Venture and enterprise capital: Smart finance for SMEs Dörte Höppner, secretary general Brussels, 6 th October, 2011

Transcription

1 Venture and enterprise capital: Smart finance for SMEs Dörte Höppner, secretary general Brussels, 6 th October, 2011

2 Introducing EVCA Established in 1983 at the instigation of the European Commission We have 12,000 members, including 800+ venture and enterprise capital firms across 50+ countries. We promote the long-term interests of the venture and enterprise capital industry in Europe. Our goal is to create a more favourable environment for equity investment and entrepreneurship. Creating lasting value 2

3 Jargon Buster Private equity: an umbrella term for a method of owning and investing in companies. Venture capital: this is when private equity is invested into young, entrepreneur-led, high-potential companies that are typically driven by technological innovation. Enterprise capital: private equity investment into more established businesses that want to internationalise, professionalise or develop their products and services. Buyouts: private equity can be used to acquire (or buy out ) all or the majority of an established business. After that, the private equity method of ownership and governance kicks in. Creating lasting value 3

4 Snapshot European Private Equity Industry 1,700 active private equity firms: Employing around 29,000 people Managing 4,200 active funds With a capital under management of 524bn Creating lasting value 4

5 Access to finance for SMEs 26,000 European companies have venture and enterprise capital investment More than 22,000 are Small and Medium Sized Enterprises Creating lasting value 5

6 Funds raised and investments - evolution billion Funds Raised Investments Source: EVCA/PEREP_Analytics Creating lasting value 6

7 Funds raised by type of investor in % 15.8% 11.8% 6.2% 2.0% 23.0% 1.7% 3.0% 1.8% 2.7% 14.2% Academic institutions Banks Capital markets Corporate investors Endowments and foundations Family offices Fund of funds Government agencies Insurance companies Other asset managers Pension funds Private individuals Sovereign wealth funds Unknown 5.4% Source: EVCA/PEREP_Analytics 3.1% 7.9% Creating lasting value 7

8 Other CEE* Funds raised by country of management billion Source: EVCA/PEREP_Analytics Creating lasting value 8 United Kingdom France Germany Netherlands Sweden Spain Belgium Switzerland Italy Norway Denmark Finland Austria Portugal Hungary Poland Luxembourg Romania Ireland Baltic countries Ukraine Czech Republic

9 Other CEE* Greece Baltic countries Source: EVCA/PEREP_Analytics Creating lasting value 9 Hungary Investment by country of destination billion United Kingdom France Germany Spain Sweden Netherlands Norway Italy Switzerland Belgium Ireland Austria Poland Finland Denmark Czech Republic Portugal Romania Ukraine Luxembourg Bulgaria

10 Private equity investment as % of GDP in 2010 (market statistics) % of GDP 0.335% 0.333% 0.325% 0.317% 0.314% 0.275% 0.266% 0.246% 0.228% 0.222% 0.192% 0.186% 0.165% 0.133% 0.109% 0.102% 0.101% 0.085% 0.068% 0.054% 0.020% 0.015% 0.614% 0.500% 0.775% 0.750% 0.90% 0.80% 0.70% 0.60% 0.50% 0.40% 0.30% 0.20% 0.10% 0.00% Sweden United Kingdom Norway Ireland France Netherlands Finland Switzerland Europe Spain Belgium Austria Bulgaria Luxembourg Poland Germany Denmark Czech Republic Portugal Italy Romania Ukraine Hungary Baltic countries Other CEE* Greece *Other CEE consists of Ex-Yugoslavia and Slovakia Source: EVCA/PEREP_Analytics Creating lasting value 10

11 Source: EVCA/PEREP_Analytics Creating lasting value % 0.042% 0.039% 0.038% 0.031% 0.030% 0.028% 0.028% 0.027% 0.025% 0.023% 0.019% 0.016% 0.015% 0.011% 0.010% 0.009% 0.007% 0.055% 0.055% 0.068% 0.004% 0.001% 0.001% 0.000% 0.000% Other CEE* Poland Greece Ukraine Venture investment as % of GDP in 2010 (market statistics) % of GDP 0.08% 0.07% 0.06% 0.05% 0.04% 0.03% 0.02% 0.01% 0.00% Bulgaria Sweden Norway Finland United Kingdom Switzerland France Portugal Denmark Germany Ireland European total Netherlands Belgium Hungary Czech Republic Austria Spain Romania Baltic countries Luxembourg Italy *Other CEE consists of Ex-Yugoslavia and Slovakia

12 Enterprise capital investment as % of GDP in 2010 (market statistics) % of GDP 0.308% 0.296% 0.287% 0.278% 0.271% 0.264% 0.244% 0.231% 0.225% 0.216% 0.191% 0.158% 0.135% 0.117% 0.098% 0.091% 0.085% 0.078% 0.050% 0.045% 0.020% 0.015% 0.472% 0.559% 0.708% 0.708% 0.80% 0.70% 0.60% 0.50% 0.40% 0.30% 0.20% 0.10% 0.00% United Kingdom Sweden Norway Ireland Netherlands France European total Switzerland Finland Spain Belgium Austria Bulgaria Luxembourg Poland Germany Denmark Czech Republic Italy Romania Ukraine Portugal Hungary Baltic countries Other CEE* Greece *Other CEE consists of Ex-Yugoslavia and Slovakia Source: EVCA/PEREP_Analytics 12 Creating lasting value

13 Investments in SMEs by European private equity firms, as a % of total number of companies financed 100% 90% 95% 97% 98% 98% 80% 80% 83% 86% 84% 70% 60% 50% 40% 64% 49% 55% 55% 69% 70% 58% 54% 30% 20% 10% 0% All Private Equity Venture Growth Buyout (excl Growth) Source: EVCA/PEREP_Analytics Creating lasting value 13

14 Private equity investments in SMEs in ,700 European SMEs financed, of which: 12,550 in venture 4,150 in enterprise capital 46.5bn provided to European SMEs 17.5bn went to venture-backed companies 29bn went to enterprise-capital-backed companies Source: EVCA/PEREP_Analytics Creating lasting value 14

15 Whose money is it? Pension funds, insurance policies, family offices and endowments Seeking strong and diversified returns Creating lasting value 15

16 How to access venture capital Invest directly in a venture capital fund Unquoted ( Limited partnership ) Invest through a fund of funds Co-invest directly into companies, alongside VC fund. Source: EVCA Creating lasting value 16

17 Direct fund investment: the Limited Partnership VC firm (General partner) Investors (Pension funds etc) (Limited partner) Venture capital fund (Limited Partnership) Company Company Company Company Company Source: EVCA Creating lasting value 17

18 Characteristics of limited partnership funds Fixed life, ten-year limited partnership (terms negotiated between GP and LP) Strong alignment of interest from company managers, VC fund managers, to fund Manager receives a performance based compensation (carried interest) based on performance targets Illiquid investments but there is a small market for secondary interests Creating lasting value 18

19 Fund of funds investment Investors (Limited partner) Fund of funds VC fund VC fund VC fund Co Co Co Co Co Co Co Co Co Co Co Co Co Co Co Source: EVCA Creating lasting value 19

20 Advantages of Fund of funds Enables large pension funds to access much smaller venture capital and enterprise capital funds many pension funds need to allocate more capital in single investments than venture capital funds can cope with Provides instant access to venture capital without having to have knowledge of market Provides a learning opportunity for investors as they monitor the progress of their investments through the limited partnership structure Provides diversification, reducing risk, across a number of venture capital funds Creating lasting value 20

21 The investment and governance model Dedicated team of professionals (the GP) trusted to identify, invest, support and sell stakes in high potential, private businesses Active and informed ownership (both strategic and financial support) driving value creation Medium to long term strategy and holding period Months, even years spent finding companies with the X factor and conducting deep due diligence Creating lasting value 21

22 Venture capital is highly selective Venture capital is not suitable for every start up with an idea Throwing money at a large group of companies does not increase the chance of success and will only decrease overall profits Venture capital relies on an existing pool of new ideas and technologies and entrepreneurs that want to pursue them Creating lasting value 22

23 How do Venture and Enterprise Capital firms sell? Businesses can be listed through IPOs on the stock market Many hi-tech growth companies are bought by larger corporations this is common in venture capital Companies can be sold to other venture capital and enterprise capital funds this is common in enterprise capital funds as funds often specialise in certain sizes of companies Creating lasting value 23

24 Main Challenges for the industry: structural barriers to fundraising Venture capital faces structural barriers to fundraising There is an absence of a class of long-term investors with skills and interest in innovation & entrepreneurship. (e.g. university endowments, foundations and family offices). For example there are only 2, 500 family offices in the EU, and 11, 000 in the US. There is a similar ratio in respect to pension funds and university endowments. University Endowments within the EU allocate less than 2% of their assets to private equity as a whole, so even if the number or size of endowments grew significantly this would not be material to addressing the gap in financing for European venture. In March 2010 EVCA published a white paper outlining a solution. Public sector financing could be used to attract private sector financing through a funds of funds scheme. Creating lasting value 24

25 Main Challenges for the industry: increased and cumulative effect of direct and in-direct regulation Capital Requirement Adequacy Based Regulation for investors Solvency II for insurance companies IORP (Institutions for ocupational retirment provision) Directive Review the potential reproduction of solvency II for IORPs CRD III for Banks CRD II has already seen many banks turn away from the industry Alternative Investment Fund Managers Directive Although fund managers with less than 500 million do not fall under the directive this causes two problems: They do not have access to a fund raising passport They do not have the credibility with investors such as pension funds as they are not regulated. Regulatory uncertainty can cause as many problems as the regulation itself with many investors, particularly insurance firms, freezing investment programmes. Creating lasting value 25

26 Where can EU policy efforts help? EU: 1. Multiannnual programme for fund of funds 2. EU passport for small funds managers Creating lasting value 26

27 Conclusions Venture and Enterprise capital cross many industry sectors and geographies. Its potential can not be fulfilled with narrow geographical, sectoral or stage oriented investment boundaries. To the help the industry to become sustainable, funding alone is insufficient, it is the smart deployment of capital that will build know-how which is critical. Private sector s involvement is necessary to bring in know-how. EU public policy efforts to be oriented to attract the private sector that would have significant impact on many EU companies by increasing the supply of VC. Creating lasting value 27