In association with: Pan-European Survey of Performance. - From Inception to 31 December

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1 RESEARCH NOTES In association with: Pan-European Survey of Performance - From Inception to 31 December October 2005 These research notes present the main findings of the 2005 Pan-European Investment Benchmarks Study, which is carried out each year by Thomson Venture Economics with the full cooperation of the European and Venture Capital Association (EVCA). All private equity performance terminology has been referenced at the end of this publication. This year, the performance sample consists of 956 funds, representing 159.6bn of committed capital. Executive summary Since inception to 31 December 2004, the net Pooled IRR has been 9.5% for the 956 responding private equity funds, with a 6.0% return for venture funds and 12.3% return for buyout funds. The net Pooled IRR of the top quarter was 23.3% at the end of 2004 while the net Pooled IRR of the top half was 14.7%. The two rankings (top quarter, and top half) generated higher returns for buyouts than for venture with a Pooled IRR of the top quarter at 28.7% for buyouts and 18.6% for venture, and a Pooled IRR of the top half at 20.9% for buyouts and 13.0% for venture. The best performing funds in the sample are the large funds (those funds having a fund size of 100m to 250m for venture and of 500m to 1bn for buyouts) with 20.4% for buyout funds and 8.0% for venture funds in those size categories. When analysing the mega funds returns (fund size of more than 250m for venture and of more than 1bn for buyouts) the J-curve effect should be factored in since these funds are recent vintages. The one-year rolling IRR reached the inflexion point in 2002, moved upwards in 2003 and moved into strong positive territory in 2004, while the five-year rolling IRR for both venture and buyouts continues to show a decline but at a slower pace. As in the years before, the private equity market registered higher pooled returns than most public market equivalents. The private equity market returns are higher than those of the Morgan Stanley Euro Index and HSBC Small Company Index, while the registered slightly higher returns. Pan-European Survey of Performance - From Inception to 31 December Page 1 of 13

2 Overall results Since inception to 31 December 2004, the Pooled IRR has been 9.5% for the 956 responding private equity funds, with a 6.0% for venture and 12.3% for buyouts. Returns since inception for all funds vary across the board with Pooled IRRs covering a range between 0.2% for early stage to 12.3% for buyouts. In terms of multiples, the total value to paid in (TVPI) was Of this 54.5% has already been distributed to investors, while 45.5% is unrealised. Figure 1 Annualised Pooled IRR since inception to 31 December 2004 (Funds formed ) Stage No. of Pooled Multiples Multiples (as % of TVPI) Funds IRR DPI RVPI TVPI DPI RVPI TVPI % 60.0% 100.0% % 47.9% 100.0% % 47.2% 100.0% % 50.8% 100.0% Buyouts % 48.9% 100.0% % 27.4% 100.0% % 45.5% 100.0% Performance Ranking The Pooled IRR of the top quarter was 23.3% at the end of 2004, while the Pooled IRR of the top half was 14.7%. The two rankings (top quarter, and top half) generated higher returns for buyouts than for venture with a Pooled IRR of the top quarter at 28.7% for buyouts and 18.6% for venture, and a Pooled IRR of the top half at 20.9% for buyouts and 13.0% for venture. The Pooled IRR of the best performing 255 funds was 23.3% in The worst performer within this class had a 10.6% Pooled IRR, setting the Upper Quartile IRR. As per definition, the Pooled IRR of the top quarter would be systematically higher than the upper quartile IRR. The best performers by stage focus are the top quarter buyout funds with a Pooled IRR of 28.7% followed by the balanced funds with a return of 21.3%. The performance of the top half shows the same ranking with a 20.9% Pooled IRR for buyout funds and 15.6% Pooled IRR for balanced funds. Since the return of the median private equity fund would strike close to 0% (0.3%), the returns of lower half funds would be almost all negative. So only half of the funds actually managed to obtain a positive return, and the Pooled IRR for those would be 14.7% altogether. Pan-European Survey of Performance - From Inception to 31 December Page 2 of 13

3 Figure 2 Pooled IRR versus Upper Quartile IRR at Top Quarter and Top Half Levels (Top Funds formed ) Sample Top Quarter *Overall Upper Quartile Sample Top Half **Overall Median Stage Size Pooled IRR IRR Size Pooled IRR IRR Buyouts * Entry point that funds have to meet or exceed as return in order to become part of top quarter funds. ** Entry point that funds have to meet or exceed as return in order to become part of upper half funds. Top Quarter The top quarter comprises funds with Pooled IRR since inception equal to or higher than the upper quartile. The Pooled IRR of the top quarter was 23.3%. This is translated into a total value to paid in (TVPI) of 1.84 for all private equity. Remarkably, 64.7% of this money has already been returned to investors (DPI = 1.19) while 35.3% is unrealised (RVPI = 0.65). The funds included in the top quarter have been able to produce outstanding returns either when considering short-term horizons (one-year IRR of all private equity funds in top quarter of 33.1%) or longer-term horizons (ten-year IRR of all private equity funds in top quarter of 31.0%) with some lower returns in the three-year horizons. Specifically the one-year Horizon IRR registered impressive upturn from negative range in 2003 into high positive numbers in 2004 with 35.7% top quarter Pooled IRR for the buyout funds and 28.7% for the venture funds. The top quarter buyout funds present positive low variation return across horizons, with a one-year Horizon IRR of 35.7%, a three-year Horizon IRR of 12.3% and ten-year Horizon IRR of 34.8%. The highest variation in returns across time horizons is registered by the early stage funds with a oneyear Horizon IRR at an impressive level of 42.8%, a three-year Horizon IRR at -1.1% and longer horizons in a stable range around 15%. The one-year return continues to be higher than the three-year Horizon IRR for all top quarter private equity funds, which indicates that the top quarter funds continue to recover and head for further improved performance. Pan-European Survey of Performance - From Inception to 31 December Page 3 of 13

4 Figure 3 - Annualized Pooled IRR since Inception to Horizon IRR to (Top Quarter Funds formed ) Stage No. of Pooled Multiples 1-Year 3-Year 5-Year 10-Year funds IRR DPI RVPI TVPI IRR IRR IRR IRR Buyouts Top Half The annualised Pooled IRR for this best performing half of private equity funds stood at 14.7% for all private equity and 13.0% for venture. Buyouts continued to perform well in this grouping returning a 20.9% Pooled IRR. The one-year Horizon IRR for the top half was 24.0%, with the lowest level registered by the threeyear Horizon IRR at 2.7% return for all private equity and higher levels registered for longer horizons (17.6% for ten-year Horizon IRR). Specifically the one-year horizon returns registered strongest positive numbers with the buyout funds at 25.5% and the venture funds at 17.3%. Figure 4 Annualised Pooled IRR since inception to Horizon IRR to (Top Half Funds formed ) Stage No. of Pooled Multiples 1-Year 3-Year 5-Year 10-Year funds IRR DPI RVPI TVPI IRR IRR IRR IRR Buyouts Pan-European Survey of Performance - From Inception to 31 December Page 4 of 13

5 Fund Size The best performing funds in the sample are the large funds (those funds having a fund size of 100m to 250m for venture funds and of 500m to 1bn for buyout funds). However, mega funds (fund size of more than 250m for venture funds and of more than 1bn for buyout funds) performed quite low as most of these were formed in the last few years, thereby still experiencing the J-curve effect. The best performing funds seem to be the large venture funds ( 100 to 250m) with a Pooled IRR of 8.0% and the large buyout funds ( 500m to 1bn) with a Pooled IRR of 20.4%. Within the fund size context, the rather low performance of the mega venture funds (fund size of 250m +) of 2.0% and of the mega buyout funds (fund size of 1bn +) of 6.4%, is partially due to the more recent nature of these funds that places them still low on the J-curve. On a one-year horizon the potential of the mega funds is reflected by the buyout funds with 27.8% IRR, the largest across buyout fund sizes, while for the venture funds the one-year horizon is still dominated by the large venture funds with 8.4%. Figure 5 - Venture Capital Funds Performance by Fund Size (Venture Funds formed ) Fund Size Sample Pooled Multiples 1-Year 3-Year 5-Year 10-Year Size IRR DPI RVPI TVPI IRR IRR IRR IRR 0-50m m-100m m-250m m Figure 6 - Buyout Funds Performance by Fund Size (Buyout Funds formed ) Fund Size Sample Pooled Multiples 1-Year 3-Year 5-Year 10-Year Size IRR DPI RVPI TVPI IRR IRR IRR IRR 0-250m m-500m m 1bn bn All Buyout Pan-European Survey of Performance - From Inception to 31 December Page 5 of 13

6 J-Curve Effect The normal life cycle of private equity funds requires at least six years to deliver significant returns. The returns in the early years of a typical fund are largely negative as companies are being funded and exits are only expected somewhere in a forthcoming number of years. When analysing the data, we can observe the lowest performance registered by the young funds in the vintage period of 2.1%, as expected given those funds are experiencing the j-curve effect. The high valuations of the year 2000 further compress the IRRs for this vintage grouping. The best performance is registered by funds of vintage years for which the pooled net IRR is 15.5%. Since these vintages are beyond the 10 year normal fund life, most of this performance is realised gains and not due to valuations, as reflected also by the high distribution to paid in (DPI) of Figure 7 - IRRs by Vintage Years (Funds formed , , , , ) Stage IRR DPI IRR DPI IRR DPI IRR DPI IRR DPI All Buyouts Short-term turbulence While private equity performance should always be measured by looking at the long-term, the short-term IRRs show positive results (with the exception of the early stage funds) at a one-year IRR for all private equity of 17.7% with high returns registered by the buyout, generalist and development funds. The one-year IRR reached a bottom in 2002 and started moving upward in 2003 and registered positive territory in Pan-European Survey of Performance - From Inception to 31 December Page 6 of 13

7 Figure 8 One - Year Rolling IRR % % Inflexion point Venture Buyout The three- and five-year Horizon IRR illustrate the influence of poor economic conditions on private equity performance, with the three-year returns being almost all negative across stages (only buyouts at a positive 2.6%) reaching -1.0% for all private equity. Figure 9 - Horizon IRR to 31 December 2004 (Funds formed ) Stage No. of 1-Year 3-Year 5-Year 10-Year Funds IRR IRR IRR IRR Buyouts Five-Year Rolling IRR The five-year rolling IRR for both venture and buyouts continues showing a decline but at a slower pace and reached 5.7% for buyout funds and -2.3% for the venture funds. When looking at the performance of all funds in the most recent years, the convergence of the performance of all investment stages registered in 2000 loosened up in 2002 and stayed relative stable since then. Pan-European Survey of Performance - From Inception to 31 December Page 7 of 13

8 The five-year rolling IRR for venture was -2.3% and for buyouts it was 5.7%, leading to a five-year rolling IRR of 2.8% for all surveyed private equity funds. The left chart illustrates how performance has decreased since 2000 for all stages of investment. The convexity of the trend curve shows there are signs that the decline may be close to reach the bottom and turn into a positive trend. When looking at five-year rolling IRRs for Europe and US, the results show that the ranking between fund stages and geographies is European buyouts (+5.7%), US buyouts (+3.0%), US venture (-1.2%) and European venture (-2.3%). Figure 10 Five-Year Rolling IRR Five-Year Rolling IRR for Europe Five-Year Rolling IRR for US Venture Buyout % -2.3% Venture Buyout % -1.2% Source: Thomson Venture Economics Comparators ( -based) Long-term private equity returns continue to exceed the performance of the public markets as proven by both Pooled IRRs and ten-year Horizon IRRs. The only exception is the JP Morgan EuroBonds index that registers slightly higher return than the private equity market. The comparison of returns of European private equity with those of other asset classes is made by calculating equivalent IRR returns. We assume the same pattern of cash flows over time in other asset classes as in the private equity data set (e.g. invested in and divested from), which leads to a representative total return index for private equity in comparison to return indices used in other asset classes. The analysis has been applied to both investment horizon returns (Horizon IRR) and cumulative returns (Pooled IRR) since inception. Private equity sustains higher returns than public market equivalents, e.g. 880 basis points more than the Index, and 170 basis points more than the HSBC Small Company Index. The only exception is the JP Morgan Euro Bond index that registers a return higher than private equity return by 10 basis points. Nevertheless, care should be taken when comparing the performance of private equity funds with the index, since the bond performance is related to a historical decrease in interest rates. Pan-European Survey of Performance - From Inception to 31 December Page 8 of 13

9 While for the venture side the private equity returns (6.0%) are exceeded by both the HSBC Small Company Index (8.5%) and the (9.6%), on the buyout front the private equity return (12.3%) is well ahead of all three indexes (highest being JP Morgan Euro Bond Index at 9.6%). Figure 11 - Comparators: Annualised Pooled IRR since inception to 31 December 2004 Stage European Private Morgan Stanley HSBC Small JP Morgan Equity Return Euro Index Company index EuroBonds Buyouts Overall, despite the high one-year horizons IRRs registered by private equity, the public market comparators managed to overpass the private equity returns on the short-term via the HSBC Small Company Equity index that systematically registered higher returns than private equity across all stages. The three-year Horizon IRRs are the most negative returns registered by private equity, with Index registering similar negative results for the same horizon (except for buyouts where the private equity return is in the positive range while Index is in the negative), and and registering positive returns and thus overpassing the private equity results. Pan-European Survey of Performance - From Inception to 31 December Page 9 of 13

10 Figure 12 - Horizon IRR to (Funds formed ) Stage / Index 1-Year 3-Year 5-Year 10-Year All Buyouts ** ENDS ** Pan-European Survey of Performance - From Inception to 31 December Page 10 of 13

11 TERMINOLOGY IRR Internal Rate of Return The IRR is the interim net return earned by investors (Limited Partners), from the fund from inception to a stated date. The IRR is calculated as an annualised effective compounded rate of return using monthly cash flows to and from investors, together with the Residual Value as a terminal cash flow to investors. The IRR is therefore net, i.e. after deduction of all fees and carried interest. In cases of captive or semi-captive investment vehicles without fees or carried interest, the IRR is adjusted to created a synthetic net return using assumed fees and carried interest. Pooled IRR The IRR obtained by taking cash flows from inception together with the Residual Value for each fund and aggregating them into a pool as if they were a single fund. This is superior to either the average, which can be skewed by large returns on relatively small investments, or the capital weighted IRR which weights each IRR by capital committed. This latter measure would be accurate only if all investments were made at once at the beginning of the funds life. Horizon IRR The Horizon IRR allows for an indication of performance trends in the industry. It uses the fund s net asset value at the beginning of the period as an initial cash outflow and the Residual Value at the end of the period as the terminal cash flow. The IRR is calculated using those values plus any cash actually received into or paid by the fund from or to investors in the defined time period (i.e. horizon). One-year horizon looks back over one year from the end 2003 to the end of 2002 to give you the IRR, three-year horizon looks back from the end of 2003 over three years to the end of 2000 and so on. Five-Year Rolling IRR The five-year rolling IRR shows the development of the five-year Horizon IRR, measured at the end of each year. Median IRR The value appearing halfway in a table ranking funds by IRR in descending order. Quartile IRR Statistically the returns of each fund can be ranked and three quartiles obtained: the upper, the median and the lower that separate the four quarters of ranked IRRs. The IRR value which lies a quarter from the bottom (lower quartile point) or top (upper quartile point) of a table ranking individual funds in descending order. Top Quarter Comprises funds with an IRR equal to or above the upper quartile point. So while upper quartile IRR is a discrete return for a single fund, the top quarter IRR is a pooled return for all the funds ranking as individual performance in the top quarter. Upper Half Comprises funds with an IRR equal to or above the median point. DPI - Distribution to Paid-In The DPI measures the cumulative distributions returned to investors (Limited Partners) as a proportion of the cumulative paid-in capital. DPI is net of fees and carried interest. This is also often called the cash-on-cash return. This is a relative measure of the fund s realised return on investment. RVPI - Residual Value to Paid-In The RVPI measures the value of the investors (Limited Partner s) interest held within the fund, relative to the cumulative paid-in capital. RVPI is net of fees and carried interest. This is a measure of the fund s unrealised return on investment. Pan-European Survey of Performance - From Inception to 31 December Page 11 of 13

12 Residual Value The estimated value of the assets of the fund, net of fees and carried interest. TVPI - Total Value to Paid-In TVPI is the sum of the DPI and the RVPI. TVPI is net of fees and carried interest. Mature Funds Funds that have been in existence for over two years. Fund Venture capital funds focused on investing in companies in the early part of their lives. Fund Venture capital funds focused on investing in later stage companies in need of expansion capital. Fund Venture capital funds focused on both early stage and development with no particular concentration on either. Buyout Fund Funds whose strategy is to acquire other businesses; this may also include mezzanine debt funds which provide (generally subordinated) debt to facilitate financing buyouts, frequently alongside a right to some of the equity upside. Fund Funds with either a stated focus of investing in all stages of private equity investment, or funds with a broad area of investment activity. Venture capital refers to early-stage (=seed and start-up) and expansion finance. Private equity provides equity capital to enterprises not quoted on a stock market and refers to all stages of industry, i.e. venture capital and buyouts. Index The equity index from Morgan Stanley Capital International, which tracks stocks from various European nations. HSBC Small European Company Index Covering 18 European nations, this index defines small cap companies by ranking all companies in Europe by market capitalisation, removing large cap companies and retaining the remaining companies. The market cap ranges from approximately 30m to 3,500m. JP Morgan Euro Bond Index European portion of the most widely used benchmark for performance measurement; measures total, principal and interest returns for those traded issues available to international investors. SCOPE AND METHODOLOGY This data is taken from the 2005 Investments Benchmarks Report: European undertaken by Thomson Venture Economics with the full cooperation of EVCA. Special thanks to the Thomson Venture Economics team for offering EVCA some insights into the US market results collected with the same methodology. The 2005 Investments Benchmarks Report contains detailed statistical measurements including distribution and valuation ratios from data based on a sample consisting of 956 funds formed between 1980 and 2004, representing a total amount committed of 159.6bn. Pan-European Survey of Performance - From Inception to 31 December Page 12 of 13

13 Notes to Editors: 1. The European and Venture Capital Association (EVCA) was established in 1983 and is based in Brussels. EVCA represents the European private equity sector and promotes the asset class both within Europe and throughout the world. With over 925 members in Europe, EVCA s role includes representing the interests of the industry to regulators and standard setters, developing professional standards, providing industry research, professional development and forums facilitating interaction between its members and key industry participants including institutional investors, entrepreneurs, policymakers and academics. EVCA s activities cover the whole range of private equity: venture capital (from seed and start-up to development capital), buyouts and buyins. Please visit at 2. Thomson Venture Economics, part of Thomson Financial, is the single source for unparalleled information and professional services for the and Venture Capital industry worldwide. Our products and services are helping industry professionals to efficiently raise capital, invest capital wisely and exit investments profitably. VentureXpert, the Thomson Venture Economics flagship online database enables sophisticated and in depth analysis of fund raising, investments, valuations and fund performance going as far back as Thomson Venture Economics global presence and exclusive performance analysis have established Thomson as the single trusted industry benchmark with proven methodology and a wealth of experience both with General Partners and Limited Partners. Thomson Financial is a US$1.73 billion provider of information and technology solutions to the worldwide financial community. Through the widest range of products and services in the industry, Thomson Financial helps clients in more than 70 countries make better decisions, be more productive and achieve superior results. Thomson Financial is part of The Thomson Corporation ( a global leader in providing integrated information solutions to more than 20 million business and professional customers in the fields of law, tax, accounting, financial services, higher education, reference information, corporate e- learning and assessment, scientific research and healthcare. With revenues of US$8.10 billion, the Thomson Corporation lists its common shares on the New York and Toronto stock exchanges (NYSE: TOC; TSX: TOC). For further information, please contact: Mirela Ene, Research Coordinator, EVCA Tel: +32 (0) or by mirela.ene@evca.com For how to contribute data to the performance benchmark and receive a free benchmark to your fund(s), please contact: Cornelia Andersson, Research Analyst, Thomson Venture Economics Tel: +44 (0) or by cornelia.andersson@thomson.com The 2005 Investment Benchmarks Report: European can be ordered from Thomson Venture Economics. All EVCA Members are entitled to a discount of 15%. To purchase the full report, please contact: Nisha Patel, Thomson Venture Economics Tel: +44 (0) or by nisha.patel@thomson.com Pan-European Survey of Performance - From Inception to 31 December Page 13 of 13