Private Equity Club Global Private Equity Village - PwC · 2015-06-03 · Global Private Equity...

22nd November 2004 pwc

Private Equity ClubGlobal Private Equity Village

Private Equity ClubGlobal Private Equity Village

2Global Private Equity Village PricewaterhouseCoopers

Agenda

• Introduction – Mark Pugh• Performance Measurement Survey 2003 – Damian Regan• Convergence of Valuation Guidelines – Vikram Krishna• Private Equity Investment Activity, Funds Raised and

Performance Data – Keith Arundale• Discussion


BVCA Private Equity and Venture Capital Performance Measurement Survey 2003

Damian Regan

BVCA Private Equity and Venture Capital Performance Measurement Survey 2003

Damian Regan


BVCA Private Equity and Venture Capital

Performance Measurement Survey 2003

• How can contributors to the Survey obtain further details on benchmarking to support internal requirements?

• Can the standard published BVCA benchmark data be applied to the requirements of the Global Investment Performance Standards (GIPS)?


BVCA Survey data

Existing data does not show/confirm:• Which investment stage the contributors funds are in• Narrower benchmarks for the funds (e.g. UK Mid MBO rather

than Mid MBO)• Which firms are within each stage / confirmation of nature of

stages• Appropriate benchmark for the vintage years (e.g. UK Mid MBO) Survey Issues• Overload of data analysis• Confidentiality (cannot identify the funds)


Our Response

• PwC International Survey Unit (Belfast) & PwC Investment Management Group (Assurance)

• Discussion with BVCA (through Keith Arundale)• Agreed limited scope procedures• Addressee use only, not for public use• Raise requests with BVCA for future surveys


Limited Scope Procedures

Overall Performance – Investment Stage*• Confirm the investment house’s funds within their investment

stage (e.g. UK Mid MBO, Non Tech)• Identify range of companies within investment stage (e.g. UK Mid

MBO, Non Tech)• Provide net performance figure for identified fund in benchmark • Provide net performance figure for required benchmark (e.g. UK

Mid MBO, Non Tech)*Confidentiality level = 5 houses


Limited Scope Procedures

Overall Performance – Vintage Year*• Confirm the investment house’s funds within their vintage year• Provide net performance figure for the identified funds• Provide net performance figure for required benchmark (e.g. UK

Mid MBO, Non Tech)*Confidentiality level = 5 funds


Engagement Issues Arising

1) Confidentiality – procedures / house & fund numbers2) Net not Gross Returns 3) Interpreting data4) Use of our report = internal only


Global Investment Performance Standards

• Private Equity Guidelines adopted 1 Dec 2003 / effective 1 Jan 2006

• Incorporates BVCA fair valuation methodology• Purpose = to increase transparency and comparability of

presenting returns


GIPS Requires

7.A.1. Private Equity investments must be valued according to the GIPS Private Equity Valuation Principles.

7.A.2. Firms must calculate the annualized Since Inception Internal Rate of Return (SI-IRR).

7.A.20. Firms must present both the Net-of-fees and Gross-of-fees annualized SI-IRR of the composite for each year since inception.

7.A.23. If a benchmark is used, the cumulative annualized SI-IRR for the benchmark that reflects the same strategy and Vintage Year of the composite must be presented for the same periods for which the composite is presented. If no benchmark is shown, the presentation must explain why no benchmark is disclosed.


Questions for BVCA

1) Gross and Net returns2) Splitting out of investment stages (e.g. Mid MBO to UK Mid MBO)3) Splitting out of vintage years (e.g. UK Mid MBO)


Convergence of Valuation GuidelinesVikram Krishna

Convergence of Valuation GuidelinesVikram Krishna


Agenda

• Existing valuation options under BVCA and EVCA guidelines• IASB stance• EVCA – BVCA working together• Definition of fair value• Convergence to fair value reporting• Specific examples• Conclusion


Existing valuation options under BVCA and

EVCA guidelines

BVCA (revised 2003 guidelines)• Cost in initial period after acquisition (up to 12 months)• Fair Value (incl. illiquidity discounts for quoted investments)• If Fair Value is not possible: cost less impairment

EVCA • Cost less impairment at 25% discounts• Fair Value (incl. illiquidity discounts for quoted investments)


IASB stance

The IASB's reasons for allowing investments to be excluded from their scope (under IAS 28 and IAS 31) provided the fair value option is used, were that:

• measuring such investments at fair value through profit or loss would produce more relevant information than using equity accounting;

• and that fair value information is often readily available because fair value measurement is a well-established practice in these industries.


Comparison to property investments

Property Valuations are based on the RICS valuation guidelines and the fair valuation guidelines are thorough, accepted in the marketplace and applied consistently across the Industry.

However existing valuation guidelines i.e. BVCA and EVCA are notapplied with the same rigour or consistency.


EVCA and BVCA working together

BVCA and EVCA drafted valuation guidelines together in Oct-Nov 2004 with a launch of a consultation paper in Dec 2004

The valuation guidelines:• provides guidance for fair valuation framework; and• attempts to meet the requirements of fair valuation for statutory

reporting, namely IFRS and US GAAP.

“Investments should be reported at fair value at reporting date”


Defining fair value

“Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction”.

Does not assume:• investee Company is saleable at the reporting date;• current shareholders intend to sell their holdings in the near

future; • there is a forced transaction, involuntary liquidation or distressed

sale


Convergence to fair value reporting

•FV reporting driven by:– pressure from accounting standards esp. US GAAP and IFRS– the needs of institutional investors for investment opportunities and

financial reporting

• Launch of new international funds are increasingly under US GAAP or IFRS and only domestic funds adopt local GAAP

• New guidelines are user friendly and are IFRS / US GAAP compliant for standard MBO valuations but not fully IFRS compliant


Specific examples of non-compliance (1)

(1) Start-up company

• Revised guidelines state use of cost or carrying value less impairment. IFRS says Fair Value.

• Our belief that it is possible to value a start-up and estimate fair value per the original business plan

• FV changes would occur if milestones (in the business plan) werepassed and an educated investor would increase fair value if therisk features (per the business plan) were passed

• Vice versa, if the external or internal market would collapse then fair value would diminish dramatically



(2) Mezzanine investments

• Debt investments normally classified as HTM• Mezzanine investments are classified as financial assets FVTPL

or AFS and not HTM• Advantages are for the investment to be valued in total instead of

separately valuing other attached financial instruments iewarrants



(3) Quoted investments

• Per IFRS quoted investments should be valued at BID price• Industry prefer valuation at BID price less discounts for thinly

traded stock or restricted stock• Conceptually correct as market price is not fair value if BID price

cannot be achieved• But resist applying discounts on generic basis at multiples of 5%• Big 4 will revisit current IFRS treatment with IASB but will it be

accepted?


2005 and beyond……..

• Consultation paper will be reviewed by a joint EVCA-BVCA committee on continual basis to assess implementation difficulties

But valuation guidelines must be applied consistently across allPE investments to enable full credibility in the marketplace….

…….2005 - NOW OVER TO THE PRACTICAL IMPACT !


Update on Private Equity Investment Activity, Funds Raised and Performance Data

Keith Arundale

Update on Private Equity Investment Activity, Funds Raised and Performance Data

Keith Arundale


PE Investment, Funds Raised and

Performance Data

Global private equity investment and funds raised overviewEuropean private equity and venture capital overviewUK Performance Measurement data


The World View: Full Year 2003

Main Headlines• Approximately $115 billion of private equity and venture capital was invested

globally in 2003 – an increase of 33% on the 2002 level of $86 billion.• More than $82 billion of funds were raised globally in 2003 – down 12% from $93

billion in 2002.Sub Headlines• Technology investments totalled approximately $38 billion in 2003 – 33% of total

investment.• Around $21 billion was invested in expansion stages in 2003 – down 15% on 2002

levels.• Approximately $73 billion was invested globally in buyouts in 2003 – an increase

of 61% on 2002.* Based on 2002 GDP, from World Bank Development Indicators – $32,300 billion

Note: Historical data has been revised based on amendments published in 2003. Data converted to US dollars using a fixed exchange rate

from 1998 obtained from oanda.com.


The World View: Investment and Fund

Raising Trends

70

124

192

103 86

115133

154

262

177

93 82

0255075

100125150

175200225250275300

1998 1999 2000 2001 2002 2003

InvestmentsFunds Raised

(US$b)

Source: The PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree™ Survey / Buyout Newsletter / Private Equity Analyst / CVCA Annual Statistical Review / EVCA Yearbook / AVCJ Guide to Venture Capital in Asia / Venture Equity Latin America / SAVCA Private Equity Survey / IVC Online

Note: The data for Eastern Europe, Middle East & Africa and Central & South America has been up-weighted to take account of under-reporting in these regions

Investment: Compound average growth rate = 10.41%Funds Raised: Compound average growth rate = -9.16%

Note: Israel did not raise any funds in 2002, but returned $145 million


The World View: Top 20 Countries (based

on investment)

North America• 1. USA (1)• 13. Canada (10)

Middle East & Africa• 15. South Africa (16)• 16. Israel (14)

Central & South America

52%

1%2%

30%15%

Asia Pacific3. Japan (6)6. Australia (11)8. Korea (8)9. China (21)14. India (13)17. Indonesia (17)18. Singapore (20)

Note: Individual country data is not available for Central and South America.

Note: Figures in brackets indicate their position in 2002

2. United Kingdom (2)4. France (3)5. Italy (4)7. Germany (5)10. Spain (12)11. Netherlands (7)12. Sweden (9)19. Finland (18)20. Denmark (24)

Europe


The World View: Top 20 Countries (based

on investment)

Country Ranking Investment Value

Funds Raised

Country Ranking Investment Value

Funds Raised

1. USA 59.20 43.94 11. Netherlands 1.28 2.40 2. UK 15.86 17.56 12. Sweden 1.19 2.52 3. Japan 7.19 1.36 13. Canada 1.00 1.35 4. France 4.98 2.39 14. India 0.86 0.26 5. Italy 3.56 2.27 15. South Africa 0.82 1.11 6. Australia 2.93 0.20 16. Israel 0.77 - 7. Germany 2.91 1.40 17. Indonesia 0.65 - 8. Korea 2.84 0.27 18. Singapore 0.54 0.10 9. China 1.67 0.34 19. Finland 0.52 0.18 10. Spain 1.57 1.03 20. Denmark 0.48 0.25

US $ Billion


The World View: Cumulative Investments

and Funds Raised (98-03)

Source: The PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree™ Survey / Buyout Newsletter /Private Equity Analyst / CVCA Annual Statistical Review / EVCA Yearbook / AVCJ Guide to Venture Capital in Asia / Venture Equity Latin America /SAVCA Private Equity Survey / IVC Online

Note: *The data for Eastern Europe, Middle East & Africa and Central & South America has been up-weighted to take account of under-reporting in these regions

Region Investment Value

Funds Raised Overhang

Global 690.63 901.45 210.82

North America 411.93 600.32 188.39

Europe 182.96* 221.62 38.66 Asia Pacific 64.23 58.15 -6.08

Middle East & Africa 13.25* 11.86* -1.39

Central and South America 18.26* 9.50 -8.76

US $ Billion


The World View: 1st Half 2004

Main Headlines• At least $48.1 billion of private equity and venture capital was invested in

the three main regions of the world in the first half of 2004. • These regions generally account for 95% of all investment globally.• Approximately $38.0 billion of funds were raised in the three main regions

of the world in the first half of 2004.• These regions generally account for 98% of all funds raised globally.Sub Headlines• Approximately $3.9 billion was invested in early stage companies in the

three main regions of the world in the first half of 2004.• Around $28.3 billion was invested in buyouts in the three main regions of

the world in the first half of 2004.

Note: Data converted to US dollars using a fixed exchange rate from 1998 obtained from oanda.com.


European Private Equity & Venture CapitalFrom the EVCA Private Equity Survey conducted by Thomson Venture

Economics and PricewaterhouseCoopers

European Private Equity & Venture CapitalFrom the EVCA Private Equity Survey conducted by Thomson Venture

Economics and PricewaterhouseCoopers


€29 billion invested in Europe in 2003

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

1995 1996 1997 1998 1999 2000 2001 2002 2003

€ m

BuyoutVenture Capital

Source: EVCA / TVE / PwC private equity survey


Amount Invested by Country 2000 - 2003

1,8

87

1,1

99

4,4

35

2,1

85

3,2

87

6,9

26

96

8

1,7

22

2,5

06

2,6

26

5,8

51

10

,38

5

1,0

92

1,3

37

2,4

81

3,0

34

4,2

46

13

,53

9

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

UKFrance Italy

GermanySpain

Netherlands

2001 2002 2003

€m


1,40

4

642

704

943

435

2,58

8

Venture Capital


Europe: Sources of New Funds in 2003

Insurance Companies

8.7%

Fund of Funds16.4%

Banks21.5%

Corporate Investors

4.8%

Pension Funds19.4%

Private Individuals3.2%

Other17.3%

Academic Institutions

1.5%

Capital Markets0.3%

Government Agencies

6.8%

Government Agencies11.1%

Capital Markets0.1%

Academic Institutions1.6%

Other4.3%

Private Individuals6.0%

Pension Funds16.3%

Corporate7.3%

Banks26.3%

Fund of Funds13.1%

Insurance Companies13.8%

2002

2003

2002

2003


Europe: Expected Allocation of Funds Raised

Buyout76.5%

High Tech Expansion

3.5%

Non-High Tech Expansion

10.8%

High Tech Early Stage5.9%

Non-High Tech Early Stage

2.2% Other1.2%

Other2.7%

Non-High Tech Early Stage

2.1%

High Tech Early Stage7.9%

Non-High Tech Expansion

13.4%

High Tech Expansion

7.5%

Buyout66.3%

2003

In 2003 :

Expected allocation to Venture Capital: 22% or €6.0 bn

Expected allocation to High-Tech: 9.4% or €2.5 bn

2002



Funds Raised and Investment - Europe

0

10,000

20,000

30,000

40,000

50,000

60,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

€m

Funds RaisedInvestment



Evolution of European Private Equity Activity by amount Q1 2002 to Q2 2004INDEX Q1 2002 = 100

0

50

100

150

200

250

300

350

400

Q12002

Q22002

Q32002

Q42002

Q12003

Q22003

Q32003

Q42003

Q12004

Q22004

Funds Raised

Investment

Divestment

Source: EVCA/Thomson Venture Economics/PricewaterhouseCoopers

Note: The percentage change mentioned refers to the evolution of the current quarter vs the previous quarter

+28%

+27%

-19%


Evolution of Private Equity InvestmentActivity by Amount Q1 2002 to Q2 2004INDEX Q1 2002 = 100

0

50

100

150

200

250

300

Q12002

Q22002

Q32002

Q42002

Q12003

Q22003

Q32003

Q42003

Q12004

Q22004

Total InvestmentEarly StageExpansionBuyout

-16%

+27%

+44%

+47%




Evolution of Private Equity DivestmentActivity by Amount at Cost Q1 2002 to Q2 2004INDEX Q1 2002 = 100

0

50

100

150

200

250

300

350

400

450

Q12002

Q22002

Q32002

Q42002

Q12003

Q22003

Q32003

Q42003

Q12004

Q22004

Total Divestment

Trade SaleWrite-Off

Sale to VC/Financial Institutions/Repay. Pref Shares/Other

-58%

+5%

+51%

-19%




UK Performance Measurement DataFrom the BVCA Performance Measurement Report

prepared by PwC

UK Performance Measurement DataFrom the BVCA Performance Measurement Report

prepared by PwC


UK PE Summary of Performance by

Investment Stage (to 31.12.03)

-18.1

-25.1

-12.5 -10.6-8.2

2.7

16.9

2.96.7 8.49.1

-3.7

2.6

-3.4

12.217.7

13.615.317.4

12.5

19.5

14.210.212.3

-30

-20

-10

0

10

20

30

40

2003 Three Years Five Years Ten Years

Early Development Mid MBO Large MBO Generalist Total

% pa

Source: BVCA / PwC performance measurement report 2003


UK PE Performance by Sub Sector

(to 31.12.03)

2.610.2

14.2

-24.4

-10.3-6.5

5.90.5

9.017.614.7

3.510.9 11.212.3

-18.0

-40.0

-20.0

0.0

20.0

40.0

60.0

80.0


Total Technology UK Non UK

% pa

Source: BVCA / PwC performance measurement report 2003


Summary of Private Equity Performance

versus Principal Comparators

12.3

2.6

10.214.2

-6.8

-1.1

6.1

17

-2.8

1.96.4

20.9

-10

0

10

20

30

40


Total Private Equity FTSE All-Share WM Pension Fund Universe

% pa


Since Inception Performance by Sub Sector

4.7

9.8 9.7

16.414.1

12.6

7.4

14.513.613.8

0.0

5.0

10.0

15.0

20.0

Ear

ly

Dev

elop

men

t

Mid

MB

O

Lar

ge M

BO

Gen

eral

ist

Tot

al UK

Non

UK

Tec

hnol

ogy

Non

-T

echn

olog

y

% pa


Summary: Key points for European PE

• Europe’s significance in the world private equity market continues to increase

• Despite so-called “wall of money”, European funds available are currently around 1 ½ years’ supply

• Amount of investments in 2003 was the second highest ever, mainly due to buyouts

• Portfolio rationalisation and write-offs now largely complete• Investment trends for 2004 are encouraging – both for buyouts and

early stage• Reasonably active M&A market and some successful IPOs• PE as a whole continues to outperform the principal comparators

over the medium to longer term, but early-stage and tech funds are lagging behind.

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