European Private Equity & Venture Capital Association Bastion Tower, Place du Champ de Mars 5 B-1050 Brussels, Belgium T +32 2 715 00 20 F +32 2 725 07 04 info@evca.eu www.evca.eu Transparency Register ID: 60975211600-74

Position Statement

1

Accelerating Innovation & Delivering Growth: Using the Jobs,

Growth and Investment Package to Attract Private Sector

Investors to the European Venture Capital Industry

November 2014

Executive Summary

The European venture capital industry provides high-growth companies and SMEs with long-

term financing, sparking innovation and driving SME growth.

Additional private sector investment into European SMEs is needed to facilitate their growth, as President Juncker has recognized in setting the outlines of the forthcoming Jobs, Growth and Investment Package

European venture capital needs to reach international investors who have access to large

pools of capital and a potentially higher risk appetite. However, such investors are not easy

for many European venture capital managers to reach for a range of reasons.

The European venture capital industry is fragmented and European venture capital funds are relatively small, particularly when compared to their competitors in the US.

For the industry to become self-sustaining and globally competitive, it is crucial that private

institutional investors are attracted back to European venture capital.

The EVCA proposes to stimulate the demand for high-quality venture funds via a public-private

partnership: a private sector-managed pan-European fund-of-funds with a high commitment

to venture capital.

By leveraging parts of the EU Budget as part of the Jobs, Growth and Investment Package, the

European Commission would play a catalytic role, providing cornerstone investment in the

funds, with this EU capital (at a minimum) matched by private money.

The purpose of a fund-of-funds is to act as an intermediary, bridging the gap between large

institutional investors and smaller venture capital funds.

The additional cost created by inserting the fund-of-funds layer in the financial value chain is

justified by the access to larger pools of international capital that European venture capital,

and the businesses it develops, need

The involvement of a fund-of-funds manager can also help venture capitalists to increase the

size of their funds – enabling them to back more companies, for longer periods of time.

Such an instrument can be funded from within the existing EU budget.

2

Introduction

The European venture capital industry is capable of providing an alternative form of long-term

financing to innovative high-growth companies and SMEs, especially at times when bank lending is

scarce. The specificities of the venture capital business model – active investment through long-

term equity stakes in private companies – need investment funds that can be managed flexibly

depending upon the phase of the investment cycle. Investment fund structures must also meet the

needs of both domestic and non-domestic investors, to encourage foreign capital to flow into the

European economy.

However, the venture capital industry is confronted with obstacles in attracting international

investors and despite investments by public institutions such as the European Investment Fund

(EIF), there is still a lack of available capital in the hands of experienced venture capital groups

in Europe. This results in high-potential companies having to curtail their growth plans as they do

not have sufficient capital to realise them. More funding for such companies would improve their

chances to grow and to compete globally.

Sustainable economic growth in Europe is directly linked to creating the right environment for high

growth potential companies to emerge and strive. The link between innovation,

entrepreneurship, venture capital and economic growth is well established and recognised,

including by the European Commission.

The venture capital industry in Europe has gone through a very large contraction over the last

decade, and if this is not arrested risks impairing permanently its capacity to help European

businesses to develop.

As investment into venture capital contracts so fund sizes reduce and the teams needed to run

them also contract. Experienced practitioners who have the contacts and the knowledge - which

typically takes 10 years to acquire - are lost to the industry.

There is urgency for Europe to increase the capital available to venture capital professionals and

through them to emerging companies.

Reinforcing the European venture capital industry and its capacity to raise funds world wide will

benefit the EU economy. Facilitating fund raising and attracting international investors to the

asset class as part of the €300 billion package will help venture capital to finance the EU’s

most innovative high-growth companies and SMEs. This remains the ultimate goal of the Jobs,

Growth and Investment Package.

In its Green Paper on Long-Term Financing of the European Economy1 (March 2013) the European

Commission has recognised this problem and has identified the development of the venture capital

sector as a potential solution to the difficulties SMEs face in accessing finance. The Commission

clearly states on page 17 that: “The venture capital sector suffers from lack of resources and is

influenced by bank and insurance prudential regulation. Funds-of-funds could be efficient

instruments to increase the volume of venture capital. A fund of guarantees for institutional

investors could further reduce the constraints in this market.”

1 http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2013:0150:FIN:EN:PDF

3

Virtuous Financing Cycle

Venture capital is at the core of achieving the European objectives of growth, competitiveness

and innovation: energising the European economy by actively investing in and supporting

businesses with high-potential in existing industry sectors, as well as creating new innovative

enterprises, sustaining growth, job creation and innovation.

Venture capital invests in the real economy, i.e. businesses which produce products and

services and in so doing generate employment. In stark contrast to speculative activity on non-

real economy based assets venture capital investors are patient investors in thousands of real

businesses.

Venture capital has a vital role in sparking innovation, a primary driver of economic growth. A Frontier Economics report2 shows that private equity builds businesses that are more innovative than non private equity-backed firms. Patents granted to private equity-backed businesses between 2006 and 2011 are expected to be worth up to €350 billioni. Private equity participation increases the number of patent citations by 25%ii. With increased numbers of citations corresponding to greater economic value, this suggests it uses resources more effectively to deliver higher returns on investment.

Venture capital funding drives SME growth, thanks to the experience, “smart capital” and

contacts these equity investors bring. Venture capital firms not only fund but also proactively

support the development of high-potential companies in the early stages of their development and

growth, often creating highly skilled employment in new and innovative areas where other sources

of finance are hard to access.

The industry provides a ‘virtuous’ financing cycle within the European economy (see Figure 1).

Investors provide funds to venture capital firms, which in turn invest to launch, grow or support

high-potential companies. When these venture capital backed companies succeed, they become

important engines of growth in the economy. The (financial) returns provide the incentive and

capital to redistribute the money, thus funding future cycles of investment. The whole sequence of

raising capital from institutional investors, investing that capital via long-term, closed-ended funds

(typically for ten years or more) into companies and then providing returns to investors, is one

inter-connected investment chain.

2 Exploring the impact of private equity on economic growth in Europe, May 2013 (http://www.evca.eu/publications/frontier_economics_report.pdf)

4

Figure 1: The Virtuous Financing Cycle of Private Equity and Venture Capital (PE/VC) Investment

Fundraising barriers: Challenges for raising venture capital funds The venture capital industry has a long-standing commitment to encouraging and facilitating long-term investing. As recognised by the European Commission in its Green Paper on Long-Term Financing of the European Economy, given the longer time horizons of their business models, institutional investors – such as (life) insurance companies, pension funds, mutual funds and endowments – represent suitable providers of long-term financing. Together, they hold an estimated total of €13.8 trillion of assets, equating to more than 100% of EU GDP3. Other institutional investors, such as sovereign wealth funds, have also emerged as providers of long-term capital.

However, in spite of this large amount of available capital, European innovation continues to be

faced with a lack of private sector investors in venture capital.

Between 2007 and 2012, pension funds, insurance companies and banks fell from 35% of funds

raised to just 15% in 2012. Over the same period of time, contributions by government agencies

grew considerably. While in 2007 government agencies accounted for less than 15% of investment

in European venture capital, by 2012 their share had increased to represent 40% of venture

funding.

The changing investor base for venture capital is illustrated in Graph 1.

3 See Fitch 2011 and EFAMA (2012).

Individuals’ pension plans, saving accounts, insurance contracts, etc.

Institutional investors (Pension funds, banks,

insurance companies, etc.)

PE/VC funds PE/VC funds

High-potential

companies

Commitments

Investments Divestments

Repayments +

Capital gains

Income withdrawal

5

Graph 1: The changing source of investors in European venture capital

Source: EVCA/PEREP_Analytics

The relatively low returns to investors from the venture capital industry in recent years in

comparison to other illiquid asset classes, coupled with tightening EU investor regulation (like CRD

and Solvency II) and the impact of other financial services legislation like the European Alternative

Investment Fund Managers Directive (AIFMD) and US FATCA, have compounded the challenge.

This trend towards increased reliance on public sector investment will be exacerbated in the

coming years as new prudential regulation comes into effect4. Institutional investors will be under

pressure to reduce their investments in long-term, illiquid investments and commitments to

private equity are also likely to be affected. As a consequence venture capital, as the smallest

part of the private equity industry and the one that is most willing to back more innovative (and

thus riskier) European companies, is in danger of being cut out entirely from the asset allocation

strategies of banks, insurance companies and occupational pension schemes.

Difficulties in reaching international investors

The withdrawal of major European institutional investors from the venture capital asset class

creates a pressing need for venture capital to reach international investors who have access to

additional pools of capital and a potentially higher risk appetite. However, this is not easy for

(small) venture capital managers, for several reasons.

Fragmentation

The European venture capital industry is fragmented and, although strategically important,

venture capital accounts for only approximately €3.7 billion on an annual basis in terms of

investments. This is tiny in comparison to other asset classes.

6

Small fund size

European venture capital funds are also relatively small. Between 2007 and 2012, the average size

of European venture capital funds (at final closing) was €61 million (see Table 1). The median fund

size only amounted to €27 million; in other words, 50% of all European venture capital funds were

smaller than €27 million.

Table 1: Average size of a European Venture Capital Fund (2007-2012)

2007-2012

Amounts in

€ millions

Number of funds Average (in €

millions) fund

size

Median (in €

millions) fund

size

Early-stage 7,488 126 59 25

Later stage

venture

3,091 41 75 36

Balanced 7,018 120 58 28

Total Venture 17,597 287 61 27

Source: EVCA\PEREP_Analytics

By comparison, the size of buyout funds would typically be in these ranges:

Large Buyout: > €2 billion

Mid-Market: €500 million – €2 billion

Small Buyout: < €500 million

Due to their small fund size, it is difficult for venture capital managers to raise capital outside of

Europe and to take advantage of a more general geographic shift in the sources of long-term

institutional private capital. As the minimum investment size of large international institutional

investors is often relatively large (sometimes even larger than the average venture capital fund –

see pages 9 and 10), it can be impossible for small venture capital managers to access them.

Small ticket size

Many institutional investors such as banks, pension funds and insurance companies, and in

particular the large pools of international capital that are interested in private equity, such as

sovereign wealth funds, and globally-active pensions and insurers, based in Asia, the US and

Australia, generally consider the market too small to allocate expertise or resources. The small

ticket size for venture capital struggles to compensate asset managers for the time, costs and

efforts that they need to expend to assess venture capital teams and managers during the due

diligence process4.

4 See for example Talmor and Vasvani (2014). The Extent and Evolution of Pension Funds’ Private Equity

Allocations. The Adveq Applied Research Series. Coller Institute, London Business School. “Larger funds have

more managerial and financial resources available to the investment team and are able to spend more on

due diligence activities. Due to the larger average investment size of larger funds (~$70-90million on

average) compared with medium-size or smaller funds (~$10-20million on average), large funds direct most

of their investments towards larger private equity funds that can absorb their desired investment amounts.

Consistent with this interpretation, […] larger pension funds (approx. $20 billion AUM on average) committed

about 80% of their private equity capital directly via mainly buyout funds, with the remaining 20% indirectly

through funds-of-funds. […] medium-sized funds (approx. $4 billion AUM) allocated 40% of their private

equity investments with funds-of-funds, while smaller pension plans (approx. $1 billion AUM) invested mainly

via funds-of- funds (80% of their private equity investments).”

7

Level of interest

As a result, international investors have lost interest in European venture capital over time.

Empirical research conducted by the EVCA5 with a number of experienced, senior fund-of-funds

managers from a range of jurisdictions across Europe shows that, when compared to other private

equity investment options, European venture capital is perceived by international investors as one

of the least favourable private equity sectors to invest in. As a standalone segment, European

venture capital would tend to be the least attractive and appear at the bottom of a large list of

investment choices for international investors (15th place). And private equity, of course, is only

one asset class to which the global investment community has access.

Table 2: International investors’ level of interest in the private equity asset class

US EU Asia

Large Buyout 14 13 12

Mid-Market 7 6 8

Small Buyout 2 1 3

Turnaround 5 4 n/a

Venture / Growth Capital 11 15 10

Expectation of performance

While interest for European venture capital scores low in relation to other asset classes, in terms

of expected future performance it would score slightly higher (around 10th place) as investors

continuing to commit to venture capital would expect higher returns given the generally higher

level of risk. The expectations of European venture capital delivering good results/returns are

therefore higher than for other investment strategies within European private equity.

Again, these findings are based on a qualitative survey carried out by the EVCA with a number of

well-established fund-of-funds managers from across Europe.

Table 3: International investors’ expectation of performance for the private equity asset class

US EU Asia

Large Buyout 13 12 14

Mid-Market 7 6 8

Small Buyout 2 1 3

Turnaround 4 5 n/a

Venture / Growth Capital 9 10 11

Graph 2 below plots where the different stages of private equity investment fit when comparing ticket size and performance expectation. Venture capital falls below the curve of interest. Investors demand exceptional performance to compensate for the disadvantages and costs that they face from the small ticket sizes and the additional due diligence that they must perform to assess a larger number of different venture funds, teams and managers. However, with venture capital not, currently, performing sufficiently well to meet those high return demands, the

sector risks falling outside the zone of investor interest.

5 Similar results have emerged from other LP Sentiment Surveys such as Coller Capital’s Global Private Equity Barometer (Winter 2013, 9 December 2013) and Probitas Partners’ Private Equity Institutional Investor Trends for 2014 Survey.

8

Graph 2: Architecture of the market: Performance and Ticket Size

All of these developments have led to shrinkage of the available capital for venture capital and of

the number of European venture capitalists that can readily raise sizeable amounts of capital. The

venture capital industry in Europe has become very reliant on their own national capital (see Table

4), and because of financial services and prudential regulation, investors will continue to move out

of the asset class.

Table 4: Fundraising by venture capital funds (2007-2012)

Amounts in € millions

2007-2012 Venture Funds

FUNDRAISING Amount of funds raised Percentage of European

fundraising amount

Within Europe 20,895

Domestic 16,708 80%

Non-domestic 4,187 20%

Outside Europe 1,628

Unknown 7,417

Grand Total 29,940

Source: EVCA/PEREP_Analytics

By contrast, larger buyout funds do get direct or indirect access to international investors. In 2012,

40% of new funds raised by the European private equity industry as a whole came from non-

European investors; in the case of venture capital, only 5.2% of new funds were raised outside of

Europe6. When comparing the different sub-classes of private equity, the difference becomes even

larger. In 2012, 48.6% of funds raised by buyout firms came from non-European countries (see Map

1 and Map 2).

6 Source: EVCA/PEREP_Analytics (2013)

Ticket size (that an LP can write)

Performance

expectation

Curve of interest

Turnaround

Venture Capital

Small Buyout

Mid-Market

Large Buyout

European Private Equity & Venture Capital Association Bastion Tower, Place du Champ de Mars 5 B-1050 Brussels, Belgium T +32 2 715 00 20 F +32 2 725 07 04 info@evca.eu www.evca.eu European Union Interest Representative ID: 60975211600-74

Position Statement

9

Map 2: Venture capital, 2012 (2011) – Source of funds - % of total amount Map 1: Buyout, 2012 (2011) – Source of funds - % of total amount

Figure 2 below aims to represent the current structure and the financial value chain in the private equity and venture capital industry. It demonstrates that, in contrast with other segments of the private equity asset class, venture capital currently does not have access to the large pools of international capital

(e.g. sovereign wealth funds in China and the rest of Asia, large pension funds in the US and Australia), either directly or indirectly through fund-of-funds.

The ticket size of those capital owners (top row in the table below) is too large for small venture capital funds. The amounts that they are willing to invest and

commit tend to be bigger than the average venture capital fund. Therefore, they will either invest in a fund-of-funds or directly into large buyouts.

Fund-of-funds, however, are currently not investing in venture capital, primarily because of performance. This adds to the challenge for venture capitalists to continue to invest in their portfolio companies and to secure follow-on investments. In the current environment, venture capital firms lack the means to grow their companies beyond a certain level and are obliged to engage and rely on growth-stage funds with professional investors that are based outside of Europe, or

even to sell their companies.

European Private Equity & Venture Capital Association Bastion Tower, Place du Champ de Mars 5 B-1050 Brussels, Belgium T +32 2 715 00 20 F +32 2 725 07 04 info@evca.eu www.evca.eu European Union Interest Representative ID: 60975211600-74

Position Statement

10

Figure 2: Value chain of finance in the private equity and venture capital industry

*Source for Global Assets under Management by LP type that invests in private equity: Preqin

Incentivise the FoF to extend down into VC land / Encourage and add members

to invest in VC

Ticket

Size

Max

Min

€100m

€10m

€500m

€100m

€100m

€10m

€50m

€5m

€50m

€5m

€5m

€1m

Financial

Intermediaries Fund-of-Funds (FoF) Consolidates and Diversifies

Direct Investors

Companies

Large Buyouts Mid Market Buyout Growth Capital Venture Capital

€5000m

€400m

€500m

€100m

€50m

€20m

€20m

€1m

Access large pools of international risk

capital directly or via fund-of-funds

Relies on individuals and covenants

Sovereign Wealth Funds

(€3 trillion)*

Pensions

(€6.4 trillion)*

Insurers

(€7.4 trillion)*

Foundations and Endowments

(€510 billion)*

Family Offices (MFO + SFO)

(€31 billion)*

HNWI

n/a Owners of

capital

European Private Equity & Venture Capital Association Bastion Tower, Place du Champ de Mars 5 B-1050 Brussels, Belgium T +32 2 715 00 20 F +32 2 725 07 04 info@evca.eu www.evca.eu European Union Interest Representative ID: 60975211600-74

Position Statement

11

Venture capital investor base needs to be diversified and internationalised

While (the generally poor historical) performance of venture capital is part of the challenge, there

is also a long-term structural challenge. Venture capital in Europe is characterised by a reliance on

public sector institutions such as the European Investment Fund (“EIF”). While it is essential that

programmes managed by the EIF and other institutions at a national level continue to sustain the

sector in the immediate term, they must be built upon and complemented by new private sector-

led programmes of investment.

For the industry to become self-sustaining and globally competitive, the number of institutions

with the skill and capacity to invest in European venture capital funds must be broadened and

diversified. Government agencies will not be sufficient in the long-term to sustain the industry. It

is crucial that private institutional investors are attracted back to European venture capital.

One of the strengths of the US LP eco-system is not only its size but also its plurality and diversity.

By way of an example, the United States has 55 university endowments, traditional investors in

innovation via venture capital funds, valued at over €1 billion; in the EU there are only three7. The

lack of a comparable long-term, patient investor base in the European Union with the skill,

capacity, interest and tradition of investing in innovation via European venture capital goes

some way to understanding why in 2011 only 2% of Europe’s SME financing requirement was met by

venture capital as opposed to 14% in the United States8.

Public-Private Partnership: A solution

The EVCA proposes to complement the EIF and to stimulate the demand for high-quality venture

funds9 via a public-private partnership (Figure 3): a private sector-managed pan-European fund-

of-funds with a high commitment to venture capital. By leveraging parts of the EU Budget as part

of the Jobs, Growth and Investment Package, the European Commission would play a catalytic

role, acting as a cornerstone investor in the funds, with this EU capital (at a minimum) matched

by private money. EU funding for a market-oriented venture capital fund-of-funds would act as a

genuine catalyst for private sector investment.

Investment would be required initially to kick-start the funds, but the goal would be for the

scheme to become self-sustaining after roughly five years, with distributions from successful

investments paying for new commitments (and even more).

7 National Association of College and University Business Officers and Common fund Institute, 2013, University of Cambridge, University of Oxford, University of Copenhagen

8 Speech by Commissioner Barnier, Brussels, February 21st, 2013

9 EVCA Venture Capital White Paper. Closing Gaps and moving up a gear: the next stage of venture capital’s evolution in Europe. 2/03/10

12

Figure 3: Functioning of the EVCA’s proposed public-private partnership

This programme would enable the European Commission to invest in a private sector-managed

venture capital fund-of-funds that would:

address the long-term structural challenges in the European venture capital investor base by

o promoting access to international institutional investors

o incentivising private sector institutional investors to invest in venture capital

o reducing the requirement for public sector support to venture capital

scale up the European venture capital industry by increasing the number of high-quality

European venture capital funds

create a level playing field with other private equity investment stages.

Benefits of a fund-of-funds manager

A fund-of-funds manager can help to tackle many of the fundraising problems that European

venture capital faces.

Such managers provide global investors with simpler access to venture capital without the

need for investors to devote scarce management time and expertise to a detailed analysis of

individual funds active in the asset class in Europe. In effect, the global institutional investor

out-sources to an expert fund-of-funds manager the task of analyzing and evaluating the

overall European venture capital landscape and of determining precisely which funds are worth

investing into.

The private sector fund-of-funds manager also acts as an advocate for European venture

capital: explaining the potential of the asset class to global investors and helping them to build

their own expertise and knowledge about the sector.

13

Fund-of-funds managers will diversify and internationalise the investor base as they will

enable smaller venture capital managers to access a wider base of international institutional

investors. A fund-of-funds would be an important vehicle to facilitate the venture capital

industry to gain access to new and emerging liquidity pools in Latin America, the Middle East,

and Asia.

Graph 3 below illustrates that historically (between 2007 and 2012) venture capital funds with a

fund-of-funds as an investor have had more access to pension funds and insurance companies,

compared to venture capital funds without a fund-of-funds as an investor. In addition, the

dependence on government money tends to be much lower.

Graph 3: Sources of funds (2007-2012)

Source: EVCA\PEREP_Analytics

This trend can also be observed in Table 5 below. Fund-of-funds provide the credibility to attract

large institutional investors such as pension funds and insurance companies, and the reliance on

government agencies, in contrast, is halved.

European Private Equity & Venture Capital Association Bastion Tower, Place du Champ de Mars 5 B-1050 Brussels, Belgium T +32 2 715 00 20 F +32 2 725 07 04 info@evca.eu www.evca.eu European Union Interest Representative ID: 60975211600-74

Position Statement

14

Table 5: Fundraising by venture capital firms in Europe (2007-2012)

2007-2012 VC funds with FoF as an LP VC funds without FoF as an LP

FUNDRAISING Fund stage focus Fund stage focus

Early-stage

Later stage

venture Balanced

Total

venture Early-stage

Later stage

venture Balanced

Total

venture

Number of funds 53 13 31 97 274 67 226 567

Amounts in

€ Mio Total amount raised 4,663 1,089 2,225 7,978

% of the

Total

venture

8,189 3,666 10,108 21,963

% of the

Total

venture

Investor type Academic institutions 22 0 3 25 0.3% 13 0 8 21 0.1%

Banks 152 55 126 333 4.5% 578 216 1,030 1,824 12.0%

Capital markets 3 95 0 98 1.3% 79 49 326 454 3.0%

Corporate investors 284 81 220 585 7.9% 830 800 852 2,482 16.3%

Endowments and

foundations 208 44 6 259 3.5% 91 84 88 263 1.7%

Family offices 236 80 98 415 5.6% 424 136 482 1,042 6.8%

Fund-of-funds 1,384 310 584 2,277 30.6% 0 0 0 0 0.0%

Government agencies 731 53 368 1,153 15.5% 2,171 262 2,281 4,715 30.9%

Insurance companies 354 92 97 542 7.3% 88 73 171 333 2.2%

Other asset managers

(including PE houses

other than fund-of-

funds)

94 34 27 155 2.1% 217 47 279 542 3.6%

Pension funds 695 115 317 1,127 15.1% 317 31 411 758 5.0%

Private individuals 243 52 138 432 5.8% 752 571 1,480 2,803 18.4%

Sovereign wealth funds 0 37 0 37 0.5% 6 5 0 11 0.1%

Unclassified 258 39 242 539 2,624 1,391 2,700 6,715

Source: EVCA/PEREP_Analytics

European Private Equity & Venture Capital Association Bastion Tower, Place du Champ de Mars 5 B-1050 Brussels, Belgium T +32 2 715 00 20 F +32 2 725 07 04 info@evca.eu www.evca.eu European Union Interest Representative ID: 60975211600-74

Position Statement

15

Historically, venture capital funds with a fund-of-funds as an investor have not only been able to

attract more ‘private’ money, they also got more access to international pension funds and, albeit

to a lesser extent, insurance companies.

Table 6: Fundraising by venture capital firms in Europe (2007-2012)

(Amounts in € millions)

FUNDRAISING VC Funds with FoF as an LP VC Funds without FoF as an LP

2007-

2012

Early-

stage

Later-

stage

venture

Balanced Total % of

Total

Early-

stage

Later-

stage

venture

Balanced Total % of

Total

Insurance

Companies 354 92 97 542 88 73 171 333

Within

Europe

318 62 97 477 88% 87 73 112 272 82%

Outside

Europe

22 22 4% 1 1 0%

Unknown 13 30 43 8% 59 59 18%

Pension

funds 695 115 317 1,127 317 31 411 758

Within

Europe

442 58 257 757 67% 312 31 364 706 93%

Outside

Europe

231 7 49 287 25% 29 29 4%

Unknown 23 50 10 83 7% 5 18 23 3%

Source: EVCA/PEREP_Analytics

European Private Equity & Venture Capital Association Bastion Tower, Place du Champ de Mars 5 B-1050 Brussels, Belgium T +32 2 715 00 20 F +32 2 725 07 04 info@evca.eu www.evca.eu European Union Interest Representative ID: 60975211600-74

Position Statement

16

Fund size determines and has an impact on the size of investment. EVCA research shows that between 2007and 2012 venture capital funds with a fund-of-funds as an

investor invested a larger amount of money on average per company (see Table 7).

Table 7: Average amount invested by venture capital funds per company (in Euro Thousands)

VC funds with FoF as an LP (Funds with fundraising) VC funds without FoF as an LP (Funds with Fundraising)

Fund stage focus Fund stage focus

Early-stage

Later stage

venture Balanced

Total

venture Early-stage

Later stage

venture Balanced

Total

Venture

INVESTMENTS mk app10

Investment stage focus

Seed 814 0 907 854 2.35 330 326 526 364

Start-up 2,042 2,037 2,242 2,144 1.72 983 676 1,635 1,244

Later stage

venture 2,270 3,578 2,908 2,804 1.33 1,664 1,824 2,198 2,114

Total

venture 2,210 3,203 2,641 2,482 1.80 955 1,308 1,959 1,377

Source: EVCA/PEREP_Analytics

10 Market statistics are an aggregation of figures according to the location of the portfolio company. At European level, this relates to investments in European companies regardless of the location of the private equity firm.

Multiple compared to investments by venture capital funds without a fund-of-funds as an investor

European Private Equity & Venture Capital Association Bastion Tower, Place du Champ de Mars 5 B-1050 Brussels, Belgium T +32 2 715 00 20 F +32 2 725 07 04 info@evca.eu www.evca.eu European Union Interest Representative ID: 60975211600-74

Position Statement

17

Preliminary analysis of the Costs and Benefits of the proposed Partnership

The purpose of a fund-of-funds is to act as an intermediary to bridge the gap between large

institutional investors and smaller venture capital funds.

The additional cost created by inserting the fund-of-funds layer in the financial value chain is

justified by the access it would give to venture capital to those larger pools of international

capital which are currently ‘out of reach’.

Costs in a fund-of-funds structure

The involvement of a fund-of-funds manager will introduce an additional layer of cost. This would

typically lead to an increase in fees of approximately 10% when compared to an equivalent

investment undertaken without this intermediary manager. Figure 4 below demonstrates how – in a

simplified scenario – this would work.

Figure 4

Benefits of the proposed Public-Private Partnership

In order to foster the industry’s basis of innovative tech businesses, the investor base for venture capital needs to be diversified and internationalised. The best way forward would be to create one (or two) further public fund-of-funds, managed by

professional and experienced managers from the private fund-of-funds industry. One of the

advantages of selecting more than one fund-of-funds manager and having multiple smaller fund-of-

funds (rather than one large fund-of-funds) is the wider outreach and scope of target investors:

different managers will have access to different and diverse private sector investor networks. In

order to avoid the risk of duplication, it would be crucial to select a handful of complementary

managers who each offer different things.

General Partner

Underlying portfolio company

Fund-of-funds

LPs (investors)

The underlying company delivers, on

average, a 2.4x return to the GP

Along the way the GP takes around 0.4 in fees and carry, and delivers 2x back to the

fund-of-funds

The fund-of-funds takes around 0.1 and

would deliver 1.90x back to the LPs

18

The investment mandate of such a new fund-of-funds would be limited to European venture

capital, to ensure a focus on the sector.

The European contribution should ideally range between €50 million and €200 million per fund-

of-funds. The private fund-of-funds manager would then - as a minimum - match this European

capital with private money, and if possible secure an even larger contribution from the private

sector.

Multipliers

The economic benefit and impact analysis on pages 20-21 covers six different scenarios, presented

according to two general Approaches. Each scenario starts from the same assumption that the

European Commission would decide to allocate €100 million to the programme.

There are then 3 ‘multiplier’ effects:

1) The fund-of-funds’ capability of attracting additional private money

In Case 3 the private fund-of-funds manager has been able to apply a 1:2 ratio, raising

another €200 million from private institutional investors.

In Case 2 the private fund-of-funds manager has been able to achieve a 1:1 ratio and has

succeeded in matching the European capital with €100 million from private institutional

investors.

In Case 1, the worst case scenario, the private fund-of-funds manager has not been able to

match the European contribution and has not attracted capital from private institutional

investors (1:0 ratio).

These three cases are assessed for each Approach.

2) Sources of funds by type of investor

This criterion relates to the kind of venture capital funds that the fund-of-funds manager

would invest in.

As indicated on pages 13 and 14, the distribution of investors as sources of funding is very

different for venture capital funds with a fund-of-funds as an investor and venture capital

without a fund-of-funds as an investor.

Approach 1 is the more conservative one and assumes that the private sector fund-of-funds

manager would not be subject to any investment conditions or restrictions. We therefore

assume that the fund-of-funds manager would reproduce what he has done in the past and

would follow the current market approach, investing solely in those venture capital funds

that have historically had a fund-of-funds as an investor.

Approach 2 works on the assumption that there would be a requirement on the private

fund-of-funds manager to invest in a broader range of European venture capital funds and

that he would be subject to a number of investment criteria and a specific investment

strategy, regardless of whether those venture capital funds have a track record of fund-of-

funds as investors. In this way, the full universe of European venture capital funds would

be opened up, including both venture capital funds with previous fund-of-funds financing

and venture capital funds that have so far not had a fund-of-funds as an investor.

3) The investment strategy of the actual venture capital funds

As demonstrated on page 16, venture capital funds with a fund-of-funds as an investor tend to

19

invest on average larger amounts of money per portfolio company. Venture capital funds

without a fund-of-funds as an investor tend to invest smaller amounts of capital in a higher

number of portfolio companies.

Depending on the investment strategy and investment scheme set for and by the venture capital

fund-of-funds manager, the ultimate outcome and benefit of allocating European capital to a pan-

European venture capital fund-of-funds would range somewhere between Approach 1 and

Approach 2.

In a more optimistic case, a venture capital fund-of-funds manager would be able to match the

€100 million from the European Commission with another €200 million from private

institutional investors, leading to a total amount of investment of almost €3 billion and

benefiting over 1,300 companies.

Under the most conservative and least optimistic circumstances, in which the fund-of-funds

manager would not be able to attract any private money from institutional investors, the €100

million of European capital would lead to a total investment amount of €327 million benefiting

just over 100 companies.

While the multiplier effect that we assume may be relatively limited, any increase in private (and

especially non-EU) investment would still represent a significant development from where the

industry is today as it gives an indication of the amount of (global) money that would otherwise not

have reached European venture capital.

This should also be seen as a starting point. Once the industry has been able to build up some

dynamism, fund-of-funds and venture capital managers might be able to attract higher amounts of

private international institutional money.

Note:

The following economic benefit and impact analysis has been prepared based on a broad

extrapolation from the entire venture capital asset class (not from an individual fund perspective)

and on historical EVCA data covering a period of 6 years (2007-2012). This means that the

distribution of investors (investor composition) for fundraising and the investment allocation is

representative for the European venture capital industry as a whole and not per fund.

It should also be noted that due to the evolution of the market and the changing investment

climate and business environment, future developments and performance cannot be predicted.

The figures presented on pages 20-21 need to be interpreted against this background; they may

(and will most likely) not be exactly representative/reflective of what the market will look like in

a couple of years’ time. Furthermore, these figures do not take into account any amount of capital

that would be used for fees and other costs.

Therefore, more detailed work is needed to examine, define and capture the real impact of the

European Commission channeling public money into a pan-European venture capital fund-of-funds.

For a complete overview of the Methodology, please see Annex I.

20

Amounts in thousand € Case 1 Case 2 Case 3

FUNDRAISING

European Commission

Funds allocated to the

programme

100,000 100,000 100,000

Fund-of-funds x x x

Additional investors effect 1 2 3

= = =

Total funds raised by the FoF 100,000 200,000 300,000

Venture Capital Funds

2007-2012 Sources of Funds

of VC Funds with FoF as LP

Academic institutions 0.3% 1,089 2,177 3,266

Banks 4.5% 14,603 29,205 43,808

Capital markets 1.3% 4,294 8,587 12,881

Corporate investors 7.9% 25,706 51,413 77,119

Endowments and foundations 3.5% 11,366 22,732 34,098

Family offices 5.6% 18,220 36,440 54,660

Fund-of-funds 30.6% 100,000 200,000 300,000

Government agencies 15.5% 50,629 101,258 151,886

Insurance companies 7.3% 23,820 47,641 71,461

Other asset managers 2.1% 6,793 13,586 20,379

Pension funds 15.1% 49,476 98,951 148,427

Private individuals 5.8% 18,987 37,974 56,962

Sovereign wealth funds 0.5% 1,645 3,291 4,936

Total funds raised by VC funds 100.0% 326,628 653,255 979,883

INVESTMENTS

Investment stage focus

2007-2012

distribution % Amounts Amounts Amounts

Seed 3.4% 11,205 22,411 33,616

Start-up 49.1% 160,448 320,895 481,343

Later stage venture 30.6% 99,952 199,904 299,856

Total venture 83.2% 271,605 543,210 814,815

Growth 11.4% 37,172 74,344 111,516

Rescue/Turnaround 0.1% 370 740 1,110

Replacement capital 0.3% 868 1,736 2,604

Buyout 5.1% 16,613 33,225 49,838

Total investment 100.0% 326,628 653,255 979,883

2007-2012

Average

investment size

Number of

companies

Number of

companies

Number of

companies

Seed 854 13 26 39

Start-up 2,144 75 150 225

Later stage venture 2,804 36 71 107

Total venture 2,482 109 219 328

Growth 4,818 8 15 23

Rescue/Turnaround 799 0 1 1

Replacement capital 1,875 0 1 1

Buyout 4,893 3 7 10

Total investment 2,781 117 235 352

Approach 1

Source: EVCA/PEREP_Analytics

21

Amounts in thousand € Case 1 Case 2 Case 3

FUNDRAISING

European Commission

Funds allocated to the

programme

100,000 100,000 100,000

Fund-of-funds x x x

Additional investors effect 1 2 3

= = =

Total funds raised by the FoF 100,000 200,000 300,000

Venture Capital Funds

2007-2012 Sources of Funds

of all VC Funds (with and without FoF as LP)

Academic institutions 0.2% 2,010 4,020 6,029

Banks 9.5% 94,704 189,407 284,111

Capital markets 2.4% 24,208 48,416 72,624

Corporate investors 13.5% 134,677 269,354 404,031

Endowments and foundations 2.3% 22,919 45,839 68,758

Family offices 6.4% 63,977 127,955 191,932

Fund-of-funds 10.0% 100,000 200,000 300,000

Government agencies 25.9% 257,655 515,311 772,966

Insurance companies 3.9% 38,431 76,863 115,294

Other asset managers 3.1% 30,607 61,213 91,820

Pension funds 8.3% 82,766 165,531 248,297

Private individuals 14.3% 142,080 284,161 426,241

Sovereign wealth funds 0.2% 2,137 4,274 6,411

Total funds raised by VC funds 100.0% 996,172 1,992,344 2,988,516

INVESTMENTS

Investment stage focus

2007-2012

distribution % of

all VC funds

investment

Amounts Amounts Amounts

Seed 4.0% 39,811 79,621 119,432

Start-up 44.1% 438,954 877,907 1,316,861

Later stage venture 35.5% 353,461 706,922 1,060,383

Total venture 83.5% 832,225 1,664,450 2,496,675

Growth 9.0% 89,167 178,334 267,502

Rescue/Turnaround 0.6% 6,166 12,332 18,498

Replacement capital 0.9% 8,867 17,734 26,600

Buyout 6.0% 59,747 119,493 179,240

Total investment 100.0% 996,172 1,992,344 2,988,516

2007-2012

Average

investment size

Number of

companies

Number of

companies

Number of

companies

Seed 468 85 170 255

Start-up 1,746 251 503 754

Later stage venture 2,595 136 272 409

Total venture 2,015 413 826 1,239

Growth 3,834 23 47 70

Rescue/Turnaround 1,488 4 8 12

Replacement capital 1,932 5 9 14

Buyout 3,876 15 31 46

Total investment 2,234 446 892 1,338

Approach 2

Source: EVCA/PEREP_Analytics

22

Job creation

In terms of job creation11, the European Commission funded VICO project12 that uses both in-depth

case studies and quantitative analyses, has found that private equity investments in a country are

negatively correlated with the unemployment rate. Ernst & Young’s study of private equity

divestments, looking at 473 private equity-backed European businesses with an enterprise value in

excess of €150 million at the time of acquisition from 2005 onwards, reports that employment in

private equity supported companies grew by an average of 2.2% per annum. 13 In comparison, the

annual employment growth across EU27 has fluctuated between negative 1.8% and 1.8% between

2007 and 2011.14

Increased fund size

The involvement of a fund-of-funds manager can also help venture capitalists to increase the size

of their funds.

The historical distribution by fund size of European venture capital funds (between 2007 and 2012)

is represented in Table 8, and Graphs 4 and 5. A distinction has been made between venture

capital funds with a fund-of-funds as an investor (Yes) and venture capital funds without a fund-of-

funds as an investor (No).

While the size of the majority (56%) of venture capital funds with a fund-of-funds as an investor

ranges between €50 million and €200 million, about half (49%) of venture capital funds without a

fund-of-funds as an LP tend to have a size ranging between €10 million and €50 million.

Between 2007 and 2012, the average fund size of a venture capital fund with a fund-of-funds as an

LP amounted to €90 million. This compares to €42 million for a venture capital fund without a

fund-of-funds as an investor.

The difference is even more striking when comparing the median fund sizes. Over the same period

of time, half of all venture capital funds without a fund-of-funds as an investor were below €20

million; the median fund size for venture capital funds with a fund-of-funds as an investor was €75

million.

Table 8: Venture capital distribution by fund size (Closed-ended funds with a 2007-2012 vintage)

Average and

median fund size in

€ million

Above

200m

100m-

200m

50m-

100m

20m-

50m

10m-

20m

5m-

10m

2m-

5m

Below

2m Total

YES

Number of VC funds 7 20 22 11 7 8 0 0 75

% of total* 9% 27% 29% 15% 9% 11% 0% 0% 100%

Average fund size 286 129 72 36 13 8 n/a n/a 90

Median fund size 262 127 75 36 12 8 n/a n/a 75

NO

Number of VC funds 13 30 49 107 87 55 31 24 396

% of total* 3% 8% 12% 27% 22% 14% 8% 6% 100%

Average fund size 365 126 65 30 14 7 3 1 42

Median fund size 350 122 68 28 13 7 3 1 20

Source: EVCA/PEREP_Analytics

* The % of total is represented in the bar chart in Graph 6.

11 Frontier Economics, Exploring the impact of private equity on economic growth in Europe, May 2013 12 VICO project, 2011, funded by the European Commission. 13 Ernst&Young, 2011. Branching out: How do private equity investors create value? A study of European

exits. 14 Employment growth statistics sourced from Eurostat.

European Private Equity & Venture Capital Association Bastion Tower, Place du Champ de Mars 5 B-1050 Brussels, Belgium T +32 2 715 00 20 F +32 2 725 07 04 info@evca.eu www.evca.eu European Union Interest Representative ID: 60975211600-74

Position Statement

23

Through a pan-European public-private partnership with a particular focus on venture capital, the industry would be able to increase the number of scale funds and

as such translate this into scale companies and long-term growth for the European economy (see Graphs 4, 5 and 6).

Source: EVCA/PEREP_Analytics

Source: EVCA/PEREP_Analytics

Graph 4: Distribution of Venture Capital funds with a FoF as LP

(Closed-ended funds with a 2007-2012 vintage)

Graph 5: Distribution of Venture Capital funds without a FoF as LP

(Closed-ended funds with a 2007-2012 vintage)

The goal of the Fund-of-Funds is to shift the curve and to increase the number of funds with a higher fund size, thus growing the size of the

effective industry.

24

100%

100%

Graph 6: Venture capital fund distribution by fund size

Source: EVCA/PEREP_Analytics

European Private Equity & Venture Capital Association Bastion Tower, Place du Champ de Mars 5 B-1050 Brussels, Belgium T +32 2 715 00 20 F +32 2 725 07 04 info@evca.eu www.evca.eu European Union Interest Representative ID: 60975211600-74

Position Statement

25

Creating a level playing field for investors in venture capital

In addition to structural issues in the investor base, venture capital fundraising has been

challenged by low returns to investors in recent years.

Unlike other asset classes such as property or later stage private equity, venture capital investors

can not reduce the cost of their equity investment by blending it with cheaper bank financing. This

is because innovative, pre-profit companies can not generally access debt financing. This increases

the risk to venture capital investors and reduces the equity return. Equity investing is expensive.

This means that venture capital firms have to generate a higher return on their equity

investment than other asset classes in order to compete. This is one factor depressing returns to

investors in innovation. The fund-of-funds could be structured to level the playing field.

The European Commission could address this challenge by investing on a non-pari passu basis in

the fund-of-funds if private sector managers feel this would be required in order to attract

international investors to the asset class and overcome the current indifference and

conservatism around venture capital. This could be achieved by way of an upside booster (for

example, differentiated fees) and/or downside protection. A number of structures have been used

successfully in the past at a fund level - the Yozma scheme in Israel is one example - and a number

of scenarios are possible:

There is a low-fixed, preferred return to the European Commission. After this return has been

met the private sector investors capture the rest of the upside and boost the returns of the

fund.

A similar structure to the low-fixed preferred return can be designed with an additional

boosting mechanism: the private sector investors also have the option to buyout the European

Commission at a fixed low rate capturing all the upside of the fund.

These are just examples of how the scheme could work to offer an incentive to the private sector.

It is essential that the European Commission work with private sector fund-of-funds managers

to create flexible, market appealing, schemes.

General design principles of the scheme

The scheme should be based closely on existing private sector fund-of-funds following typical

market characteristics.

The scheme could be based on incentives to attract investors and enhance performance: the

private sector can not be ordered to invest in venture capital.

A limited partnership is a negotiated agreement, not a product that is bought or sold. The

fund-of-funds needs to work with the public sector investor to develop a compelling strategy to

the market - a one-size-fits-all approach will not work.

The fund-of-funds should be able to invest across all industry sectors:

Different sectors have different funding cycles - directing capital to certain themes or

sectors without an accompanying market driver can distort the market.

26

The fund-of-funds manager needs to have the flexibility to develop an investment strategy

which will attract private sector investors to deploy capital in a ten-year investment

programme. A themed approach would reduce the ability to attract private sector

investors.

Innovation can not be produced on demand. Channeling capital to certain sectors is

counterintuitive to how venture capital works in practice and limits the success of public

support. This programme aims to create a thriving venture capital industry with its

celebrated externalities of job creation and growth.

The targeted commitment to venture capital should significantly exceed the public sector

investor’s commitment to any fund-of-funds.

The fund-of-funds are pan-European and could have a variety of strategies (some would be

generalist; others would be specifically dedicated to venture capital). The venture funds in

which they invest should have a high target allocation to European companies.

In order to ensure that the private sector fund-of-funds manager can match the European

capital, there should be a cap on the size of the fund-of-funds and the amount of European

capital flowing into the fund-of-funds. The European contribution should ideally range between

€50 million and €200 million per fund-of-funds. The benefit of having multiple smaller fund-of-

funds over one large fund-of-funds is the diversification in the pool of investors ensuring

different sets of investors and different approaches.

The scheme is a multi-annual programme over the EU Budget period, gradually building

capacity in the market with a number of fund-of-funds.

The scheme could, if necessary, have a mechanism that creates a level playing field for

investors in innovation and venture capital and thereby improve returns - this could be

achieved by a non-pari passu fund structure.

Summary

The European Commission is committed to making “an efficient European venture capital market a

reality”15.. New President Jean-Claude Juncker also mentioned in his introductory speech in

Strasbourg that “we need smarter investment, more focus, less regulation and more flexibility

when it comes to the use of these public funds”16. This can not be done without bringing the

private sector back to venture capital. The proposals outlined in the document are not a request

for subsidies, grants or protection mechanisms such as guarantees, just the smart use of public

sector capital to enable institutional investors either to re-engage with, or start, investing in

European innovation and high technology growth companies.

15 Communication from the Commission “EUROPE 2020 A strategy for smart, sustainable and inclusive growth”

16 A new Start for Europe: An Agenda for Jobs, Growth, Fairness and Democratic Change – Political Guidelines for the next Commission, 15th July 2014

27

Annex I: Methodology

The extrapolation is based on historical data from EVCA/PEREP_Analytics covering a six-year period

between 2007 and 2012.

Fundraising – Investor distribution

We have calculated the average sources of funds (contribution) per investor type for all

European venture capital funds during this time frame. This is an average based on the entire

venture capital asset class as a whole, and not on an individual fund level.

We have then applied the percentages to the €100 million (or €200 million or €300 million for

Case 2 and Case 3 respectively) provided by the European Commission and matched with

private capital.

Under Approach 1, which focuses only on venture capital funds with a track record of having a

fund-of-funds as an investor, fund-of-funds represented on average 30.6% of the total funds

raised by those venture capital funds between 2007 and 2012.

Under Approach 2, which covers the full universe of venture capital funds (i.e. including

venture capital funds with a track record of fund-of-funds as an investor and venture capital

funds without such history), fund-of-funds accounted on average for 10% of the total funds

raised between 2007 and 2012.

The other amounts have then been calculated, applying the respective percentages per

investor and based on the assumption that the €100 million (or €200 or €300 million) represents

30.6% or 10% as the case may be.

For example, under Approach 1 – Case 1, if €100 million represents 30.6% of the overall funds

raised, 15.1% for pension funds would amount to and correspond with €49.5 million.

For example, under Approach 2 – Case 1, if €100 million represents 10% of the overall funds

raised, 8.3% (which is the average contribution by pension funds between 2007 and 2012)

would amount to and correspond with €82.8 million.

This calculation and methodology has been used for each of the three cases under both

approaches.

Investments

A similar approach has been followed for the investments. First we have calculated the

average historical distribution of amounts by investment stage focus for all venture capital

funds under Approach 2 and for venture capital funds with a fund-of-funds as an investor in

Approach 1. These percentages have then been applied to the total amount of funds raised. In

this way we have calculated the total amounts spent in the different investment stages.

For example, under Approach 1 – Case 3, between 2007 and 2012, venture capital funds

invested on average 49.1%% in the start-up stage. 49.1% of the almost €980 million of funds

raised is €481 million.

For example, under Approach 2 – Case 2, between 2007 and 2012, venture capital funds

invested on average 35.5% in later stage venture. 35.5% of the almost €2 billion of funds raised

is €706 million.

For the number of companies, we have first calculated the average investment size, per

investment stage focus, over the period 2007-2012 and have applied those averages to the

28

total amount of investment.

For example, under Approach 1 – Case 2, between 2007 and 2012, venture capital funds

invested on average €2.1 million in the start-up stage. Applying this to the total amount of

investment, €653 million, would lead to 150 companies.

For example, under Approach 2 – Case 1, between 2007 and 2012, venture capital funds

invested on average €468,000 in seed. Applying this to the total amount of investment, €996

million, would lead to 85 companies.

It should be noted that the total number of companies of the three investment stages (seed, start-

up and later stage venture) in each of the six cases will not add up to the total number of

companies for venture capital at large due to the fact that a portfolio company can receive

multiple investments during the different stages of its life cycle. The total number of companies

for all Venture Capital, however, does not include any double counting and reflects the total

number of companies that would be affected by the total amount of investment.

29

Annex II: The European Union Policy Instruments

It is an extremely positive development that both Horizon 2020 and the programme for the

Competitiveness of Enterprises and Small and Medium-sized Enterprises (COSME) explicitly

recognise the use of private sector managed venture capital fund-of-funds as a policy instrument.

Given the continued challenge for raising venture capital funds the EVCA supports in particular:

1. the specific wording on the equity facility providing equity finance for R&I in the Horizon 2020

framework programme for research and innovation (2014-2020)17:

“(…) The Equity facility will focus on early-stage venture capital funds and funds-of-funds providing venture capital and quasi-equity (including mezzanine capital) to individual portfolio enterprises. The facility will also have the possibility to make expansion and growth-stage investments in conjunction with the Equity Facility for Growth under COSME, to ensure a continuum of support during the start-up and development of companies.

(…) The start-up window, supporting the seed and early stages, shall enable equity investments in, amongst others, knowledge-transfer organisations and similar bodies through support to technology transfer (including the transfer of research results and inventions stemming from the sphere of public research to the productive sector, for example through proof-of-concept), seed capital funds, cross-border seed and early-stage funds, business angel co-investment vehicles, intellectual property assets, platforms for the exchange and trading of intellectual property rights, and early-stage venture capital funds and funds-of-funds operating across borders and investing in venture capital funds. (…)

The growth window shall make expansion and growth-stage investments in conjunction with the Equity Facility for Growth under COSME, including investments in private and public sector funds-of-funds operating across borders and investing in venture capital funds, most of which will have a thematic focus that supports the goals of the Europe 2020 strategy.”

2. the specific element of the Horizon 2020 Work Programme 2014-2015 on Access to Risk Finance

that states:

“The Commission aims to make the European venture capital (VC) industry more self-sustainable and globally competitive by reducing its dependence on the public sector and encouraging more investments from institutional and private sources, especially into early and growth-stage funds. Funds-of-funds (FoFs) have the potential to act as intermediaries between such investors and VC and other risk-capital funds investing in SMEs and small midcaps.18”

The EVCA is convinced that deploying part of the European budget via private sector venture capital fund-of-funds managers will succeed in bringing private capital from international institutional investors back into the sector. This outcome would be a big step on the road to solving the structural issues in Europe’s venture capital investor base and provide increased certainty of funding to Europe’s most innovative young companies.

17 European Parliament legislative resolution of 21 November 2013 on the proposal for a regulation of the

European Parliament and of the Council establishing Horizon 2020 - The Framework Programme for Research

and Innovation (2014-2020) 18 http://ec.europa.eu/research/participants/portal4/doc/call/h2020/common/1587761-

06._accesstoriskfinance_wp2014-2015_en.pdf

30

However, even on the most optimistic timeline, the process being envisaged by the European Commission is unlikely to have any real market impact much before 2017, given the decision to proceed with a comprehensive feasibility study.

The EVCA would very much like to see this timeline accelerated, and in the interim there is a

strong case for launching a number of pilot projects as soon as possible in 2014.

i Frontier Economics triangulated various elements of academic research: Popov and Roosenboom (2009) finds that 12% of total European industrial innovation is attributable to private equity, using data on private equity investments and patenting activity from 21 European countries covering the period of 1977-2004; according to the World Intellectual Property Organisation’s (WIPO) database, there were 973,410 patents granted to European companies between 2007 and 2011. Applying Popov and Roosenboom’s estimate to this suggests that 116,000 patents are attributable to private equity-backed companies. Gambardella et al. (2008) find that the average value of a patent held by a European company is €3m. Applying this to the estimated 116,000 patents that are attributable to private equity-backed companies suggests total value of €350bn over five years.

ii Lerner et al. (2011), examining 495 LBO transactions across the world between 1980 and 2005, find that patents filed in the US and which are created by private equity-backed companies tend to be economically more relevant, as measured by the number of citations for these patents. They find that on average, the citations for patents increase from an average of 1.99 times before private equity participation to 2.49 after private equity participation.