The Globalisation of Venture Capital

1
The Globalisation of Venture Capital

• 2007 Taiwan Venture ForumInvest In Taiwan
  Access to Asia
• Javier Echarri
• EVCA Secretary General
• December 10, 2007

2
Presentation structure

• Private Equity and Venture Capital The European
  view
• The European Market Structure and Trends
• The Global Debt Market situation
• The Political landscape and its impact on the
  Private Equity and Venture Capital industry
• Venture Capital Globalisation Challenges and
  Opportunities

3
Private Equity and Venture Capital The European
View

• Seed
• Start-up VENTURE CAPITAL
• Later stage
• Expansion
• Developpment
• Buyouts Small, Large and Mega Turnarounds
  Secondary transactions etc

4
Evolution Activity Flows
billion
EVCA Yearbook 2007 Conducted by Thomson Financial
and PricewaterhouseCoopers on behalf of EVCA
5
European Fundraising All-Time Record at 112 bn

• Pension funds continue to invest massively baby
  boomers with a pension shortfall
• Funds of funds allocations double
• 75 of funds raised allocated to buyout in 2006

EVCA Yearbook 2007 Conducted by Thomson Financial
and PricewaterhouseCoopers on behalf of EVCA
6
2006 Funds Raised Country of Origin and Country
of Management of European Funds Raised
billion
Note US amount of 32.4 billion comprises
fundraising by European funds from US LPs.
EVCA Yearbook 2007 Conducted by Thomson Financial
and PricewaterhouseCoopers on behalf of EVCA
7
Record level investments at 71 Billion (Equity
only from private equity funds)
EVCA Yearbook 2007 Conducted by Thomson Financial
and PricewaterhouseCoopers on behalf of EVCA
8
Venture Capital and Buyout Amount Invested as
of GDP
EVCA Yearbook 2007 Conducted by Thomson Financial
and PricewaterhouseCoopers on behalf of EVCA
9
2006 Investment as of GDP Investments by
Country of Destination
EVCA Yearbook 2007 Conducted by Thomson Financial
and PricewaterhouseCoopers on behalf of EVCA
10
Stage Distribution of InvestmentsAmount Invested
2005
2006
EVCA Yearbook 2007 Conducted by Thomson Financial
and PricewaterhouseCoopers on behalf of EVCA
11
Stage Distribution of InvestmentsNumber of
Investments
2005
2006
EVCA Yearbook 2007 Conducted by Thomson Financial
and PricewaterhouseCoopers on behalf of EVCA
12
EVCA Quarterly Activity IndicatorQ1 2003 to Q2
2007
November 2007

• Conducted by
• PEREP Analytics

13
Evolution of European Private Equity Activity By
Amount (index - Q1 2003 100)
-38
-9
-33
Source PEREP Analytics Note The percentage
change mentioned on the right refers to the
evolution of the current quarter versus the
previous quarter
14
Some take-homes

• Very strong investment in first half 2007
• Both in venture and buyouts
• Fund Raising slowdown already in Q2
• Showing signs of buyout slowdown in Q2
• Very severe slow-down of buyouts in Q3

15
Debt markets
16
Debt Market impact. Phase I

• Banks are left with huge amounts of unsold US
  mortgage derivative products
• Impact is severe
• Sold products at discount. Negative PL impact
• Absorbed debt out of balance sheet. Capital
  requirements also have an impact on PL
• No appetite left of any additional debt of any
  kind by large investment banks
• Traditional banks with US mortgage exposure
  suffer the same situation

17
Debt Markets Phase II

• Individual BO deal debt in Europe Absorbed
  relatively well given the low exposure.
• Difficulty in the USA due to large amount of
  Public to Private deals open.
• We have not seen defaults of BOs
• Derivative debt products are out of the market

18
Debt Market. Phase III

• Back to 2005
• Cost of debt is higher
• Covenants are back at traditional terms
• Derivative products are not available
• Mid market buyout deals
• Doing Ok, financed via long term proximity bank
  relationship and strong due diligence
• Appetite exists for deals under 500m
• Much more restrictive company selection, to
  ensure strong drivers exist for value creation
• Strategic focus
• Operating cost improvement
• Financial optimisation

19
Open Questions

• How much exposure is sitting in the European
  banks via derivative products?
• How much exposure is sitting in the Pension Fund
  and other Institutional Investor books?
• Will there be a recession?

20
Political Landscape
21
Trade Unions

• Tension started with Munterfering in Germany at
  election time
• Attacks from Trade unions since November 2006
• Clear goals
• Strongly campaign against the financialisation
  and globalisation of the economy
• Pick a few industries and implement a name and
  shame strategy
• Ensure a maximum press coverage in order to
  counter a ever increasing loss of affiliation
• The large 2005 and 2006 Public to Private
  transactions made us an easy target

22
Governments

• Governments under pressure from TUs wisely asked
  their regulators to analyse the consequences and
  the health of the system in place.
• The angle was double
• Systemic risk
• Market abuse
• Conclusions by all regulators have been very
  positive to the PE industry
• Highlighted the strong positive impact on the
  economy
• Identified the systemic risk as belonging to the
  debt markets, not to the PE operations
• Expressed questions about a number of specific
  areas linked to Public to Private transactions
  Conflict of interest of management, Public
  Disclosure

23
Industrys Reaction

• Walker report
• Focus on Large operations
• Public disclosure equivalent to public companies
• Independent Board Membership
• EVCA Code of Ethics
• 6 principles taken from the IOSCO (international
  regulators organisation)
• Normalisation Strategy towards the TUs

24
What Next?

• Taxation
• The debate about taxation will continue,
  particularly in the USA and the UK.
• In the rest of Europe the core debate is about
  difficulty for cross-border fund raising and
  investment Permanent Establishment rules,
  Prospectus Directive
• Taxation debate focussed on a narrow view.
  Countries Should consider the whole economic
  impact of the fiscal measures carefully and put
  them in the perspective of the overall
  competitiveness of the country
• Large Deals Out of the market for a very long
  time
• Different views from some months to couple of
  years
• It calms the political debate
• Economic impact studies are a very important
  tool
• Independent research launched by Governments (the
  ECB, the FSA, the Dutch Erasmus university, etc)
• Industry associations initiatives

25
Global Trends in Venture Capital
26
Current strategies for foreign investing

• European venture capitalists who are currently
  investing abroad have established several
  strategies to manage their foreign investments
• Leading with 60 is the practice of investing
  only with other investors with a local presence.
• They also require their partners to travel more
  to foreign locations (57).
• They develop strategic alliances with
  foreign-based firms (48).
• A significant number (30) invest in local
  portfolio companies with operations abroad.
• More than one-third of European VCs hire
  investment staff with local expertise (36) or
  open new offices in the foreign location (35).

Source Global Trends in Venture Capital,
Deloitte, 2007
27
Foreign investments currently held by European VC
firms
Source Global Trends in Venture Capital,
Deloitte, 2007
28
Primary locations where European investors would
like to expand investment focus
India, Other Asia, Japan, South Korea
Africa, Israel, Middle East (excl. Israel)
Source Global Trends in Venture Capital,
Deloitte, 2007
29
Future business practices

• As these European investors look and plan ahead,
  how do their strategies change from their current
  practices?
• 31 expect to invest only with other investors
  with a local presence.
• 18 plan to hire investment staff with local
  expertise.
• Another 17 intend to develop strategic alliances
  with foreign-based firms.
• Fewer plan to open new offices in foreign
  locations (14), or require their partners to
  travel more (11).

Source Global Trends in Venture Capital,
Deloitte, 2007
30
Primary reasons venture investors are expanding
globally
Source Global Trends in Venture Capital,
Deloitte, 2007
31
Capital under management

• Among European investors currently investing
  abroad
• 52 have less than 5 of capital under management
  invested in foreign locations
• 14 have between 6-10 of their capital invested
  abroad
• 4 have between 11-15 of their assets in
  international investments
• 2 have between 16-20 4 have between 21-25
  and 7 have between 26-50 of their capital
  invested abroad
• 9 have between 51-75 of their capital invested
  abroad and 8 have between 76-100

Source Global Trends in Venture Capital,
Deloitte, 2007
32
Capital under management (2)

• European investors looking 5 years into the
  future
• 3 expects to have less than 5 of their capital
  under management deployed in international
  investments
• 12 expects to have between 6-10 of their
  capital invested abroad
• 20 expects to have between 11-15 of their
  assets in international investments
• 17 expects to invest between 16-20 16 between
  21-25 and 14 between 26-50 of their capital
• 10 expects to have between 51-75 of their
  capital invested abroad and 8 between 76-100

Source Global Trends in Venture Capital,
Deloitte, 2007
33
Primary reason for not expanding intl investment
in next 5 years
Source Global Trends in Venture Capital,
Deloitte, 2007
34
Investing globally by investing locally

• While investing directly in a foreign company is
  the most conventional approach, there are
  certainly other options available to investors,
  including investing locally in portfolio
  companies with overseas operations.
• Additionally, given that resource constraints can
  put a damper on international investment, it
  makes sense that some VCs find investing in local
  companies with operations abroad attractive. This
  strategy can help VCs ramp up in foreign markets
  with greater ease of mind and less risk.
• Among European respondents, 86 acknowledged that
  at least some part of their portfolio has
  significant operations manufacturing, RD,
  engineering, and back office located outside
  the country in which their companies are based.

Source Global Trends in Venture Capital,
Deloitte, 2007
35
Investing globally by investing locally (2)

• 28 of European VC firms indicate that only 1 to
  10 of their portfolio companies have significant
  operations located abroad.
• Another 23 indicate that 11-25 of their
  portfolio had significant foreign operations.
• 18 had between 26-50 15 between 51-75 and 2
  between 76-100
• 14 of the VCs stated a zero percentage of
  significant operations outside the headquarter
  country
• By comparison, among US VCs, the numbers are
  slightly higher than European VCs at the low end
  of the scale, evening out at 18 when both groups
  of respondents reach the 25 to 50 mark. US VCs
  are far behind European investors when reaching
  the 51 to 75 range (4). However, they slightly
  exceed European investors at the highest level.

Source Global Trends in Venture Capital,
Deloitte, 2007
36
Investing globally by investing locally (3)

• European VCs countries of choice for relocating
  the significant operations
• China is the most popular choice for
  manufacturing (19), although Central and Eastern
  Europe are close behind (17). The U.S. (5),
  other Asian countries (5), and India (1) are of
  far less interest.
• When it comes to RD, the U.S. (15) and Central
  and Eastern Europe (13) are preferred by
  European investors, with all other
  countries/regions of negligible interest.
• European investors are staying close to home in
  the engineering arena, with Central and Eastern
  Europe the most favored at 14, followed by the
  U.S. (8) and Austria, Germany, Liechtenstein,
  and Switzerland (4).
• Back office operations are equally split at 10
  between Central and Eastern Europe and India as
  the location of choice. The U.S. shows up among
  4 of European VCs.

Source Global Trends in Venture Capital,
Deloitte, 2007
37
Impediments to global investing

• One of the toughest issues globally is
  intellectual property protection.
• China is, by far, the most frequently cited
  country in which VCs identify financial risk in
  this arena. Among European VCs, 59 identify
  China as having IP laws that create additional
  financial risk. India was next with 16.
• When it comes to other investors around the world
  looking at Europe and the risks involved in
  different regions on the continent, the number of
  VCs who identified problems were fairly low
  across the board.

Source Global Trends in Venture Capital,
Deloitte, 2007
38
Thank You

• Javier Echarri
• EVCA
• www.evca.eu