weidig and Mathonet, January 2004
15
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

16
Evolution of the Asset Class 1989-2003
  • Fundraising
  • Investments
  • Sources of Funds

17
Evolution of the Asset Class 1989-2003
Source EVCA, PricewaterhouseCoopers, Thomson
Venture Economics (2003 figures)
18
Sources of New Funds in 2003
2003
Source EVCA Survey of Pan-European Private
Equity and Venture Capital Activity 2003
Conducted by Thomson Venture Economics and
PricewaterhouseCoopers
19
European Private Equity Funds Formed
1980-2003 Net IRRs to Investors Investment
Horizon Return as of 31-Dec-2003
Source Thomson Venture Economics
20
Top Quarter -European Private Equity Funds Formed
1980-2003 Net IRRs to Investors Investment
Horizon Return as of 31-Dec-2003
21
Performance Benchmarks

How are these IRRs compared to public market
indices?
22
Comparators CLN Index Method Public Market
Equivalents Returns as of 31 December 2003
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
23
EVCAs 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.
24
EVCAs 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, RD)
  • EVCA works with policymakers through
    research-based constructive dialogue
  • raising awareness of key issues
  • providing evidence
  • seeking mutually acceptable solutions.

25
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

26
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.

27
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

28
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.

29
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

30
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.

31
EVCA - Working together with Europe s National
Associations 
  • The collaboration between EVCA and AVCO.

32
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.

33
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

34
EVCA
  • Vielen Dank für Ihre Aufmerksamkeit!
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