european growth capital market overview · media). we strive to pursue both of these strategies in...

EUROPEAN GROWTH CAPITAL MARKET OVERVIEW

SEPTEMBER 2015

EUROPEAN GROWTH CAPITALMARKET OVERVIEW

SEPTEMBER 2015

This presentation has been prepared by Idinvest Partners and/or its affiliates (“Idinvest Partners”) for the exclusive use of the party to whom Idinvest Partners delivers this presentation (together with its subsidiaries and affiliates, the “company”) using information provided by the company and other publicly available information. The valuations, forecasts, estimates, opinions and projections contained herein involve elements of subjective judgment and analysis.

Any information or opinion expressed herein is subject to change without notice. Nothing contained herein is, or shall be relied upon as, a promise or representation as to the past or future. Idinvest Partners, its affiliates, directors, officers, employees and/or agents expressly disclaim any and all liability relating to or resulting from the use of all or any part of this presentation.

This presentation has been prepared solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The company should not construe the contents of this presentation as legal, tax, accounting or investment advice or a recommendation. The company should consult its own counsel, tax and financial advisors as to legal and related matters concerning any transaction described herein. This presentation does not purport to be all-inclusive or to contain all of the information that the company may require.

No investment, divestment or other financial decisions or actions should be based solely on the information in this presentation.

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Idinvest Partners is a portfolio management company authorized and regulated by the AMF under number GP97-123. It is headquartered at 117 avenue des Champs-Elysées 75008, Paris, France. Idinvest Partners is registered with the Paris Trade and Commerce Register under reference B 414 735 175.

DISCLAIMER

IDINVEST PARTNERS117 Avenue des Champs-Elysées

75008 ParisFRANCE

+ 33 (0)1 58 18 56 56www.idinvest.com

Dear investor,

We are pleased to present Idinvest Partners’ new European Growth Capital Market Outlook. Prepared with European investors in mind, it offers insights into the economic impacts of private equity as well as the statistics and prevailing trends of the growth capital market in 2015.

For almost 20 years, Idinvest Partners has been one of Europe’s leaders in growth finance for French and European SMEs. We fund unlisted companies that have attractive development prospects, a proven track record of resilience to market cycles, and a credible strategy for creating value.

In the current European economy, where overall growth remains weak, Idinvest Partners believes that value-creation strategies can be split into two broad categories:• Buy-and-build and other inorganic growth strategies: strengthening companies on the European front

so they can capture growth further afield – backed by Idinvest via both equity and debt.• Innovation strategies: we fund young, innovative companies that capture the potential value in three key

sectors: healthcare, cleantech and new information and communication technologies (internet, digital, media).

We strive to pursue both of these strategies in keeping with the principles of Socially Responsible Investing (SRI), which Idinvest has applied since 2005 and through which we can help make France and Europe’s economies more competitive while at the same time pursuing an ecologically and socially sustainable investment policy.

We hope you will find this material interesting and informative, and urge you to contact us if you have any follow-up questions.

Yours faithfully,

Christophe BavièreCEO

Benoist GrossmannManaging Partner

CONTACT

Olga KoulechovaPartner,Head of Business [email protected]+33 (0)1 58 18 56 58

Estelle [email protected]+33 (0)1 76 21 17 75

Marie-Claire MartinHead of [email protected]+33 (0)1 58 18 56 69

CONTENTS

THE PRIVATE EQUITY MARKET

SPOTLIGHT ON THE EUROPEANGROTWH CAPITAL SEGMENT

Introduction : the economic and financialenvironment of Private Equity

Definition and risk/return profile of the Growth Capital segment

Growth Capital fundraising activity in Europe

Growth Capital investor profile

The Growth Capital market

Growth Capital investees

Main Growth Capital target industries

Investing in Growth sectors

Portfolio exist at post-crisis high and less tied to capital markets

Growth Capital fund performance

Growth Capital fund terms and conditions

Private Equity strategies overview

Private Equity’s impact on the economy

11

01

02

03

04

05

06

07

08

09

10

02

03

11

16

22

28

31

32

38

40

43

44

52

55

58

28

Private Equity fundraisingReturns Correlation, Beta, alpha and portfolio constructionDry powderRegulations

Economic and social impact of Private Equity on the world economyPrivate Equity and jobsEuropean entrepreneurs: optimistic despite the uncertain economic backdrop

16

17

19

20

21

22

24

27

01

EUROPEAN GROWTH CAPITAL MARKET OVERVIEW - SEPTEMBER 2015 11

One of France’s greatest bulwarks against stagnant growth and the struggling economy, both at home and Europe-wide, is entrepreneurship.

The top priority right now should be to invest in innovative companies: to give them the equity and debt financing they need to grow organically and externally, to expand across borders, to innovate, to build their growth story.

Unfortunately the poor economic outlook has had a direct impact on both French and European corporate finance, provoking risk aversion and wait-and-see attitudes among investors. Companies in these spaces have found their access to equity as well as debt increasingly constrained, especially SMEs, whose freedom to tap capital markets is limited. Regulatory developments such as Solvency II and Basel III have thrown additional obstacles in their path.

Against this pressurized backdrop, several European countries (including France) have made a national cause out of growth finance. Indeed, corporate investment – without which there can be no jobs recovery – merits greater emphasis amid the so-far timid comeback announced in France and Europe, where SMEs and midmarket companies play a decisive economic role.

Many SMEs are natural candidates for private equity or private debt financing, but experience difficulties securing it because so much private capital is earmarked for companies that have already attained midmarket status.

THE PRIVATEEQUITY MARKET

INTRODUCTION :THE ECONOMIC AND FINANCIAL

ENVIRONMENT OF PRIVATE EQUITY01

Difficulties persist at the base of the market,in core SME financing.

12 EUROPEAN GROWTH CAPITAL MARKET OVERVIEW - SEPTEMBER 2015

A PRUDENT ECONOMIC OUTLOOK

Compared to large-cap companies with significant international operations, SMEs and midmarkets tend by nature to have greater local exposure, which in this case means more exposure to European and domestic conditions. Even though Europe’s economy undeniably appears far less fragile than at the height of the recent financial crisis, an investment strategy for European SMEs and midmarkets cannot be based solely on blind faith in extensive local organic growth.

The design of an effective SME financing strategy must take into account this basic assumption: that it is not viable simply to hope for widespread, rapid European GNP growth.

THE MAIN DRIVERS OF GROWTH CAPITAL STRATEGIES

Certain SMEs have continued to flourish despite the current macroeconomic climate of low growth. The following three trends emerge as consistent predictors of outperformance:

a. Innovation

Innovation is a source of decorrelation from prevailing economic cycles. Examples abound: a drug proven to treat a disease more effectively and cheaply than others will sell better and generate a bigger profit, no matter how the economy is performing. Obviously, as a general rule, this does not apply exclusively to SMEs. But according a recent and accelerating trend, there is a form of innovation that is thriving at SMEs, having all but disappeared from the largest corporations.

Private equity markets are well suited to the financing of innovation-based growth strategies. They provide access not only to capital but also to essential business support in the shape of advice, assistance, board presence and more.

Investing in growth through innovation is sometimes mistakenly held to be the same as investing in research and development. This has never been further from the truth. New innovations – in the digital, healthcare and environmental spheres, for example – tend to “go global” immediately, and sufficient capital financing is one of the key ingredients needed to successfully harness the growth potential offered by such worldwide exposure. In other words, both the need for capital and the return on it are greatest during those early phases when growth is accelerating and money is required to fuel an innovation’s acceptance by the market.


b. Exports

While spontaneous organic growth seems set to remain weak in the mature and aging markets of Europe, the emergence of a middle class in other areas of the world offers increasing opportunities for SMEs. However, SMEs and midmarket companies lack the scale advantage of their larger counterparts and will need time and support to implement an effective international growth strategy.

With exports, as with innovation, the factors to consider are the quickening tide of interest in emerging markets and tight financing needs. Even SMEs that lead the market for their particular product will require progressively heftier amounts of both equity and debt capital – and faster execution than their competitors – to stake a successful claim In China, India or Brazil.

c. External growth

Achieving faster organic growth can be difficult enough for a French SME at the top of its market, but sometimes penetrating emerging markets is just as hard or harder. In such cases, external growth may provide a viable alternative. Helping French SMEs acquire their European competitors and thus consolidate their field of play is an effective value creation strategy and a nice fit for private equity investors, who are often in a good position to provide outsourced M&A services to their portfolio companies.

Note that this strategy applies particularly well to the current landscape of European SMEs since, unlike the largest capitalizations, they continue to form a diverse patchwork of local market leaders. European SME consolidation is an accelerating process that lends itself readily to private financing through a combination of equity investments and leveraged acquisitions.

Here again, access to appropriate financing is a key driver of business success. Quite a few well managed French SMEs that enjoy leading positions in their sectors, but that may be left out due to a lack of financing for external growth, risk making perfect targets for their German, American and Chinese competitors.


GLOBAL KEY FIGURESWORLD

2,206

$1.24 tn

$104 bn

33%Number of private equity funds on the road at the end of Q1 2015.

Private equity dry powder record, end-March 2015.

Biggest private equity-sponsored buyout in Q1 2015.The Kraft/Heinz merger is also the second-biggest dealever recorded.

Total achieved by the 166private equity funds thathad their final closesometime in Q1 2015

One third of surveyed LPswant to increase theirprivate equity allocationin 2015

$40 bn

Source : Preqin - Q1 2015


PRIVATE EQUITY STRATEGIES OVERVIEW02

PRIVATE EQUITY FUNDRAISING

According to a study conducted by Preqin, 166 private equity funds reached a final close in Q1 2015, a decline of nearly 50% from Q4 2014, when 324 vehicles closed. A similar trend was observed the year before, between Q4 2013 and Q1 2014, when the number of closings fell 34%.

However, the level of aggregate capital raised has not diminished proportionally. Private equity vehicles closed in the first quarter of the year collected $104 billion, just 36% less than the previous quarter, indicating an increase in the average final fund size. Preqin also observes that 50% of vehicles closed in Q1 2015 exceeded their targets, while a further 24% met their targets.

INVESTOR APPETITE

As reported in the summer 2015 edition of Coller Capital’s Global Private Equity Barometer, a majority of LPs expect to boost their private equity allocations. A full 49% of European fund subscribers report underexposure and 74% indicate an intention to increase the weight of private equity holdings in their portfolios. LPs in North America (56%) and Asia (43%) plan to do the same. This response is not surprising given that nearly 80% of all private equity portfolios deliver annual net returns of more than 11% over their lifetimes, according to the Coller Capital survey. In addition, as equity markets are currently at lofty valuation levels, institutional investors are looking for alternative investment vehicles offering attractive returns. Private equity provides a good fit for those investors in light of their financial constraints.

Global quarterly private equity fundraising, Q1 2010 - Q1 2015

No. of funds closed

No. of funds closed

Aggregate capital raised ($bn)

500

400

300

200

100

0Q1 Q1 Q1 Q1 Q1Q2 Q2 Q2 Q2 Q2Q3 Q3 Q3 Q3 Q3Q4 Q4 Q4 Q4 Q4 Q1

2010 2011 2012 2013 2014 2015

7564

195

236198

363

227 217

391 408

279250 245 251

311

399

263294

272

324286

303

83 73 77 67100

127154

180

111

156

108

162 166

1041089199 89 8793

Source: Preqin


Private equity quarterly index by fund type

RETURNS

Robust and attractive returns

Private equity has consistently outperformed the stock markets since 2000. Its outperformance is especially pronounced during hard times, which makes it an all the more attractive investment. The 2007 financial crisis only widened the gap in returns between private equity and stock market indices.

Private equity’s outperformance of listed assets is tied to its long-term investment approach involving a rigorous selection process, the alignment of shareholder and investor interests, and efficient governance. This gives the private equity asset class relatively low volatility and good resilience to economic cycles, allowing for greater visibility. The absence of trading activity and the fact that private equity investments are held to maturity significantly reduces volatility in the asset class. Moreover, valuation is based on company fundamentals rather than market fluctuations.

600

500

400

478

379

289

200196

90

300

200

100

31 d

ec 0

0

30 ju

n 04

31 d

ec 0

7

30 ju

n 11

30 ju

n 01

31 d

ec 0

4

30 ju

n 08

31 d

ec 1

1

31 d

ec 0

1

30 ju

n 05

31 d

ec 0

8

30 ju

n 12

30 ju

n 02

31 d

ec 0

5

30 ju

n 09

31 d

ec 1

2

31 d

ec 0

2

30 ju

n 06

31 d

ec 0

9

30 ju

n 13

30 ju

n 03

31 d

ec 0

6

30 ju

n 10

31 d

ec 1

3

31 d

ec 0

3

30 ju

n 07

31 d

ec 1

0

30 ju

n 14

Inde

x R

etur

ns (R

ebas

ed to

100

as

of 3

1-D

ec-2

000)

0

Source: Preqin

Preqin - Buyout Index

Preqin - Distressed Private Equity Index

Preqin - Venture Capital Index

Preqin - Fund of Funds Index

S&P 500 TR Index

Preqin - All Private Equity Index


PME+ for Private Equity vs MSCI Europe Standard Index (at Dec. 31, 2014)

PUBLIC MARKET EQUIVALENT (PME)

Public market equivalent, or PME, is a performance measure that calculates an alternate internal rate of return (IRR) by applying the investment cash flows of the private equity vehicle to a public benchmark. Thus the performance of a private equity holding can be compared with that of a roughly equivalent stock market investment. The alternate PME IRR represents the return an investor could have obtained by buying or selling the index every time there was a capital call or distribution, respectively, by the private equity fund.

Below is a graph of the PME for private equity as a whole using the MSCI Europe index according to Preqin.1 It shows private equity outperforming the PME vehicle between 2000 and 2012.

1Preqin uses the model developed by Capital Dynamics, which applies a fixed scaling factor to private

equity distributions to keep the end-of-period net asset values (NAVs) of the PME and private equity

vehicles the same.

2000

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

16.94

15.7

60.26

12.57

52.6

21.06

21.23

39.43

14.81

7.66

46.94

38.47 N/A

15

8.02

19.34

9.4

13.2

10.47

11.22

10.53

6.92

10.45

6.86

10.29

5.02

10.15

7.38

5.3

7.29

4.85

7.19

2.9

8.14

2.73

6.49

Vintage Median IRRPME+ Benchmark

(MSCI Europe)Capitalization

(USD Bn)

Median privateequity IRR

PME+ Benchmark (MSCI Europe)

25

20

15

10

5

PM

E Va

lue

(%)

02000 20062002 20072003 20082004 20092005 2010 2011 2012


As reported by Pantheon in a recent study, private equity assets behave similarly to public equities in the long run, but outperform them: 2

Beta is a measure of volatility or sensitivity to market changes. By definition, a beta of close to 1 suggests that the potential value of private equity investments generally moves in step with public market returns.

Based on Pantheon’s historical dataset, private equity added value to a portfolio of public equities via an annualized alpha of 3.16%. Alpha is the excess return on a portfolio, stock or security in relation to a benchmark, often calculated using the capital asset pricing model (CAPM).

Pantheon’s alpha suggests that, over the sample period, private equity gave access to additional annualized average returns of 3.16% that could not have been achieved by investing in public equities.

Private equity provides diversification benefits when included in a portfolio with listed stock

Consequently, adding private equity to a portfolio of public equities provides diversification benefits. This correlation was calculated, for private equity, on the basis of data for all US buyout funds of vintage years 1992 to 2004, as reported by Preqin. For public equities, Pantheon used the CRSP U.S. Total Market Index published by the Center for Research in Security Prices, covering all of the US equity market including small and middle capitalizations.

The results indicate that adding private equity to a portfolio of randomly selected public equities may raise risk-adjusted returns.

The mean-variance analysis conducted by Pantheon suggests that an optimal portfolio of risky assets should include up to a 38% commitment to diversified private equity funds, where uncalled capital and distributions are invested in the public market. Although the secondary market for private equity fund units is developing rapidly, private equity remains a relatively illiquid asset class. Adjusting for this, the optimal allocation suggested by Pantheon is 23.6% for an investor with liquidity constraints.

According to Pantheon’s findings, the correlation between private equity and the public market is 70.1%.

According to Pantheon’s estimate, the beta of private equity in relation to the public market is 1.05.

2 Ian Roberts, Can Private Equity Improve the Risk-Return Characteristics

of a Portfolio of Public Equities?, April 2015

CORRELATION, BETA, ALPHA AND PORTFOLIO CONSTRUCTION


DRY POWDER

The graph below, produced by Preqin, shows the level of dry powder (uncalled capital commitments) in the private equity industry.

Much of this dry powder is in buyout funds (37%) and venture capital funds (11%).

Growth capital was the fastest-growing segment between December 2014 and March 2015, with a 23% increase in dry powder.

Preqin notes a 13% spike between December 2014 and March 2015.

Dry powder has increased every year since 2012 and stoodat $1.24 billion in March 2015.

Private equity dry power by fund type, December 2003 - March 2015

Other

Venture Capital

Real Estate

Mezzanine

Growth

Distressed Private Equity

Buyout

1,400

1,200

1,000

800

600

400

200

Dry

Pow

der

($bn

)

0

dec-

03

dec-

04

dec-

05

dec-

06

dec-

07

dec-

08

dec-

09

dec-

10

dec-

11

dec-

12

dec-

13

dec-

14

mar

-15

Source: Preqin


In the aftermath of the financial crisis, the private equity industry has been under heightened scrutiny by authorities, and the regulatory environment is becoming more complex. As reported by Preqin, 21% of investors believe regulations will pose a challenge in the coming years.

AIFMD IN EUROPE

The implementation of the Alternative Investment Fund Managers Directive (AIFMD) continues in EU countries. The aim of this directive is to provide a framework for the oversight of alternative investment fund managers (AIFMs) operating in the EU and to provide greater transparency and security for investors as to the way funds are managed and operated. The directive also aims to define a common European standard in this area by introducing an AIFMD passport for the marketing of funds by the alternative investment industry.

The implementation of this directive and the passport by the regulatory authorities in each country continues to cause complexities for fund managers. The introduction of the EU marketing passport, originally expected by 2016, will certainly be delayed.

Such regulations will also make access to the European market more difficult. According to Probitas Partners, small/mid-cap fund managers outside the EU are likely to avoid raising capital in the eurozone.

However, the AIFMD does not apply to Switzerland, which is not an EU member, although foreign fund managers raising capital from Swiss investors and not regulated by FINMA (the Swiss Financial Market Supervisory Authority) must now be registered. This is an additional barrier to entry for smaller fund managers.

• More stringent regulations have compelled funds to ensure greater transparency.

• The UN-backed Principles for Responsible Investment (PRI), launched in 2005, are now applied operationally and influence funds’ investment decisions.

• Public policy guidelines are converging with regulatory initiatives.

CONVERGENCE BETWEEN REGULATIONS ANDPUBLIC POLICY


PRIVATE EQUITY’S IMPACTON THE ECONOMY

Source: Frontier Economics, “Analytical framework: transmission channels” from a report prepared

for EVCA in May 2013

With Europe’s economies stuck in the doldrums since the 2008 crisis, financial markets and private equity in particular have two responsibilities. One is to boost the eurozone recovery by financing SMEs and midmarket companies that demonstrate strong growth potential. The other is to attract institutional investors by offering an attractive risk/reward profile.

In a report prepared for the European Private Equity and Venture Capital Association (EVCA), the consulting firm Frontier Economics studied the impact of private equity on economic growth in Europe.

The methodology used by Frontier to identify links between private equity and economic growth is based on three “building blocks.”

Frontier’s three building blocks of the underlying causation chain from private equity to economic growth are: private equity “activities”, the intermediate “outcomes” of those activities, and their eventual long-term “impacts” on the underlying companies, business sectors and the economy as a whole.

03

ECONOMIC AND SOCIAL IMPACT OF PRIVATE EQUITY ON THE WORLD ECONOMY

Attracts investable

funds

Offers investors alternative investment

opportunities

Invests in SMEs and larger companiesto support their . . .

Startup Growth Succession Recovery

Provides managerialfunctions, business

standards and know-how

Corporate governance

Management and industry

expertise

Increasedcapital

investment in the EU

Additional asset class

and attractive investment

returns

New business creation and sustainable employment

Improved management methods

New products and

processes

Improved corporate recovery

Improved corporate

performance

Greater innovation Increased productivity Enhanced competitiveness

Economic growth

PE

Act

iviti

esO

utco

mes

Impa

cts a b c


a. Greater innovation

Private equity firms provide not only capital (equity and debt) but also operational and strategic support to the companies they invest in, giving business managers guidance on how to improve their organization’s processes and performance.

Private equity thus fosters innovation both directly, by allocating more funds to research and development for new products and processes, and indirectly, by investing in young (more innovative) companies.

b. Increased productivity

Economic growth is associated with improvements in productivity. More efficient production allows for more efficient use of resources.

As mentioned above, private equity contributes to improvements in management and/or resource allocation, which ultimately leads to increased productivity and thus economic growth.

For example, private equity funding can enable a company to make new investments in plants, buildings and equipment that will increase its production capacity.

c. Enhanced competitiveness

One of the necessary conditions for economic growth is the improvement of an economy’s productivity and therefore the enhancement of the productivity of individual businesses.

By helping portfolio companies improve their productivity, private equity funds can make them more competitive in their domestic markets as well as internationally.

According to the Frontier report, the three main impacts of private equity on Europe’s growthprospects are:


PRIVATE EQUITY AND JOBS

The VICO4 project, funded by the European Commission to measure the impact of private equity financing on the performance of innovative companies in Europe, found that private equity investments are negatively correlated with the unemployment rate.

In Ernst & Young’s report5 on European exits6, private equity-backed companies grew their staff by an average of 2.2% per annum.

For comparison purposes, according to Eurostat statistics, job growth in Europe’s 27 member states fluctuated between -1.8% and 1.8% from 2007 to 2011.

Private-equity ownership also seems to be associated with a high level of employee satisfaction.7

On December 10, 2014, the French private equity association AFIC (Association Française des Investisseurs pour la Croissance) and EY released a report on 2013 growth data for 2,889 companies backed by French private equity funds, using comprehensive revenue and workforce disclosures obtained by AFIC.

The report compares the growth of private equity-backed companies with that of the French for profit sector in general.1

According to the Frontier Economics study, recent available data suggests that investment by private equity funds leads to more stable job creation.

4 VICO project, 2011, funded by the European Commission. http://cordis.europa.eu/publication/

rcn/14044_en.html5 Ernst&Young, 2011. Branching out: How do private equity investors create value? A study of European

exits. Available at: http://www.ey.com/Publication/vwLUAssets/ Private-equity-creates-value-in-

Europe/$FILE/Euro_PE_ Study_2012.pdf6 Sample of 473 companies in Europe7 Gospel et al., 2010, Employee participation and corporate governance, in The Oxford Handbook

of Participation in Organisations

1 More specifically the “market sector” as defined by France’s national statistics agency: “Market

goods and services are generally intended to be sold on the market at a price calculated to cover their

production cost” (INSEE).

ECONOMIC AND SOCIAL IMPACT OF FRENCH PRIVATE EQUITY


In 2013, France’s for-profit sector continued to suffer from the sluggish economy and posted significant job destruction. AFIC reports a 9.5% drop that year in SME investment, which hit its lowest point since 2000, as well as nearly 175,000 additional fully-unemployed jobseekers.

Companies backed by private equity, on the other hand, continued to create jobs.

Between 2009 and 2013, the 2,889 companies in the sample group created more than 250,000 jobs, while France’s for-profit economy as a whole shed nearly 60,000.

Revenue figures tell a similar story. Economic growth continued to stagnate in 2013 for France and its principal trading partners: French nominal GDP growth fell yet again, to 1.1%, with the US and EU economies also experiencing a slowdown.

However, French companies backed by French private equity showed strong momentum. Revenue in France and abroad for the companies in the sample group grew by 1.4%.

Net new jobs* for the 4 years from(December 31, 2009 to December 31, 2013)

Revenue growth** (2012 to 2013)

French for-profitsector

2,889 PE-backed French companies

+253,128 jobs.

-59,800 jobs.

French nominal GDP

2,889 PE-backed French companies

+1,4%

+1,1%

* Not like-for-like. French companies’ workforces in France and abroad.

Sources: AFIC/EY – INSEE

** French companies’ revenue in France and abroad.


Since 2011, net new job creation by private equity-backed French companies has evolved positively despite the opposing national trend.

Revenue growth also reflects a superior overall performance by private equity-backed companies in the face of economic woes.

2009 2010 2011 2012 2013

-59,800 jobs

+8,300 jobs

+115,300 jobs.

+56,900 jobs

+61,293 jobs

+137,364 jobs

+217,031 jobs

+253,128 jobs

Base 0

* Not like-for-like. French companies’ workforces in France and abroad.

Sources: AFIC/EY - INSEE

* Not like-for-like. French companies’ revenues in France and abroad.

Sources: AFIC/EY - INSEE

French for-profit sector

Net new jobs created by French companieswith backing from French private equity*

French nominal GDP

Aggregate revenue growth of French companies backedby French private equity*

2009 2010 2011 2012 2013

109.0107.8

106.2

103.1

107.2

114.5

119.1120.7

Base 100


Despite the dull economy, entrepreneurs remain upbeat. Judging by a Hogan Lovells-commissioned Financial Times survey, levels of optimism among corporate leaders in the United Kingdom, the United States, continental Europe and Asia are high for the current climate of uncertainty. Even though economies have contracted for several successive quarters, more than eight out of ten bosses – when asked how they see their companies growing over the next two years – foresee organic growth in their existing markets. Nearly six in ten are considering expanding to new geographical areas, while 56% express an interest in domestic mergers and acquisitions.

These responses conflict with the fears expressed by executives about the climate of uncertainty in the eurozone. European firms cited government intervention and protectionism, for example, as a possible stumbling block to mergers and acquisitions.

In France, the most recent “Envie d’Entreprendre” survey8 – conducted by Idinvest in partnership with newspaper Le Figaro – revealed the country’s strong entrepreneurial drive. An appetite for business creation was expressed by 34% of respondents between February 20 and March 3, 2015.

8 Given to a representative sample of 5,000 French adults based on quotas for gender, age, profession,

region and size of town of residence..

EUROPEAN ENTREPRENEURS: OPTIMISTIC DESPITE THEUNCERTAIN ECONOMIC BACKDROP


Growth capital investments take place at critical times in a target’s development when fresh funding can unleash significant revenue growth. On the business maturity spectrum of the private equity industry, growth capital deals are typically considered to sit somewhere between venture capital and buyouts.

There are several key differences between growth capital and venture capital for private equity investors. Unlike venture capital, which backs promising but untried ideas, growth capital finances more mature enterprises with proven business models. This makes for limited technology risk. Moreover, whereas venture capital funds will tend to select groups of targets from the same industry, growth capital funds sponsor only the demonstrable market leaders. The investment decision criteria are also different in that venture capital funds analyze projected revenues while growth capital looks for a robust strategy aimed at achieving specific profitability objectives.

On the other side of the maturity spectrum, buyout funds usually take majority equity stakes, as opposed to the minority positions preferred by growth capital funds. Growth capital funds also generally target companies that have little to no leftover free cash flow (and lower short-term profit margins) because they choose to reinvest that money in growing the business.

This cash squeeze makes heavy leverage impossible, leading to low levels of debt and thus reduced default risk among growth capital targets.

SPOTLIGHT ON THE EUROPEAN GROWTHCAPITAL SEGMENT

DEFINITION AND RISK/RETURN PROFILE OF THE GROWTH CAPITAL SEGMENT01

Growth capital is the subset of private equity deals focused on facilitating the development of established ventures by financing their expansion, new market penetration and strategic acquisitions.


Buyout

Distressed private Equity

Fund of funds

Growth

Infrastructure

Mezzanine

Secondaries

Venture Capital

12.0 %

12.6 %

15.0 %

8.9 %

7.0 %

11.0 %

10.0 %

8.6 %

1,186,070

113,472

225,645

115,091

235,547

92,720

157,133

99,405

16.7%

12.8%

14.0%

16.8%

7.6%

16.6%

12.8%

5.4%

Type of strategy Standard deviation of net IRR (%)

Sum of fundsizes ($m)Median net IRR (%)

The main risks faced by growth capital investors are execution risk and management risk. Venture capital investors take on those same risks, in addition to product risk, making venture capital theoretically the riskiest private equity asset class. Buyout investors have to contend with credit risk, which is rare in growth capital deals. Buyouts are considered the least risky private equity segment, with growth capital opportunities offering a moderate level of risk.

In actual fact, the statistics gathered by Preqin on vintage 2008 to 2012 funds show that the risks of investing in venture capital, growth capital and buyouts are roughly similar. As the table below illustrates, the three strategies exhibit comparable standard deviations of net IRR.


Below is the graph of private equity risk/return profiles plotted by Preqin.

According to Taylor Wessing, buyout and venture capital funds are setting their sights on the growth capital segment. An influx of cash to those markets has led to price pressure on deals, making growth capital opportunities more attractive.

By making the shift towards growth capital, venture funds can continue using their expertise to back companies in transformation phases while having some cash flow to help reduce risk. Financing more mature enterprises also enables venture funds to shorten their time to exit.

The motivations for buyout funds to back less developed companies are different. Businesses in need of venture capital are typically not in a position to take on major leverage. Even if generally profitable, they have minimal cash flows and prefer to reinvest their profits in further growth rather than interest payments.

Buyout funds tend to concentrate on operational improvements and financial engineering to generate returns. But in an environment where the leverage on deals has been low since the subprime crisis and where financial engineering cannot necessarily be counted on to generate a return, growth capital deals can offer similar returns with very moderate leverage.

«As venture houses change their risk profile to

look at mature businesses, they are increasingly

looking at companies in need of growth capital,

while difficult leverage markets are causing

buyout specialists to look at businesses which

aren’t suitable for leveraging but could offer high

returns. In the future we may see buyout and

venture investors co-investing in the same deal».

Taylor Wessing - Unquote

Risk/return profiles

2%

Ris

k –

stan

dard

dev

iatio

n of

net

IRR

(%)

0%

4%6%8%

10%12%14%16%18%20%

5% 10% 15%

Return – median net IRR (%)

Buyout

Distressed Private Equity

Fund of funds

Growth

Infrastructure

Mezzanine

Secondaries


The total capital raised in 2014 by European funds with a growth strategy was up nearly 65%year-on-year at 1.8 billion (2013: 1.1 billion). The number of growth capital funds closed during the year also increased, to 25 (2013: 22).

In sync with the ups and down of the financial markets, the number of final fund closings and the capital raised by those vehicles has increased for the past two years. Unlike the rest of the industry, growth capital funds have returned to pre-crisis levels. Despite a drop in 2012, the trend is now towards an increase in both capital commitments and final fund closings.

GROWTH CAPITALFUNDRAISING ACTIVITY IN EUROPE 02

2007 – 2014: Growth capital fundraising in Europe

2007 – 2014: Number of European growth capital fund closings in the year (final or interim)

Source: EVCA / PEREP_Analytics

Source: EVCA, PEREP_Analytics

€ bi

llion

Num

ber

of fu

nd c

losi

ngs

0.50 2007 20122008 20132009 20142010 2011

11.5

2.52

33.5

44.5

1.3

3.6

1.1

2.6

4.4

0.5

1.1

1.8

5

02007 20122008 20132009 20142010 2011

10

15

25

20

30

35

2624 23

28

32

18 19

25


Since the financial crisis of 2009, risk aversion has remained strong and European institutional investors have displayed an increasing interest in the growth capital segment. This is because more mature and less leveraged investment targets mean lower levels of risk.

According to Preqin, even though buyout and venture capital remain the fund types most sought after by investors, statistics bear out the attractiveness of growth capital. While 52% of investors canvassed from the database conveyed an appetite for buyout funds and 59% said they preferred venture funds, Preqin’s Investor Intelligence division nonetheless reports that, of the 5,346 private equity investors in their system, two fifths have invested in a growth capital fund or show a preference for such vehicles.

The Preqin survey has 11% of investors identifying growth capital as the best investment opportunity and 18% considering a growth capital investment sometime in 2015.

Government agencies and insurers account for more than half of the growth capital investor base. Banks and pension funds represent 9.4% and 13.2% respectively.

40.7%

0.4%

9.4%6.2%

13.2%

7.5%

22.5%Government agencies

Funds of funds

BanksHigh-net-worth individuals

Pension funds

Other asset managers

Insurance

Source: EVCA, data at 05/30/2015

Investors in European growth capital funds in 2014

GROWTH CAPITAL INVESTOR PROFILE03


Change in growth capital fundraising amounts from 2010 to 2014, by investor type as a percentage of total funds raised

Source: EVCA, data at 05/30/2015

As the graph above shows, the portion of commitments to growth capital funds by public agencies and insurance companies increased significantly from 2013 to 2014. Funds of funds and corporates reduced their investments during the same period.

GOVERNMENT INITIATIVES

With backing from institutional investors, governments are looking to kick start growth by investing in SMEs and midmarket companies both directly and via funds.

60%

50%

40%

30%

20%

10%

2010

0

70%

2011 2012 2013 2014

The increasing weight of public sector commitments to growth capital funds (see graph above) is attributable in part to the proliferation of government initiatives to stimulate the economy.

Academic institutions

Bank

Capital markets

Family offices

Corporate investors

Fund of funds

Government agencies

Pension funds

Insurance companies

Sovereign wealth funds


Below are some examples of European stimulus programs.

European Union

In an effort to enhance Europe’s competitiveness and appeal, the EU has established a research and innovation program that invests in promising new technologies and businesses to drive “smart, sustainable and inclusive” growth. The Horizon 2020 program started on January 1, 2014 with total funding of €79 billion available over the 2014-2020 period and will focus its commitments on its three program sections: “excellent science,” “industrial leadership” and “societal challenges.”

France

French institutions have also brought forth a number of economic stimulus initiatives.

In May 2015, the European Investment Fund (EIF) and Bpifrance signed a guarantee agreement providing loans of €420 million over two years to innovative French SMEs and midmarket companies. France’s minister of the economy, Emmanuel Macron, has said this will make it possible to finance more investments, more quickly, in projects with more risk.

Also in 2015, the French government launched the Novi fund, structured by Caisse des Dépôts and backed by institutional investors. The fund is managed by Idinvest Partners alongside Oddo AM, and Tikehau alongside Financière de l’Echiquier. It is an extension of the Nova and Novo fund lines designed to address the lack of SME finance in France.

Novi will give investors the chance to finance listed and unlisted French SMEs in the €30 million to €200 million revenue range, especially those with plans for innovative internal, external or international growth in one of the economy ministry’s nine priority sectors for industrial development. Novi offers more financing options than its predecessors, allowing issuers to choose from a wide array of instruments including equity, bonds and loans, or a combination of the two.

Novi subscriptions have already surpassed the fund’s initial €300 million investment target, giving it a final size of €580 million, with contributions from 19 insurers, 3 pension funds, and its promotor Caisse des Dépôts.

United Kingdom

The UK government has set up a number of programs with the aim of giving businesses easier access to finance. Grants and loans offered to entrepreneurs by the government and the European Union total nearly £2 billion.

Businesses in search of funding in amounts of less than £1 million may apply for support through Regional Growth Fund (RGF) programs. These programs are managed by national or local organizations. A total of £1.7 billion has been allocated to RGF programs since 2011, supporting over 12,750 SMEs. In order to be eligible for funding, businesses must be based in England, have a plan to strengthen or grow their business, create or protect jobs, and be investing private capital.

The UK government has also established what it calls Enterprise Capital Funds (ECFs) to back young, innovative businesses in need of funding to reach their full growth potential. Each ECF is allocated up to two thirds of the fund size or £25 million by the government and the remainder is raised from private investors. ECFs are able to invest in funding rounds of up to £2 million. Twelve funds of this type have been launched since the start of the program in 2006 and nearly £180 million has been invested.


Spain

FOND-ICO Global, established by Instituto de Crédito Oficial (ICO), a state-owned bank attached to the Spanish Ministry of Economic Affairs and Competitiveness, has become the key driver of the private equity recovery in Spain.

The establishment of this fund responds to a concern of venture and growth capital firms, who want to see greater involvement by the public sector in creating and expanding alternatives to bank financing for businesses at all development stages. FOND-ICO Global will invest in the seed to growth capital range.

In 2014, commitments recorded for investments in Spanish companies following FOND-ICO Global’s first two funding rounds amounted to €1.33 billion, three times the total amount raised by the entire Spanish private equity industry in 2012.

In the region of Catalonia, Institut Català de Finances (ICF) aims to promote and facilitate access to finance for Catalan SMEs and midmarket companies. Its two main branches of activity are debt financing (loans and guarantees) and equity (seed, venture and growth capital). ICF belongs to the Autonomous Government of Catalonia and is a significant contributor to the revitalization and growth of the region’s economy. According to its 2014 annual report, ICF has invested close to €120 million in venture and growth capital via 28 vehicles, four of which it manages directly.

Pologne

The European Investment Fund (EIF) and Bank Gospodarstwa Krajowego (BGK) have set up the Polish Growth Fund of Funds (PGFF) to boost the level of equity investment in high-growth companies both in Poland and other Central and Eastern European (CEE) countries. With the fund’s first closing announced at €90 million, it is expected that other investors will join the initiative to reach the target size of €180 million at final close. The PGFF will build a portfolio of investments in venture and growth capital, private equity and mezzanine debt, in Poland and across Central Europe, for an investment period of five years.

The EIF will leverage its expertise and experience managing similar initiatives all over Europe to assist the PGFF. The fund will start out at a size of €90 million, combining €30 million in EIF commitments with €60 million from BGK. Each selected underlying fund will undertake to invest at least twice its allocation in Polish companies.


KEY CHALLENGES FOR LPs

Investors interested in the growth capital segment of private equity face some important decisions.

The deployment of funds committed by LPs irrespective of market conditions is a key challenge. An LP’s private equity firm of choice must favor a cross pollination approach and be able to seize opportunities across multiple channels, through direct investment, equity purchases on the secondary market, investments in funds, purchases of fund units on the secondary market, and co-investment.

A flexible investment strategy allows for adjustments in the portfolio to match market conditions and maintain proper diversification by strategy, vintage year and geographic location. Indirect approaches give access to regional corporates and provide a diverse portfolio of business sectors and geographies. Secondaries open up further opportunities and can help smooth the J-curve.

Deal sourcing and the ability to anticipate and successfully complete exits from portfolio companies are also deciding factors in the choice of a growth capital specialist or private equity firm.

Firms with an established presence at all growth stages will be more comprehensively aware of the market and have better visibility into deal flow and exits. Those involved in venture capital will enjoy improved deal sourcing potential and extra growth-industry insights. By tracking companies consistently from the startup phase, firms can unlock additional upstream opportunities and build ties with entrepreneurs. Buyouts provide yet another source of profitable exits.

These are all excellent reasons to choose a multi-specialist private equity firm.

LPs also need a firm whose investments are socially responsible and which offers a sophisticated ESG policy. Effective communication on the SRI benefits of the portfolio is increasingly important. Investors want to be able to apprehend the impact of their investment on the real economy. Job creation is also key. Proactive communications and regular reporting are a sign that GPs are attentive and committed to these issues.


MARKET MAPPING OF PRIVATE EQUITY FIRMS

Gro

wth

cyc

le

Years

Mid

-Cap

Smal

l-C

ap

Venture Capital Growth Capital Buyouts

Source: Idinvest (not exhaustive)


The growth capital market is vast and offers many attractive investment opportunities. According to Eurostat, 98.7% of companies in Europe have fewer than 50 employees and 1.1% employ between 50 and 249 people.

However, accessing these companies is difficult and the market remains highly fragmented. It is essentially made up of niche segments dominated by local market leaders, of which PE firms will select the most profitable and technologically disruptive. The market’s hidden gems are accessible only to the most experienced, on-the-ground, connected managers.

European companies face a growing need for financing. In 2014, according to a study of the European market by EVCA, the number of companies receiving growth capital finance was up 13% year-on-year (1,270 versus 1,122 in 2013).

Amount invested and number of companies financed in Europe

Number of companies in Europe

Source: EVCA 2014

THE GROWTH CAPITAL MARKET 04

Amount invested

Number of companies financed

1.0

€bn

0.02007 20122008 20132009 20142010 2011

2.0

3.0

4.0

4.35.0

6.0

7.0

8.06.7

5.1

6.3

5.2

4.03.6

5.6

200

0

400

600

800

1,000

1,200

1,400

348

593

775

994 932

1,0661,122

1,270

Source: Eurostat

Upper Mid-Cap50 - 249 employees230,000 companies1.1% of companies

Small/Lower Mid-Cap≤ 50 employees

20,700,000 companies98.7% of companies

Large-Cap250+ employees

41,988 companies0.2% of companies


According to EVCA, in 2014, companies received a total of €5.6 billion in growth capital.

The United Kingdom and France continue to drive growth in Europe, accounting for 60% of European growth capital investments in 2014.

French growth capital investments totaled €1.081 billion in 2014 – 90% more than in 2013. The number of companies backed also increased by 26% (239 in 2014 versus 189 in 2013).

In 2014, a total of 1,270 companies were financed by growth capital. The leading regions were DACH (Germany, Austria and Switzerland: 40%) and France (31%).

Source: EVCA/ PEREP_Analytics

DACH: Germany, Austria, Switzerland; Southern Europe: Italy, Portugal, Spain, Greece; Nordic countries:

Denmark, Finland, Norway, Sweden; CEE: Central and Eastern Europe

Source: EVCA/ PEREP_Analytics

DACH: Germany, Austria, Switzerland; Southern Europe: Italy, Portugal, Spain, Greece; Nordic countries:

Denmark, Finland, Norway, Sweden; CEE: Central and Eastern Europe

Number of companies financed by growth capital in Europe in 2014;

Amount invested in growth capital in Europe in 2014

0.2

€bn

0UK &

Ireland

0.4

0.6

0.8

1.5

1

1.2

1.4

1.6

1.8

France &Benelux

DACH SouthernEurope

Nordiccountries

CEE

1.7

0.81

0.4

0.2

100

Num

ber

of c

ompa

nies

fina

nced

0UK &

Ireland

200

300

400

141

500

600

France &Benelux

DACH SouthernEurope

Nordiccountries

CEE

401

516

91 76 45


GROWTH CAPITAL INVESTEES05

According to EVCA, based on 2014 data, SMEs receive 81% of the growth capital finance in Europe.The definition of an SME in France is a company with fewer than 250 employees.

According to the graph below, 55% of all European growth capital is invested in SMEs. Companies with 20 to 99 employees are the most frequently backed, representing nearly 37% of the total.

European growth capital investees (by company size)

Growth capital investments in 2014 by portfolio company size- amount invested and number of companies

Source: EVCA 2014

Source: EVCA 2014

5.4%

4.3% 0.9%

8.5%

4.6%

19.5%

19.8%

36.9%

0 - 19

20 - 99

100 - 199

250 - 499

1,000 - 4,999

200 - 249

500 - 999

5,000 +

SMEs 80.9%

Number of companies

Amount - € billion

0.2

€ bn

0.00 - 19 500 - 99920 - 99 1000 - 4999100 - 199 5000+200 - 249 250 - 499

0.4

0.6

0.8

0.1

1.0

1.2

1.4

1.61.5

1.2

0.2

0.6 0.6

1.2

0.9

500

100150200250300350

Number of employees

Number of companies

400450500

Amount invested55%

SMEs Number of employees

81%

Number ofemployees


Candidate companies for growth capital finance are generally founder-owned, with no prior institutional investment. They must be profitable or clearly approaching profitability, and cash-flow positive. Typical growth capital targets therefore have an established customer base, solid market positioning, and significant potential for organic or external growth.

Entrepreneurs may choose to continue growing at their own pace by gradually deploying internally generated cash flows, or they may opt for the quicker path of growth capital. Companies that take on growth capital funding believe in their value-creation potential and want to send a strong signal to the market and investors. However, their owners do accept a dilution and partial loss of control.

There are several reasons why entrepreneurs may wish to have their company backed by a growth capital fund.

The main reason is the desire to speed up growth by investing in product development, new staff, overhead, or geographic expansion. A capital injection can also help the company consolidate its position by taking over competitors or making other good-fit acquisitions.

Investees also benefit from their GPs’ experience and assistance with strategy, operations, and capital management and allocation.

Working with GPs also means access to their ecosystem and network of serial entrepreneurs. Past success stories are attractive to founders, who regularly approach their GPs during fundraising for guidance on international development, potential acquisitions, foreign subsidiary openings, manufacturing, staffing, and scouting for strategic or financial partners.

A GP’s proven experience in the international expansion of French and European companies is therefore vital. Partnerships with manufacturers also enable the best GPs to provide massive research and innovation support to their portfolio companies – another reason why entrepreneurs come to them.

The decision to use growth capitalto grow a business is often discretionary.

WHAT ENTREPRENEURS ARE LOOKING FOR


WHAT INVESTMENT FUNDS ARE LOOKING FOR

Growth capital teams look for companies with clear growth plans, focusing on:

• Expansion (domestic or international) through new product launches and/or innovation financing

• Business development and market share growth in France or abroad, requiring fresh financing to open new foreign offices or hire staff, etc.

• External growth in France or abroad as part of a buy-and-build strategy

The best growth capital funds generally invest in companies that operate in expanding markets and generate their own growth through organic revenue-building rather than financial or operational restructuring. The GP identifies products and services likely to provide sustainable growth over the years to come, and invests in companies that are already established on those market segments and have the capacity to become European or global leaders.

The following table ranks the top ten growth capital deals in European private equity in the first quarter of 2015.

Source: Ten largest European private equity-backed Growth Capital deals,

Q1 2015 - unquote

Germany

France

United Kingdom

France

United Kingdom

Germany

Germany

United Kingdom

United Kingdom

United Kingdom

110

63

100

48

45

43

100

89

81

77

Insight Venture Partners

Morningside, Oxford Capital Partners, et al.

Idinvest Partners, BPI, et al.

Valar Ventures, IA Ventures, et al.

360 Capital Partners, MCI Management, et al.

Rocket Internet, Mangrove Capital Partners, et al.

CM-CIC Capital Finance, BNP CapitalDeveloppement et al.

Accel Partners, Technology Crossover Ventures

General Catalyst Partners, Novator Holdings, et al.

Vitruvian Partners

Deal Equity investment fundValue(€m)Country


Companies selected for growth capital investments often operate in industries that are outgrowing the overall economy. This makes growth capital a particularly attractive strategy when the macroeconomic environment is gloomy.

Growth capital GPs track various industries and trends for appropriate investment opportunities. Unlike venture capital funds, which tend to select groups of targets from the same industry, growth capital funds sponsor only the clear market leaders. As a result, growth capital funds often have a wider range of target industries than venture capital funds.

MAIN GROWTH CAPITALTARGET INDUSTRIES 06

Highly specialized industries such as medical/biotech, cleantech, software, IT and digital have been notable growth drivers in private equity.

Top-tier investment teams with industry knowledge and a deep understanding of the leading technologies are best positioned to select the most promising tech segments, identify investment opportunities, weigh the risks of each deal and convince entrepreneurs of their added value.

Growth capital investors in the tech arena want to fund companies that have already proven their technologies and business models work.

Statistics show that the best way to create value through growth is to focus investments on the leading technologies in each target sector.


INVESTING INGROWTH SECTORS07The last twenty years have seen the emergence of European tech companies whose innovative products and services have transformed entire industries. Today, these companies are poised to become global leaders. Some of them took on seed capital or early-stage venture funding, while others have no prior institutional investments.

To keep growing – especially on the world stage – these companies need funding. But because there are far fewer growth capital than venture capital funds, the support they require is hard to come by, especially for ticket sizes of €10 million and up. Investing in these tech-heavy businesses also requires management teams with extensive subject matter expertise. A team with one or more technology specializations will have a clear competitive advantage, enabling it to:

• access proprietary dealflow • help portfolio companies implement their strategy • win deals over less-specialized competitors

Lack of tech-industry knowledge can be a barrier to entry for non-specialized funds.

The numerous investment opportunities in high-growth tech companies has led to an overflow of demand that greatly exceeds the supply of funding currently available in Europe, creating a unique window of opportunity.


Selling, distribution and transaction costs have been slashed by mobile technologies, social media, cloud computing, adtech, fintech, etc. – a trend reinforced by the slow-moving economy as companies seek to boost productivity while cutting costs and consumers endeavor to save.

Changes to laws in the telecommunications, energy, healthcare and financial sectors offer major opportunities for new entrants. In the financial services industry, for example, anti-money laundering processes and controls are becoming more and more sophisticated, leading to the creation of firms like Fircosoft that specialize in watch-list filtering for banks. In healthcare, the Internet of Things will allow patients’ personal data to be remotely collected and processed. Green technologies are rapidly gaining traction in the energy sector.

Low-cost consumer technology has made starting a business easier and less expensive, enabling the emergence of a wide range of startups with less capital-intensive business models. These have developed quickly and are now ripe for growth capital funding and in search of institutional investors.

Once again, European experts believe that growth capital funding for tech companies is one of today’s most promising investment avenues. Disruptive technologies are behind strong growth in a wide range of industries, for several reasons.

The ongoing globalization of the world’s economies – especially high-tech industries such as web services, digital, biotech and medtech – encourages exports. Local companies have taken to international development and are looking to capture their share of foreign markets, a proposition that requires substantial capital resources.

Fortunately, there is no shortage of exit routes in the tech industry. Multinational behemoths such as Google and Facebook (for new technologies), Novartis, Pfizer and GSK (for the pharmaceutical industry) and EDF (energy) are eager to snap up innovative SMEs, and acquisitions are thriving. IPO activity has also intensified, especially in biotech.

TECHNOLOGY SEGMENTS: GROWTH DRIVERS


This figure is based on market trends derived from an analysis of five prominent sharing economy sectors: peer-to-peer finance, online staffing, peer-to-peer accommodation, car sharing, and music and video streaming. PwC also surveyed 1,000 adult US consumers from December 17 to 22, 2014.

According to their findings, peer-to-peer finance and online staffing are tomorrow’s frontrunners, with respective annual growth projections of 63% and 37% over the next few years, followed by peer-to-peer accommodation (31%) and car sharing (23%). The projected growth of conventional access-driven sectors such as equipment rentals (5%) and youth hostels (4%) is considerably more modest.

The sharing economy’s potential is a reflection of mounting consumer interest. When asked what appealed to them about collaborative consumption, survey responders cited better pricing, more convenient access, and more choice in the marketplace.

Clearer regulatory and tax frameworks are sorely needed, however, to help get the sharing economy off the ground and cope with the disruption caused to traditional industries by its impressive rise.

EXAMPLES OF HIGH-GROWTH MARKETS

THE SHARING ECONOMY

According to the Paris-based Institute for Sustainable Development and International Relations (IDDRI), “shareable goods account for about a quarter of household expenditure and a third of household waste.” This implies that sharing economy models such as reselling and short-term renting, whether peer-to-peer or business-to-peer, have the potential to generate major savings for consumers.

By IDDRI’s estimate, optimizing collaborative consumption models could save households up to 7% and cut their waste by 20%.

PwC expects the value of the global sharing economy to reach nearly $335 billion by 2025 (it was $15 billion in 2014).

In ten short years, the sharing economy has gone from just an idea to a fully-fledged marketplace teeming with startups and multinationals alike. Olivier Salesse, Strategy Director at PwC, believes this to be the result of “a fusion of several major trends that emerged in large part thanks to new technologies, dwindling resources and social change.”


EXAMPLE

THE UBERIZATION OF THE ECONOMY

For months now, “uberization” has been the buzzword on everyone’s lips. Given the meteoric rise of Uber and Airbnb, respectively upending urban transport and the hotel industry, many companies today are fearful that their own sectors will suffer the same fate, with the arrival of new players leveraging the latest technologies. No industry is immune from this wave of change, not even banking and financial services. Lending Club, a peer-to-peer lending company, made its stock market debut at the end of 2014, lifting its valuation to nearly $9 billion.

“Although it definitely poses a threat for established industries or services, the uberization of the economy also opens up a world of opportunities for investment and overall value creation,” says Benoist Grossmann, Managing Partner at Idinvest. “The revolution fueled by these new disruptive technologies offers potential returns on a par with the magnitude of the transformations in business models.” The current upheaval is driven by a multitude of companies that need only capital and the support of shareholders to achieve their goals. Europe is teeming with investment opportunities in digital products and services.

Having taken hold more recently in Europe than in the United States, this phenomenon is destined to be long lasting, thanks to the emergence of a digital ecosystem built up through virtuous cycles and bringing together entrepreneurs, investors and all the other stakeholders any industry sector needs to ensure its continued growth.


15%

$7.1 tn

Of all physical objects will be connected to the Internet by 2020.

Worldwide market for IoTsolutions in 2020.

Growth in this sector will also result in the creation of numerous jobs. According to IDC, 36 million IT professionals will be working worldwide in 2020, up from 28 million in 2014.

According to a study conducted by International Data Corporation (IDC), the global Internet of Things (IoT) market is growing more than three times as fast as the traditional Information and Communication Technology (ICT) industry and is expected to reach a size of $7.1 trillion by 2020.

IDC analysts also predict that 15% of all “things” will be connected by that same year. Only 10 billion things out of the 1.5 trillion that could be connected to the Internet currently are, suggesting an immense potential for business growth.

In a report on the Internet of Things, Cisco estimates that there is as much as $14.4 trillion of potential economic “value at stake” in the sector for businesses over the next decade. According to the report, better use of resources (including higher labor efficiencies) made possible by the Internet of Things will likely generate as much as $2.5 trillion of value over this same period.

IDC – The Internet of Things Moves Beyond the Buzz – 2014

IDC – The Digital Universe of Opportunity – 2014

Cisco – Internet of Everything Economy – Visualizing the IoE

$14.4 tnValue at stake in the sector for businesses over the next decade.

THE BUSINESS OF THE INTERNET OF THINGS


World medical technology market by region, based on manufacturer prices, 2014

Source: MedTech Europe

Basing its analysis on manufacturer prices, MedTech Europe estimates that the European market represented 28% of the world total in 2014. The European market is driven largely by countries such as Germany, France, the United Kingdom, Italy and Spain.

The medical technology market is characterized by a constant flow of innovations, resulting from significant investments in research and development as well as close cooperation with users. Products generally have a lifecycle of just 18–24 months, by which time new or improved alternatives typically become available. In 2013, more than 10,000 patent applications were filed with the European Patent Office (EPO) in the area of medical technology, i.e. 7% of total applications. The 28 EU member countries, Norway and Switzerland together account for 41% of patent applications filed with the EPO, with the remainder originating in other countries, including 39% from the United States.

MEDICAL TECHNOLOGY

Innovation in healthcare technologies is making a significant contribution to medical progress. These evolving technologies are giving rise to a diverse set of products and services spanning a range of therapeutic applications and operational settings: imaging, diagnostics and biochips; software tools and surgical robotics; instruments and sensors; implants and prosthetics; e-health and independent living services, etc.

As reported in “The European Medical Technology Industry in Figures,” a study published by MedTech Europe in 2014, the European medical technology market is estimated at roughly 100 billion.

5%

0%USA

10%

15%

20%

39%

25%

EUROPE JPN CHN RUS CAN BRA OTHER

35%

30%

40%

28%

9%5%

2% 2% 2%

12%


Most medical technology companies report high, and frequently double-digit, operating margins. According to Xerfi Global, companies in the sector saw average growth in operating performance of about 17% between 2008 and 2014.

The market is mainly dominated by about ten large companies with a global presence. Apart from these big names, there are also a multitude of French and European SMEs, such as Amplitude, a leader in the international market for lower limb prostheses, Trixell, the world’s leading supplier of X-ray flat panel digital detectors for radiological imaging, and bioMérieux, which develops innovative solutions for in-vitro diagnostics.

Germany accounts for the largest share of total employment in this field, followed by the United Kingdom and France. With so many people employed, it is clear that the medical technology industry is an important stakeholder in the European economy.

According to MedTech, there are nearly 25,000 medical technology companies in Europe. SMEs make up almost 95% of the medtech industry, most of them employing fewer than 50 people.

According to the MedTech study, the European medical technology industry employs more than 575,000 peoples.

DEU 175.000

CHE 51.000

ITA 52.700

FRA 65.000

GBR 71.000

ESP 29.000


PORTFOLIO EXITS AT POST-CRISIS HIGH AND LESS TIED TO CAPITAL MARKETS08

Portfolio exits have reached their highest levels since the crisis, in both volume and value terms, driven by the lofty valuations in today’s financial markets.

According to EVCA, private equity divestments totaled a record €37.8 billion in 2014, as firms exited more than 2,400 companies. This is the highest divestment figure to date for the private equity industry in Europe.

Growth capital exits accounted for 6% of equity divested (at cost) and 25% of the number of companies. The amount divested in growth capital increased by 16% in 2014, to €2.2 billion, and the number of companies exited increased by 9% to 611.

There are several conceivable exit routes for these companies, including:1) Trade sale2) Management buyout 3) Sale to another private equity firm;4) Sale to a financial institution5) Initial public offering

The most prominent exit routes in 2014 were trade sales (26.6%) and management buyouts (15.7%), reinforcing the view that companies receiving growth capital investments have strategic value.

Source: EVCA

Growth capital divestments at cost by exit route in 2014

5.9%

15.7%

9.6%

12.6%

5.9%

26.6%

7.4%

7.6%

5.3%

3.4%

Other

MBO

Sale to a financial institution

Repayment of principal loans

Sale to another private equity firm

Trade sale

IPO

Sale of quoted equity

Write-off

Repayment of silent partnership


Sales to management (MBOs), when managers want to increase their stake in the company, are one of the simplest exit routes to set up, but they must be planned very early in the investment process.

Trade sales, typically the buyout of the portfolio company by a larger player in the same industry, are usually considered by buyers wishing to fill specific gaps in their own expertise. The target must be backed by a leading private equity firm with an extensive network of business and financial connections and strong partnerships, thus enabling it to identify the potential needs of major industry players and carry out the planned sale. As the company grows, the GP must make sure that it is building up strategic business relations with its potential acquirers. Once the milestones of value creation have been achieved and the company has reached the desired level of maturity, an investment bank is often sought out to organize the exit. The presence of an independent director from the industry frequently facilitates divestments.

PwC observes that US companies are the most active on the M&A market for European tech companies. About 37% of the acquisitions tracked by Tech.eu in 2014 involved acquirers based in the United States. Google was very active, acquiring eight tech companies in Europe including DeepMind for $390 million, followed by Microsoft and Facebook. German companies came in second, but well behind their US counterparts, with 40 European acquisitions in 2014.

Initial public offerings (IPOs) are often used by companies that already enjoy strong visibility and have taken their international expansion reasonably far. The decision to adopt this route also depends on market conditions and it is true that the recent volatility in public markets can dissuade companies from considering an IPO. Therefore, the final decision (even if already contemplated at the time of the initial investment) is generally made soon before the planned exit and may be delayed if market conditions are not favorable.

According to Forbes, 2014 was a banner year for IPOs, driven by Alibaba’s $25 billion debut. Although there is no single transaction of this size anticipated in 2015, analysts are predicting robust IPO activity, especially in tech sectors. Initial public offerings from Pinterest, Snapchat and Dropbox are on the horizon.

Lastly, the LBO exit route is also frequently chosen in connection with growth capital investments, once the company is on a growth track and is generating sufficient cash flow to make this type of transaction feasible.


GROWTH CAPITALFUND PERFORMANCE

Based on data collected by PitchBook, growth capital funds outperformed buyout and venture capital funds between 2007 and 2010. Since 2011, growth capital investments have underperformed, but they seem to have returned to an upward track since 2013.

Median IRR by strategy in Europe

50.0

40.0

30.0

20.0

10.0

0.0

-10.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014-20.0

Buyout

Growth/Expansion

Venture Capital

Buyout

Venture Capital

8.9 17.1 17.9 -12.9 -4.9 3.2 2.0 4.2 9.1 8.7

-9.6 9.4 14.2 2.6 2.4 0.7 6.1 4.0 2.1 4.6

Fund Type 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Growth/Expansion 29.2 8.9 38.2 15.6 11.6 8.6 4.3 -1.3 -1.7 7.0

As evidence of the interest raised by this asset class, Cambridge Associates has decided to issue benchmarks on a regular basis.

Source: PitchBook Data, Inc.

09


The results of the benchmarking study published by Cambridge Associates in June 2014 are presented below.

Global ex-U.S. Growth Equity Index(1)

MSCI Europe (€) Index

MSCI World Index

S&P 500 Index

4.17 8.38 22.13 7.58 13.45

3.99

4.86

5.23

6.15

6.18

7.14

22.74

24.05

24.61

10.77

11.81

16.58

13.58

14.99

18.83

Indices 1-Quarter YTD 1-Year 3-Year 5-Year 10-Year

Barclays Capital Government/Credit Bond Index

1.92 3.94 4.28 4.08 5.09

17.37 18.64

12.82

6.27

7.25

7.78

4.94

7.58 13.45

9.80 11.90

CA Index 10-Year5-Year3-Year1-Year

12.82

7.10

10.30

Applying the PME method to market indices, the Global ex-US Growth Equity Fund Index always outperforms them over the long term (10 years), but the difference in return is less significant than in the first example, where this method was not applied to the indices.

The index is an end-to-end calculation based on data compiled from 266 global ex-US growth capital

funds including fully liquidated partnerships, formed between 1989 and 2014.

(1) Pooled end-to-end return, net of fees, expenses, and carried interest.

Sources: Cambridge Associates LLC, Barclays, Frank Russell Company, Standard & Poor’s, Thomson

Reuters Datastream, and Wilshire Associates, Inc.

Global ex-US Growth Equity Fund Index: End-to-end pooled return – Net to LPs

Global ex-US Growth Equity Fund Index: End-to-end pooled return compared to CA Modified Public Market Equivalent (mPME) – Net to LPs

S&P 500 Index

Global ex-U.S.Growth Equity Index (1)

MSCI Europe Index

mPME Analyse (2)

24.57

22.13

23.27

The index is an end-to-end calculation based on data compiled from 266 global ex-US growth capital

funds including fully liquidated partnerships, formed between 1989 and 2014.

(1) Pooled end-to-end return, net of fees, expenses, and carried interest.

Sources: Cambridge Associates LLC, Barclays, Frank Russell Company, Standard & Poor’s, Thomson

Reuters Datastream, and Wilshire Associates, Inc.


The index is an end-to-end calculation based on data compiled from 409 global (US and ex-US) growth

capital funds, including fully liquidated partnerships, formed between 1986 and 2014. Internal rates

of return are net of fees, expenses and carried interest. Vintage year funds formed since 2010 are too

young to have produced meaningful returns. Benchmarks with NA (not applicable) have an insufficient

number of funds in the vintage year sample to produce a meaningful return.

Global Growth Equity: Since-inception IRR and multiples by fund vintage year – Net to LPs

2000 9.51 6.71 6.52 12.64 1.97 1.41 0.22 1.63 28

2001 15.84 5.70 8.34 13.44 1.44 1.84 0.57 2.41 8

2002 14.34 16.75 9.36 15.41 6.87 1.64 0.24 1.88 10

2003 17.91 25.07 17.22 NA NA 1.56 0.38 1.94 6

2004 8.51 26.27 7.79 24.77 1.60 0.98 0.43 1.42 20

2005 12.85 11.54 10.67 16.20 4.73 1.17 0.64 1.81 37

2006 9.66 8.48 5.60 13.68 1.40 0.51 1.02 1.53 34

2007 10.12 6.58 9.42 13.52 -0.43 0.46 0.99 1.45 52

2008 13.31 9.38 8.23 13.46 3.61 0.34 1.10 1.44 32

2009 12.51 8.70 8.25 15.72 5.44 0.17 1.12 1.29 18

2010 15.80 17.16 12.06 24.32 4.67 0.13 1.19 1.31 25

2011 14.50 7.61 6.14 16.62 -2.91 0.06 1.12 1.18 27

2012 11.49 0.98 3.44 12.79 -13.42 0.04 1.06 1.10 15

Vintageyear DPI RVPI TVPI

Pooledreturn

(%)Median

(%)Number of Funds

Arithmetic mean

(%)

UpperQuartile

(%)

LowerQuartile

(%)

(2) CA Modified Public Market Equivalent (mPME) replicates private investment performance under

public market conditions. The public index’s shares are purchased and sold according to the private

fund cash flow schedule, with distributions calculated in the same proportion as the private fund, and

mPME NAV is a function of mPME cash flows and public index returns. “Value-Add” shows (in basis

points) the difference between the actual private investment return and the mPME calculated return.

Sources: Cambridge Associates LLC, Frank Russell Company, MSCI Inc., Standard & Poor’s and

Thomson Reuters Datastream.


GROWTH CAPITAL FUND TERMSAND CONDITIONS10

Fund terms and conditions are one of the chief concerns of institutional investors active in the private equity market and they remain a sensitive issue in discussions between LPs and GPs.

Management fees

Management fees during the investment period are generally calculated as a percentage of the commitments made by the LP to the fund. The reason for this is that the main focus of the GP’s workload during this period is the search for potential investments, driven by the size of total commitments to the fund and not the actual amount invested at this point in the fund’s life.

As management fees generally decrease after the end of the investment period, the length of the investment period as stated in the fund’s terms by the GP is an important factor for LPs.

The mean and median investment periods by type of fund are presented in the graph below. Respondents are funds currently raising and not having started their investment period or vintage 2013/2014 funds.

Investment periods by type of fund

Source: Preqin

Mean

Median

5

4

3

2

1

0

Buy

out

5

6

Dis

tres

sed

Pri

vate

Eq

uity

Fund

s of

fund

s

Gro

wth

cap

ital

Infr

astr

uctu

re

Mez

zani

ne

Rea

l est

ate

Seco

ndar

ies

Vent

ure

Cap

ital

4.56

3333.25

33

5

4.34

54.67

43.67

3

3.75

54.92

Inve

stm

ent p

erio

d le

ngth

(yea

rs)


The graph below shows the mean and median management fees by type of fund. Preqin compiled data from 750 vintage 2013/2014 funds.

According to the statistics compiled by Preqin, management fees for growth capital funds are slightly lower than those for venture capital funds.

Management fees by type of fund

Source: Preqin

Mean

Median

2.00%

1.50%

1.00%

0.50%

0.00%

Buy

out

2.50%

Dis

tres

sed

Pri

vate

Eq

uity

Fund

s of

fund

s

Gro

wth

cap

ital

Infr

astr

uctu

re

Mez

zani

ne

Rea

l est

ate

Seco

ndar

ies

Vent

ure

Cap

ital

2.00%

1.82%

0.90%

2.00%2.00%

1.56%1.63% 1.74%

1.52%

1.75%

1.50%

1.23%1.23%

2.19%

2.00%

1.00%

1.99%1.89%


Management fees for growth capital funds during the investment period

Management fees for growth capital funds by fund size

Source: Preqin

Source: Preqin

Within this sample, 64% of growth capital funds have management fees of between 2.00% and 2.24%, and one-fifth of the funds have fees lower than 2.00%. As management fees are correlated with the size of the fund, small growth capital funds have higher fee rates than large funds.

The mean management fee applied by funds of less than $250 million is 2.08%, while the mean of those applied by funds of $500 million or more is 1.87%. The median is the same for the three segments and only fees applied by funds of less than $250 million are in excess of this median.

As shown in the graph below, management fees have changed for funds of different vintage years. Management fees peaked in 2009 (2.13%) and 2012 (2.13%) but have declined since then. In 2013, fees declined by 11 basis points on average and 2014 vintage funds have fees of 1.96% on average.

10%

0

Less than 2%

20%

30%

40%

20%

50%

60%

2% - 2.24% 2.25% - 2.5% 2.5% or more

64%

12%4%

70%

1.80%

1.75%

Less than $250mn

1.85%

1.90%

1.95%

2.08%

2.00%

2.05%

$250-$499mn $500mn and more

2.00%

2.10%

1.90%

2.00%

1.87%

2.00% Mean

Median

Pro

port

ion

of fu

nds

Man

agem

ent f

ees

duri

ng th

ein

vest

men

t per

iod


Magement fees of growth capital funds by vintage year

Growth capital funds – Mechanisms for reduced management fees after the end of the investment period

As mentioned previously, most private equity funds calculate management fees during the investment period on the basis of the amount committed by LPs. This is the most costly period for GPs in terms of management, due to the workload entailed by the search for investment opportunities and the execution of investments. Once this period ends, fees are frequently reduced via various mechanisms. For example, the capital on the basis of which the fees are calculated may be changed from the amount committed to the amount invested to date, or the total amount of commitments less the investments already made.

Source: Preqin

Source: Preqin

2.15%

2009

1.85%

1.90%

1.95%

2.13%

2.00%

2.05%

2010 2011

2.00%

2.10%

2012 2013 2014 /fundraising

2.10%

2.00%

2.06%

2.00%

2.12%

2.00% 2.01% 2.00%1.96%

2.00%

Mean

Median

10%

0

Annualreduction in

managementfees

20%

30%

40%

6%

50%

Reduced rate,based on

capitalinvested

Same rate,based on

capitalinveste

No change Othermechanism

13%

44%

25%

12%

Man

agem

ent f

ees

duri

ng th

ein

vest

men

t per

iod

In addition to management fees, most private equity managers also receive consideration based on the net gains from investments, called carried interest.

The GP only receives carried interest when the LP has received distributions equal to its commitment to the fund, plus a hurdle rate defined in the fund’s terms.


Carried interest is subject to a clawback provision until the end of the fund’s life. This allows investors to claim a portion of these gains in the event of a subsequent loss on investments in the portfolio.

The graph below indicates the basis for the distribution of gains by type of fund. Growth capital and buyout funds show very similar results.

Basis for distribution of gains by fund type

Source: Preqin

Source: Preqin

100%

80%

60%

40%

20%

0

Buy

out

Dis

tres

sed

Pri

vate

Eq

uity

Gro

wth

cap

ital

Infr

astr

uctu

re

Mez

zani

ne

Rea

l est

ate

Seco

ndar

ies

Vent

ure

Cap

ital

31%10%

32%9%

20% 14%

100%

4%8%

88%86%80%91%

68%

90%

69%

Other

Deal by Deal

All funds

Furthermore, when the fund has achieved its performance objectives, there is a period during which the GP can recover the amount paid to investors under the hurdle rate, by means of a catch-up fee. The larger the fund, the higher the catch-up fee.

The graph below shows the catch-up rate by type of fund. Most funds apply a catch-up rate of 100%.

Basis for distribution of fund gains by fund type

100%

80%

60%

40%

20%

0

Buy

out

Dis

tres

sed

Pri

vate

Eq

uity

Gro

wth

cap

ital

Infr

astr

uctu

re

Mez

zani

ne

Rea

l est

ate

Vent

ure

Cap

ital

0%

1 - 19%

20 - 49%

50%

60 - 79%

80 - 99%

100%


As equity markets are currently at lofty valuation levels, investors are looking for attractive alternative investment opportunities. Private equity fits the bill given their constraints, and Coller Capital’s Global Private Equity Barometer finds that LPs expect the share of private equity in their overall investment portfolios to increase in 2015. Within this asset class, the growth capital segment is the focus of mounting interest.

In a market commentary, Cambridge Associates defines growth capital (or growth equity) as a strategy that sits between late-stage venture and leveraged buyouts. Growth capital is suited for companies with a proven business model that require funding for expansion or development and, for the most part, have not received any prior institutional investment. Investors typically take minority stakes and use little if any leverage.

According to EVCA (the European Private Equity and Venture Capital Association), the amount raised by funds with a growth capital strategy increased nearly 65% in 2014. Government agencies and insurers account for more than half of the investor base. Backed by institutional investors, governments are eager to restart the engine of growth in Europe by financing SME development, and are making commitments to growth capital programs.

The European growth capital market is massive, inefficient and difficult to access. The field of potential target companies is highly fragmented and dominated by numerous local market leaders. Nevertheless, it offers many investment opportunities for experienced managers with a strong presence on the ground and robust business networks.

In 2014, according to the growth capital overview drawn up by EVCA, 81% of the companies receiving this type of financing in Europe were SMEs. The sectors in which these businesses operate are often growing faster than the overall economy. Growth capital is therefore particularly attractive in a sluggish macroeconomic environment. Statistics show that the best way to create value through growth is to implement, in each industry, an approach focusing on leading-edge technologies.

Highly specialized segments, such as the medical and biotech industries, cleantech, software, IT and digital have been growth drivers for private equity.

Portfolio exits have reached their highest levels since the crisis, in both volume and value terms. According to EVCA, private equity firms exited more than 2,400 companies during the year, 25% of which were growth capital investments.

Investors interested in taking positions in this segment are looking for a fund manager that can deploy capital under any market conditions. With dry powder at record levels, the ability to track down high-potential targets is a major advantage.

TAKEAWAY POINTS


NOTES

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