Professional advisors (lawyers, placement agents, investment bankers, ...)
National Private Equity and Venture Capital associations
Background to EVCA’s Foundation
In 1980, the European Commission (DG XIII) set up a pilot scheme following an analysis of ‘Barriers to Industrial Innovation’ in Europe.
This pilot scheme had to decrease the lack of financing to new technology-based firms and to encourage cross-border operations.
At the end of 1980, in total 7 companies had joined the scheme.
When the EC noticed in mid-1983 that many more companies had wanted to join, it set two subsequent meetings. The interest shown during those meetings resulted in the set-up of a European-level association, which would later carry the name EVCA.
EVCA was provisionally set up on 31 August 1983, without an established staff nor office.
On 9 November 1983, EVCA was inaugurated with 36 full members and 7 associate members.
The European Commission gave financial support to EVCA in its three first years. This support covered the cost of hiring a Secretary General and staff, and, of course, an office.
Even after the 3-year period, EVCA continued to work closely together with the EC (Venture Consort Scheme)
EVCA initially stood for ‘European Venture Capital Association’ and was established as an international Scientific Association.
Venture Consort Programme: Launched in cooperation with the EC in 1985 Its goals were to increase financing for SMEs involved in new technologies through the formation of cross-border syndicates of venture capitalists
European Seed Capital Fund Scheme: Launched in 1988 and terminated in 1995, the scheme’s goal was to encourage private investment into innovative, technology-based young firms
NIS Venture Capital Programme: Part of the Phare-Tacis Programmes with an aim to develop venture capital in the former Soviet Union and Central and Eastern European Countries by providing training courses and networking opportunities for venture capital operators
Private Equity Support Programme for CEE: Pilot programme launched in 1993 by EVCA financed by EU’s Phare programme, focussing on strenghtening the private equity capital infrastructure in Central & Eastern European countries
Presentation of EVCA
The Association’s aim:
Create a more favourable environment for equity investment and entrepreneurship
Its strategic priorities:
Actively raise awareness to improve knowledge and understanding of the European Private Equity/Venture Capital industry
Reinforce and develop professional standards for the industry
Strengthen the industry across Europe by maintaining a strong and relevant community of shared interests for European PE/VC practitioners
Members as of December Yearly and as of 11 October 2006
Direct members involvement
Via EVCA’s seven operating committees, led by industry specialists
Conferences and Member Services
Tax & Legal
In addition, a series of task forces and working groups on specific issues (CEE, Awareness of the industry,…)
EVCA key services
Public & Regulatory affairs at EU level
Statistical research: activity and performance
Economic & Industry analysis with academics: Corporate Venture, Fund of Funds surveys, Tax & Legal Benchmark
Conferences & networking events: Investors Forum, Symposium, Venture Capital Conference
Professional development and training
The “virtuous cycle” of the PE/VC investment
A high level of ethics: the professional standards
Private Equity in the global economy Repayments + Capital gains Commitments Divestment Pensions Savings Savings and Pensions Investment Private Equity Funds High-growth companies Institutional investors (Insurance companies, pension funds, banks…) Private Equity Funds Institutional investors (Insurance companies, pension funds, banks…) Saving accounts, Pension plans, Insurance contracts…
Single fund structure
Young innovative company High Growth Markets Pension Fund Directive Solvency II Entrepreneurship
Economic and social impact of European PE/VC
Since 2000, over 48,000 companies financed, employing 6 million people
Creating 1million jobs
Close to €200 billion of equity invested
EVCA Professional Standards….
EVCA believes that transparency is a key factor in the success and growth of PE/VC and has developed the highest Professional Standards
The most advanced professional standards of any alternative asset class and u nique when compared with other regions and in particular with the US
They constitute a key success factor for the European PE/VC industry and help achieving its major long term goals:
Build a stable, long term relationship with institutional investors and regulators
Increase overall transparency and trust in the asset class
Protect industry against over-regulation.
Professional Standards Framework Limited Partner General Partner Portfolio Company Reporting Guidelines Governing Principles Valuation Guidelines IFRS – US GAAP consistent Corporate Governance Code of Conduct
II - Three decades of Private Equity & Venture Capital in Europe
Trends: global expansion
The early days in the 80’s
A cottage industry
Fundraising & investment levels were very low: < € 3bn p.a. and largely dominated by the UK
Venture oriented, but only a handful of technology oriented managers (more traditional financial backgrounds)
Small teams, local or regional focus and proprietary deal flow
Only a few US based forerunners investing in Europe
Most EU money originating from captives (banks or insurance companies) and public money
Lack of entrepreneurship in EU vs. US
1990-1996: money raised < €5bn p.a.
- growing but still a niche industry –- biggest fund worldwide $1.4bn
- growing sophistication brought in by investment banks, consultants, lawyers, auditors, …
1997-2000: money raised, increased 6folds to €30bn+ p.a.
- Explosive growth – due to the hype of “new economy”
- Shift to independent funds
- Fast growing buyout segment, corporate Europe restructuring
- Emergence of entrepreneurship
- Emerging markets: CEE, Asia
2001: dotcom bubble bursts - write-offs & loss of confidence
- Industry levels at €30bn p.a.
- Asset allocation growing (4-5%)
- Domination by buyouts (return driven)
- Emergence of big US buyout funds in Europe
- Auctions and stapled finance
- VC: low level of money raised, investments and performance gap
- High level of competition combined with low interest rates levels driving up valuations (10x EBITDA) and debt levels (5x EBITDA)
Value creation tools & processes
Buyout 80’s Financial engineering Cash flow management 90’s Buy & build strategy M&A expertise 00’s Operational improvements Industrial expertise Venture Expansion financing Financial & strategic expertise Technology investments Tech-entrepreneurs US - VC model adopted by the large funds … from financiers via strategists to industrialists…….
Today: Industry structure in Europe
1 100 GPs / 2 000 LPs -> $800bn AUM
Industry growth over 10 years: CAGR 21% p.a. (AUM)
Trends: global financial investment expansion 2005 (Preliminary) $93.4 Trillion 1969 $2.3 Trillion Source: UBS Global Asset Management / Adams Street Partners NVCA Annual Meeting 2006
PE activity levels, confirming a new record in ‘05 € billion Source: EVCA/Thomson Financial/ PricewaterhouseCoopers
Not too much capital overhang
68% of investments in 2005 related to buyout deals, vs. 70% in 2004
Pension funds taking the lead in fund raising (24,8%), followed by banks (17,6%), funds of funds (13,1%) and insurance companies (11,1%)
Stage distribution by % of amount invested 2005 European Private Equity Survey Conducted by Thomson Financial and PricewaterhouseCoopers on behalf of EVCA
Satisfactory exit conditions Source: EVCA/Thomson Financial / PricewaterhouseCoopers Divestments – Breakdown by Type M&A Activity, Europe* IPO Activity, Europe* Source: Thomson Financial *Public and private deals
European Private Equity Funds Formed 1980-2005 Net IRRs to Investors, Investment Horizon Return as of 31-Dec-2005 Source: Thomson Financial/EVCA Short term and long term indicators show an improving performance 10.4 11.4 2.0 6.3 33.8 All Private Equity 8.6 9.6 -4.3 2.2 52.4 Generalist 13.7 14.3 6.1 9.1 31.7 Buyouts 6.4 6.4 -3.0 1.7 36.5 All Venture 20 YR 10 YR 3 YR 1 YR Stage 5 YR
Private equity continues to deliver a strong performance Evolution of Private Equity and Public Market comparators 10-year rolling IRR for 2000-2005 Updated Benchmarks 31-December-2005 Source: Thomson Financial / EVCA NB: 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.
III. Future trends of the EU market
Market evolution in 2006
EU market evolution in 2006 (e)
Estimation of activity levels for 2006:
another excellent year
Fundraising 75-80 € bn 72 € bn
Investments 45-47 € bn 47 € bn
Divestments 20-24 € bn 20 € bn
Buyout funds as main drivers of fund raising and investments
An expanding global investment focus (Respondents by Region/Continent) Comment: Overall, 56% of global respondents will expand their global investment focus. European respondents show the strongest increase at 66%. Source: Deloitte/EVCA
Percentage of GPs expanding their European activity (all respondents split by continents) Comment: Europe is now perceived as a preferred destination by 30% of global respondents who intend to expand their activities. This is outpaced as an international expansion target only by Asia at 43%. Source: Deloitte/EVCA
Primary reasons for investors not to expand their international investment focus in the next 5 years (all respondents) Source: Deloitte/EVCA * predominant reason - the firm was already invested internationally Missing bars indicate the reason is not applicable for the specific region 0% 10% 20% 30% 40% 50% 60% Adequate deal flow in existing markets Contractual restrictions Lack of partner capacity Legal restrictions Size of fund does not allow for cross border investing Superior returns are available in our local market Other * Europe U.S. APAC Middle East/Africa Americas (excluding U.S.)
Looking forward in EU
Rising interest from limited partners for PE
Increase asset allocation (because of, among others, demographic pressure on pension funds)
New limited partners coming to the market
Rising public awareness
More scrutiny from press, governments and public at large, not always with a clear understanding of the business model
More communication with the different parties
Increase professionalism in a more mature industry
Institutionalization of large players into “alternative asset managers”
Growing secondary market and market liquidity
Differentiation in market niches
Overregulation or market distorting regulation due to the development of the financial sphere including PE/VC
EU Enlargement (25 Member States, soon 27). Discrepancies in PE/VC markets development
Globalisation (US, India, China…)
Changing macroeconomic factors such as interest rates
Rising competition levels within BO and VC markets
Value contribution as key to performance
Avoid me-too strategy (for both LPs and GPs)
Attracting and retaining talent (fund managers or entrepreneurs - with industrial knowledge & experience)