AIFI, Convegno Annuale March 28, 2006 Milano The state of Private Equity in Europe What investment professionals and policymakers do and can do! Herman Daems EVCA Immediate Past Chairman Chairman GIMV
State of the European private equity industry 2 2005 was an excellent year for fundraising, exits and investments, but are we already approaching a new bubble? The venture and the growth capital part of the business have not yet fully recovered from the crisis of 2001. The structure of our industry is changing Value creation models are changing: passive ownership is out, active ownership is in! European capitalism is changing rapidly: capital has at last become more liquid, leading to more demands for public scrutiny What should be done to foster the future of our industry? What EVCA has been doing and will be proposing to European policy-makers.
After the fast recovery are we already approaching a new bubble? 3 2005 was a record year for fundraising Large funds were an important driver, Good year for investment and exits as well mostly driven by buyouts Conditions were nearly normal again with write-downs at 5,5 % down from 9,7% in 2004. Returns have increased significantly Increasing competition in some segments Some concern over rising valuations and debt levels Secondary buyouts raise questions but they will be a normal part of the private equity business
Fund raising: an all-time record of 60bn The shortage of investment money is over! 4 billion 60 50 40 30 20 10 Capital Markets Academic Institutions Fund of Funds Insurance Companies Pension Funds Banks Government Agencies Private Individuals Corporate Investors Realised C apital Gains Others/Not Available 25.4 3,4 20.0 20.3 3,3 4,7 4,9 5,0 8.0 7,4 5,7 5,2 1,8 2,4 48.0 5,0 5,7 10,7 9,6 40.0 4,6 4,7 10,2 9,2 27.5 27.5 27.0 3,4 4,2 3,2 3,6 2,2 2,8 4,3 4,9 4,5 6,8 5,4 5,1 59.5 3,4 7,2 14,9 17,9 Sustainable level? 77% of funds raised in 2005 allocated to buyout, vs. 65% in 2004 Pension funds invest massively baby boomers with a pension shortfall Banks are back! US fund raising also a record with $173bn, but second to 2000 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: EVCA/Thomson Financial/ PricewaterhouseCoopers
5 Investments and divestments have gone up, but less than fundraising billion 60 50 40 30 20 10 Funds Raised Investments Divestments 48,0 25,1 25,4 20,0 20,3 14,5 9,7 8,0 8,6 6,8 7,0 5,8 3,6 59,5 43.0 40,0 36,9 35 27,6 29,1 27,5 27,0 27,5 24,3 24,0 19,6 12,5 13,6 10,7 9,1 Not too much capital overhang 66% of investments in 2005 related to buyout deals, vs. 70% in 2004, compare with fundraising! 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: EVCA/Thomson Financial/ PricewaterhouseCoopers
Is there a leverage bubble? 6 European buyout transactions Debt / EBITDA Ratio 8 7 6 5 4 3 2 1 0 2003 2004 2005 Max Average Min Source: Thomson Financial NB: Based on calculated or reported ratios, for transactions were the data was available
Exit prospects are healthy 7 100% 90% 80% 70% 60% 33,9 30,9 2,0 6,6 9,1 5,3 20,4 5,6 6,2 11,6 23,7 24,6 4,8 3,6 5,1 7,0 5,5 9,7 Trade Sale IPO Sale of Quoted Equity Write- Off 50% 40% 22,8 30,0 20,2 13,1 18,2 Sale to Another PE Firm Repayment of Shares/Loans Sale to Financ ial Institution 30% 3,8 3,9 15,9 21,3 20,5 Other 20% 14,5 8,4 6,0 2,9 5,4 10% 4,3 3,9 9,5 11,0 14,1 17,5 17,1 0% 2001 2002 2003 2004 2005 Divestments Breakdown by Type Source: EVCA/Thomson Financial / PricewaterhouseCoopers *Public and private deals Source: Thomson Financial
because of improved M&A and IPO activity M&A Activity, Europe* IPO Activity, Europe* 8 in m 1.200.000 1.000.000 800.000 Rank Value # of Deals Number 18.000 16.000 14.000 12.000 in m 120.000 100.000 80.000 Proceeds # of Deals Number 700 600 500 600.000 10.000 8.000 60.000 400 300 400.000 200.000 6.000 4.000 2.000 40.000 20.000 200 100 0 2000 2001 2002 2003 2004 2005 0 0 2000 2001 2002 2003 2004 2005 0
Average European LB0 purchase-price multiples* 8,0 7,5 7,0 6,5 6,0 1997 98 99 2000 01 02 03 04 05 *Purchase price/ebitda, excluding fees and transaction costs Source : J.P. Morgan
IRR s for European buyouts continue rising 3-,5-,10-Year Rolling IRR s 40 30 20 10 0-10 10-year IRR 5-year IRR 3-year IRR +12.6% +7.9% +5.0% 10 Rolling IRRs (%) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: Thomson Financial / EVCA
European Venture IRR s also have improved 3-,5-,10-Year Rolling IRRs 40 30 20 10 0-10 10-year IRR 5-year IRR 3-year IRR +5.3% +0.6% 11 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Rolling IRRs (%) 2005 Source: Thomson Financial / EVCA -4.0%
Top quarter funds return 23% 12 Stage Pooled IRR Minimum value Top Quarter Pooled IRR Top Quarter Ranking Quarter IRR 100 All Venture 5.6 6.1 23.9 +23.0% 75 10.4% Buyouts 12.4 17.1 35.3 +9.5% 50 Generalist 8.6 8.1 12.4 3rd quarter 25 All Private Equity 9.6 10.4 23.0 0 4th quarter 2005 European Private Equity Funds Formed 1980-2005 Source: Thomson Financial / EVCA
But some remarkable trends are observable 13 Substantial differences in investment activity between countries, reflect differences in activity of management teams, not market attractiveness Maybe not surprising, but overall deal sizes continue to increase Seed an start-up investments together have gone up slightly, but deal sizes have declined High tech investments are up, slightly Midmarket continues to be largest Buyout segment
Private equity and venture capital in Europe: a diverse picture Comparison of the level of private equity investments in terms of percentage of GDP - data 2003 14 Slovak Republic Greece Czech Republic Hungary Poland Austria Switzerland Portugal Belgium Germany Norway Spain Ireland Denmark Italy Netherlands Finland France Europe Sweden US UK Venture Capital Buyout 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 % of GDP Source Europe: EVCA, PricewaterhouseCoopers, Thomson Venture Economics Source US: Estimations based on figures provided by Thomson Venture Economics and the National Venture Capital Association
The venture and the growth capital part of the business have not yet fully recovered from the crisis of 2001. 15 Deal-flow is limited and investment levels remain modest. But some improvement in fundraising The venture business is of strategic importance for competitiveness and growth of Europe
Changes in structure of the industry and in value creation models Industry is becoming more European, but more is possible and desirable Funds raised outside home market but within Europe up more than 17 % (2004) Investments outside home market up more than 50 %. (2004) But less transnational syndication (2004) The threat of new players Some new players are eying some segments of our industry However, industry requires experience and specific skills that are broader than financial capabilities Value creation models are changing: passive ownership is out, active ownership is in! Will all players be able to make the transition to the new value creation models? 16
The nature of European capitalism is changing Private equity is beginning to change the face and structure of European capitalism Capital has become more liquid Higher turnaround and secondary buyouts Capital has become more demanding The demand for control has been replaced by the desire for return Family firms are changing The change leads to greater public scrutiny The Locust debate in Germany The national champions debate in France The concern for more bankruptcies in UK 17
Improving transparency 18 Critical voices about our industry are on the rise. The large difference between average net portfolio returns and the variability in the gross returns on a deal basis undermine the professional reputation of the industry Some concerns about the carried interest system A perception of secrecy EVCA beliefs that its efforts to improve transparency are of critical importance. Four initiatives have made major process this year. Show more clearly the macro-economic benefits of capital mobility and performance enhancement. Improved reliability of statistics and performance data is critical. Reliability is a public good for the industry Corporate governance International Valuation Guidelines and now also Reporting Guidelines
New International Valuation Guidelines have taken over from the previous EVCA guidelines 19 Major wins One common set of guidelines for everyone in Europe and beyond Compatible with IFRS and US Gaap Flexible within a consistent framework Application guidelines for specific circumstances in venture capital and buyouts A steering process is created through an International Valuation Guidelines Board Will deal with questions and comments Will evaluate need for adjustments
Private equity s strategic importance: Engine for economic growth 20 Liquidity of capital Economic growth Creation of new firms 72 % seed companies would not have existed Enhancing performance 2/3 companies increase performance Revitalizing companies R&D increased on average with 66% Increasing competitiveness Stimulating company growth 63 % expanded in new markets
Top six recommendations for policy makers 21 Develop specific status for Young Innovative Companies Fiscal and social investments for investments in high tech Encourage institutional investors to invest in PE/VC Ensure capital adequacy or solvency requirements do not unduly impede investment decisions Create a specific pan-european fund structure for PE/VC investment funds to facilitate cross-border investment decisions Clarify intellectual property rights in academic environments Benchmark the best policies in Europe Stimulate the development of a high growth market in Europe
Conclusions 22 Spectacular increase in fundraising is good sign that industry is at last gaining significant position in Europe. But increase signals also problems: The increase may be too rapid Competition is increasing Valuations are rising Competitors are becoming larger and more European But let us not forget that the potential for the industry is still substantial in Europe Venture capital 0,10 % of GDP up from 0.08% of GDP in Europe in 2003 to 0.2% of GDP Buyouts 0.26% of GDP up from 0,21% in 2003 Our challenge must be to bring Venture capital to 0,2 % and Buyouts to 0,4 % We can only achieve this if we continue efforts towards Professionalism Greater transparency A better business environment