European Private Equity: Investor Relations and Investment Strategies. Javier Echarri EVCA Secretary-General European Parliament 25 February 2008

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1 European Private Equity: Investor Relations and Investment Strategies Javier Echarri EVCA Secretary-General European Parliament 25 February 2008

2 Who invests in private equity funds? Type of investor Share in total funds raised Banks 18% Geographical origin of funds raised Europe 60% Funds of funds 16% Pension funds 23% Other (capital markets, N/A) 11% Corporate investors 5% Private individuals 7% Government agencies 9% Insurance companies 11% Asia and the rest of the world 15% USA 25% Note: Total amount raised : 266bn Source: EVCA/Thomson Financial/PricewaterhouseCoopers 2

3 Institutional Investors: Strategic asset allocation to private equity North American Investors European Investors % of Total Assets % of Total Assets Private Equity Hedge Funds Real Estate 0 Private Equity Hedge Funds Real Estate Forecast Forecast Note: 2001 North American hedge fund allocation is represented by the median. Source: Russell Survey on Alternative Investing 3

4 Private equity: Demonstrated persistence of outperformance by the best teams; selection process paramount Evolution of Private Equity and Public Market Comparators 10-Year Rolling IRR for Morgan Stanley Euro Equity HSBC Small Company JP Morgan Euro Bonds European Private Equity Top Quarter European Private Equity Funds IRR % Source: Thomson Financial/EVCA 4

5 The limited partnership agreement: The heart of the private equity model Private Equity fund managers are mandated by their investors to invest in mostly unquoted companies and to divest from them after several years in order to meet their own financial return requirements Due diligence by institutional investors: thorough process lasting several months before investment. Tailor-made contractual agreements are the outcome of the process (Limited Partnership Agreements), setting out: Investment Policy Risk Diversification Investment Committee composition Supervisory Committee composition Reporting requirements Funds raised, management fees, carried interest and other terms and conditions result from market forces in a market which is not oligopolistic. 5

6 Private Equity vs Hedge Funds Important dimensions distinguishing private equity from hedge funds: Redemption rights: Private Equity uses 10 close end fund vehicles. Redemption only after 10 years. Use of leverage. Private equity investment vehicles are non-leveraged, closed-end funds Carried interest triggers only after return of capital and hurdle rate of the total fund. 6

7 European buyout investments (transaction value - bn) H Source: CMBOR 7

8 Mega buyouts vs. total buyouts in Europe % of Amount invested (equity value) Mega Buyouts 27% % of Number of Investments Mega Buyouts 1% Other Buyouts 73% Other Buyouts 99% Note: Mega Buyouts defined as equity invested > 300m Source: EVCA/Thomson Financial/PricewaterhouseCoopers 8

9 European Public to Private transactions as % of total buyout investment, % of Value invested Public to Private 22% % of Number of Investments Public to Private 3% Other Buyout 78% Other Buyouts 97% Note: Public to Private transactions - delisting companies from stock markets Source: CMBOR 9

10 Evolution of deal origination By number of deals Family & Private Foreign parent Local parent Public to Private Receivership Secondary buyout Source: CMBOR 10

11 The buyout model Active Ownership Value growth depending on four mechanisms: Market price evolution: purchase and sale Use of debt / leverage. Does not differentiate from other players. No competitive advantage. Reduction of agency costs: alignment of interest via a strong involvement at Board level Growth strategy: The recent study commissioned by the European Parliament shows that out of 1,000 buyout companies, 91% implemented growth strategies Average holding period of PE houses: 3 to 5 years. Longer than block holders in quoted securities. Recent study by the WEF proves the positive impact of buyout investors on innovation 11

12 Regulatory environment The fund manager or the fund or both are regulated in most EU Member States (e.g. 60% of European capital under management is regulated by the UK FSA) Institutional investors are also regulated (Capital Requirement Directive, Pension Funds Directive, etc.) Retail investors can have access to the asset class only through quoted vehicles having to comply with stock market regulation 12

13 EVCA Professional Standards Fund managers EVCA Code of Conduct (1983). It will be replaced by the Code of Ethics in 2008 Fund managers/investors Reporting Guidelines (2000, update in 2006) Governing Principles and Sound Practices for Establishment and Management of PE/VC Funds (2003) Valuation Guidelines (1990, updated 2001, IPEV - International PE/VC Valuation Guidelines 2005 updated 2006) Fund managers/portfolio companies Corporate Governance Principles (2005) All professional standards are downloadable at 13

14 For more information: Javier Echarri EVCA Secretary General 14