Pan-European Survey of Performance. - From Inception to 31 December

Transcription

1 In Association with: RESEARCH NOTES Pan-European Survey of Performance - From Inception to 31 December July 2006 These research notes present the main findings of the 2005 Pan-European Investment Benchmarks Study, which is carried out each year by Thomson Financial with the full cooperation of the European Private Equity 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 1,069 funds, representing bn of committed capital. Executive summary Since inception to 31 December 2005, the net pooled IRR (net of management fees and carried interest) was 10.3% for the 1,069 private equity funds in the sample, with a 13.7% return for buyout funds and 6.3% return for venture funds. The net pooled IRR of the top quarter was 22.9% while the net pooled IRR of the top half was 14.2%. Both rankings (top quarter and top half) generated higher returns for buyouts than for venture with a pooled IRR of the top quarter at 31.8% for buyouts and 17.1% for venture, and a pooled IRR of the top half at 20.9% for buyouts and 12.3% for venture. The best performing funds in the sample were the large funds (those funds having a size of 500m to 1bn for buyouts and of 100m to 250m for venture) with 20.5% for buyout funds and 7.2% for venture funds in those size categories. When analysing the mega funds returns (fund size of more than 1bn for buyouts and of more than 250m for venture) these funds were out of the J-curve with strong positive returns on the short-term. The one-year rolling IRR reached the inflexion point in 2002, moved upwards in 2003 and 2004, and registered outstanding performance in 2005, with 31.7% net IRR for buyouts and 36.5% for venture. With the one-year rolling IRR showing strong performance for two years running, the three-year rolling IRR was pushed into positive territory not only for buyouts but also for venture. At the same time, the five-year rolling IRR continued to show a decline but at a slower pace. The convergence of the performance of all investment stages registered in 2000 has loosened up ever since and the 2005 ranking of performance by stages and geographies on a five-year horizon was: European buyouts (+6.1%), US buyouts (+5.4%), European venture (-3.0%) and US venture (-6.7%).

2 As in previous years, the private equity market registered higher pooled returns than most public market equivalents. The private equity market returns were higher than those of the Morgan Stanley Euro Index and HSBC Small Company Index, while the JP Morgan Euro Bonds registered slightly higher returns. On the short-term private equity outran all public indexes

3 Overall results Since inception to 31 December 2005, the net pooled IRR has been 10.3% for the 1,069 private equity funds in the sample, with 6.3% for venture and 13.7% for buyouts. Since inception the net pooled IRR has been 10.3% for all the 1,069 private equity funds in the sample. The venture funds registered a 6.3% net IRR, with the best performers within the class being the development funds returning 9.2%. The buyout funds produced higher returns than the venture funds with 13.7% since inception for the 349 buyout funds in the sample. Returns since inception for all funds vary across the board with pooled IRRs covering a range between 0.1% for early stage to 13.7% for buyout funds. In terms of multiples, the total value to paid in (TVPI) was 1.39, with 0.80 being distributed to paid in (DPI) and 0.59 being the unrealised part of the multiple. TVPI was higher than in 2004 when it reached 1.33, the increase being generated primarily by the distributed part that increased as percent in TVPI from 55.6% in 2004 to 57.6% in Figure 1 Annualised Net Pooled IRR since inception to (Funds formed ) Stage No. of Pooled Multiples Multiples (as % of TVPI) Funds IRR DPI RVPI TVPI DPI RVPI TVPI Early Stage % 60.4% 100.0% Development % 49.4% 100.0% Balanced % 47.3% 100.0% All Venture % 51.6% 100.0% Buyouts % 42.4% 100.0% Generalist All Private Equity % 29.2% 100.0% 1, % 42.4% 100.0% - 3 -

4 Performance Ranking The net pooled IRR of the top quarter was 22.9% at the end of 2005, while the net pooled IRR of the top half was 14.2%. 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 31.8% for buyouts and 17.1% for venture, and a pooled IRR of the top half at 20.9% for buyouts and 12.3% for venture. The pooled IRR of the best performing 279 funds was 22.9% 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 top quarter performers by stage focus are the buyout funds with a pooled IRR of 31.8% followed by the balanced funds with a return of 23.7%. The performance of the top half shows the same ranking with a 20.9% pooled IRR for buyout funds and 13.7% pooled IRR for balanced funds. Since the return of the median private equity fund would strike close to 0% (0.5%), 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 net pooled IRR for those would be 14.2% altogether. Figure 2 Net Pooled IRR versus 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 Early Stage Development Balanced All Venture Buyouts Generalist All Private Equity * 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

5 Top Quarter The top quarter includes funds with net pooled IRR since inception equal to or higher than the upper quartile. The pooled IRR of the top quarter was 22.9% as of end of 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 44.9%) or longer-term horizons (ten-year IRR of all private equity funds in top quarter of 34.6%) with some lower returns in the five-year horizons. Specifically the one-year horizon IRR registered impressive results for the second year running, with the 2005 net return at 39.8% for the buyout funds and 53.5% for the venture funds. While the oneyear return continues to be the highest across horizons for most of the stages, the five-year return has the lowest performance due to the negative impact of the bubble burst still reflected in this horizon. Figure 3 - Annualized Net Pooled IRR since Inception to Horizon IRR to (Top Quarter Funds formed ) Stage No. of funds Pooled 1-Year 3-Year 5-Year 10-Year IRR IRR IRR IRR IRR Early Stage Development Balanced All Venture Buyouts Generalist All Private Equity Top Half The annualised net pooled IRR for the best performing half of private equity funds stood at 14.2%. Buyouts continued to perform well in this grouping returning a 20.9% net pooled IRR and venture funds generated a 12.3% net return. The one-year horizon IRR for the top half was a high 41.1%, while the lowest level registered by the five-year horizon IRR at 5.3%. Higher levels were registered for longer horizons (e.g. 18.4% for ten-year horizon IRR). Specifically, the one-year horizon returns registered the strongest positive numbers for both buyouts at 38.1% and venture at 47.8%

6 Figure 4 Annualised Net Pooled IRR since inception to Horizon IRR to (Top Half Funds formed ) Stage No. of funds Pooled 1-Year 3-Year 5-Year 10-Year IRR IRR IRR IRR IRR Early Stage Development Balanced All Venture Buyouts Generalist All Private Equity Fund Size The best performing funds in the sample are the large funds for both buyout and venture. Moreover, mega funds performed well being out of the J-curve as reflected by the short-term returns. On the long-term, the best performing funds seem to be the large buyout funds ( 500m to 1bn) with a net pooled IRR of 20.5% and the large venture funds ( 100 to 250m) with a net pooled IRR since inception of 7.2%. On a three-year horizon, the buyout funds of all sizes are in positive territory, with the best performance registered by the medium sized buyout funds ( 250m to 500m) at 13.7%. On the same horizon, the venture funds still generate negative returns, with the exception of the mega venture funds which returned a 5.7% net IRR. On a one-year horizon, the potential of the mega funds (above 1bn for buyout funds and above 250m for venture funds) is reflected by the buyout funds with a 34.8% net IRR and by the venture funds with 48% net return, with the large funds for both buyouts and venture registering lower short-term returns despite their higher long-term performance. For the buyout funds, the best performers are the medium sized funds with a staggering 50.3% short-term return

7 Figure 5 - Buyout Funds Performance by Fund Size to Horizon IRR to (Buyout Funds formed ) Fund Size Sample Pooled 1-Year 3-Year 5-Year 10-Year Size IRR IRR IRR IRR IRR 0-250m m-500m m 1bn bn All Buyout Figure 6 Venture Funds Performance by Fund Size to Horizon IRR to (Venture Funds formed ) Fund Size Sample Pooled 1-Year 3-Year 5-Year 10-Year Size IRR IRR IRR IRR IRR 0-50m m-100m m-250m m All Venture J-Curve Effect The best performing funds are those in the vintage years with a net pooled IRR as of end of 2005 of 16%. Despite J-Curve effects, recent vintage ( ) funds performed as well with 13.9%, however this is mainly due to an increase in valuations since DPI is only 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 generally negative as companies are being funded and exits are only expected some years down the line. When analysing the data, despite the J-curve effects for recent vintages, the vintage grouping has generated a hefty 13.9% net return. However, this return is mainly due to unrealised gains generated by the increase in valuations, since DPI is only The J-curve effect is still reflected in the venture funds where the return is negative for this vintage grouping

8 The best performance is registered by funds of vintage years for which the pooled net IRR is 16%. Since these vintages are beyond the 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 For the rest of the vintage groupings, the pooled IRR stays almost at the same level -around 9% - with the buyout returns systematically higher than the venture ones. Figure 7 - IRRs by Vintage Years as of (Funds formed , , , , ) Stage IRR DPI IRR DPI IRR DPI IRR DPI IRR DPI All Venture All Buyouts All Private Equity Short-term uptake in performance The short-term returns show strong positive results for the second year running at a oneyear IRR for all private equity of 33.8%, with venture funds performing better than the buyout funds on this short horizon. Figure 8 One - Year Rolling IRR All Venture 1999 All Buyouts Inflexion point +36.5% +31.7% While private equity performance should always be measured by looking at the long-term, the shortterm IRRs show strong positive results for the second year running at a one-year IRR for all private - 8 -

9 equity of 33.8%. With a net IRR of 36.5%, the venture funds returned better results than the buyout funds at 31.7% on this one-year horizon. Returns move into positive territory on the medium-term While the three-year horizon IRR moved into positive territory at 6.3% due to the outstanding evolution of the one-year rolling IRR in the last two years, the five-year horizon IRR still shows the influence of poor past economic conditions on private equity performance, with positive returns proven by buyout funds and negative returns registered by venture and generalist funds; altogether a modest 2.0% net return for all private equity on a five-year horizon. The convergence of the performance of all investment stages registered in 2000 has loosened up ever since and the 2005 ranking of performance by stages and geographies on a five-year horizon was: European buyouts (+6.1%), US buyouts (+5.4%), European venture(-3.0%) and US venture (- 6.7%). The outstanding evolution of the one-year rolling IRR for the second year running pushed the threeyear horizon IRR into positive territory, with 9.1% return for buyouts and 1.7% for venture, reaching altogether a 6.3% net IRR for all private equity funds. The five-year horizon IRR still shows the influence of poor past economic conditions on private equity performance, with negative returns registered by venture and generalist funds (-3.0% and - 4.3% respectively), and positive returns proven by buyout funds at 6.1%. Altogether, the five-year horizon IRR registered a modest 2.0%. Figure 9 - Horizon IRR to (Funds formed ) Stage No. of 1-Year 3-Year 5-Year 10-Year Funds IRR IRR IRR IRR Early Stage Development Balanced All Venture Buyouts Generalist All Private Equity 1,

10 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 relatively stable since then. The left chart illustrates how the five-year rolling IRRs 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 reaching the bottom and turning into a positive trend. When looking at five-year rolling IRRs for Europe and US, the results showed that the ranking between fund stages and geographies is similar to last year, with the exception of the venture funds where European venture funds ranked better in 2005 than the US venture funds: European buyouts (+6.1%), US buyouts (+5.4%), European venture(-3.0%) and US venture (-6.7%). Figure 10 Five-Year Rolling IRR for Europe and the US European Five-Year Rolling IRR US Five-Year Rolling IRR Inflexion point +6.1% Inflexion point +5.4% % % All Venture All Buyouts All Venture All Buyouts Comparators ( -based) Long-term private equity returns continued to exceed the performance of the public markets as proven by both pooled IRRs and ten-year horizon IRRs. The only exception was the JP Morgan EuroBonds index which registered a slightly higher return than the private equity market. The buyout funds outperformed all indexes. The comparison of returns of European private equity with those of other asset classes is made by calculating equivalent IRR returns. Thomson Financial assumes 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 indexes 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 sustained higher returns than public market equivalents, e.g. 600 basis points more than the Morgan Stanley Euro Index, and 60 basis points more than the HSBC Small Company Index. The only exception was the JP Morgan Euro Bond index which registered a slightly higher return than private equity (by 20 basis points). The outperformance of private equity was mainly due to buyout returns for which the IRR was well above all the three indexes (the highest being JP Morgan Euro Bond Index at 10.7%)

11 Figure 11 - Comparators: Annualised Pooled IRR since inception to Stage European Private Equity Return Morgan Stanley Euro Index HSBC Small Company index JP Morgan Euro Bonds Early Stage Development Balanced All Venture Buyouts Generalist All Private Equity Private equity generated on average higher returns than the public markets, being outrun by the JP Morgan Euro Bonds only in the last two years. Nevertheless, care should be taken when comparing the performance of private equity funds with the JP Morgan Euro Bonds index since the bond performance is related to a historical decrease in interest rates. The portfolio diversification benefits that private equity can bring to asset managers at large is reflected by the graph below. Figure 12 Evolution of Comparators 10-Year Rolling IRRs Morgan Stanley Euro Equity HSBC Small Company JP Morgan Euro Bonds European Private Equity

12 Figure 13 - Horizon IRR to (Funds formed ) Stage / Index 1-Year 3-Year 5-Year 10-Year Early Stage Private Equity Morgan Stanley Euro HSBC Small Company Equity JP Morgan Euro Bonds Development Private Equity Morgan Stanley Euro HSBC Small Company Equity JP Morgan Euro Bonds Balanced Private Equity Morgan Stanley Euro HSBC Small Company Equity JP Morgan Euro Bonds All Venture Private Equity Morgan Stanley Euro HSBC Small Company Equity JP Morgan Euro Bonds All Buyouts Private Equity Morgan Stanley Euro HSBC Small Company Equity JP Morgan Euro Bonds Generalist Private Equity Morgan Stanley Euro HSBC Small Company Equity JP Morgan Euro Bonds All Private Equity Private Equity Morgan Stanley Euro HSBC Small Company Equity JP Morgan Euro Bonds

13 On the short-term, the high one-year horizons IRRs registered by all private equity (33.8%) outperformed the returns of all the public market comparators, the highest among comparators being MSCI Equity at 16.6%. The three-year horizon IRR at 6.3% for private equity, was outrun by all three indexes. On a fiveyear horizon, private equity at 2.0% performed better than MSCI Equity which registered negative return, but was outrun by HSBC Small Cap and JP Morgan Bond indexes. ** ENDS **

14 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). A one-year horizon looks back over one year from the end 2003 to the end of 2002 to give you the IRR, a 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 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

15 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. Early Stage Fund Venture capital funds focused on investing in companies in the early part of their lives. Development Fund Venture capital funds focused on investing in later stage companies in need of expansion capital. Balanced 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. Generalist 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. Morgan Stanley Euro 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 The 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 2006 Investments Benchmarks Report: European Private Equity undertaken by Thomson Financial with the full cooperation of EVCA. Special thanks to the Thomson Financial team for offering EVCA some insights into the US market results collected using the same methodology. The 2006 Investments Benchmarks Report contains detailed statistical measurements including distribution and valuation ratios from data based on a sample consisting of 1,069 funds formed between 1980 and 2005, representing a total amount committed of 205.2bn

16 Notes to Editors: 1. The European Private Equity 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 before 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 startup to development capital), buyouts and buyins. Please see our website at 2. Thomson Financial provides information and technology solutions to the worldwide financial community, and is the single source for unparalleled information for the Private Equity and Venture Capital industry worldwide, building on the legacy of Thomson Venture Economics and Thomson MacDonald. Our products and services help industry professionals to efficiently raise capital, invest capital wisely and exit investments profitably. VentureXpert ( our flagship online database, enables sophisticated and in-depth analysis of fund raising, investments, valuations and fund performance going as far back as Our global presence and exclusive performance analysis have established Thomson as the single most trusted industry benchmark with proven methodology and a wealth of experience with General Partners, Limited Partners and Advisors. 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, CFA Head of Research, EVCA Tel: +32 (0) or by mirela.ene@evca.com For information on how to contribute data to the performance benchmark and receive a free benchmark to your fund(s), please contact: Cornelia Andersson Research Analyst, Thomson Financial Tel: +44 (0) or by cornelia.andersson@thomson.com The 2005 Investment Benchmarks Report: European Private Equity can be ordered from Thomson Financial. All EVCA Members are entitled to a discount of 15%. To purchase the full report, please contact: Nisha Patel Thomson Financial Tel: +44 (0) or by nisha.patel@thomson.com