european private equity: facts and figuresfacts about the relationship between investors and pe fund...

European Private Equity: Facts and figures

Didier GuennocEVCA

EESC – 5 December 2007

Private equity (PE) as financial intermediary

repayments+ capital gains

commitments

divestments

pensions savings

savings and pensions

investments

Private Equity Funds

Companies

Institutional investors(Insurance companies,

pension funds, banks…)




Saving accounts, Pension plans,

Insurance contracts…

Facts about the relationship between investors and PE fund managers


commitments

divestments

pensions savings


investments


Companies








€112 Billion raised in 2006for venture capital and buyout investments

12.8 12.625.1 24.2 18.6 21.1 18.2

59.3

89.6

25.6

50.012.8

22.915.9

8.9 5.9 9.2

12.5

22.7

3.4

6.7

0

20

40

60

80

100

120

1998 1999 2000 2001 2002 2003 2004 2005 2006 H12007*

H22007*

€ billion

Venture Capital Buyout

EVCA Yearbook 2007Conducted by Thomson Financial and PricewaterhouseCoopers on behalf of EVCA* Source: PEREP Analytics (data are updated quarterly), preliminary data for H1. H2 data represents large buyout funds currently being raised

Who are the investors in private equityfunds?

Geographical origin of funds raised

2002-2006

Type of investorShare in total funds raised 2002-2006

Pension funds23%

Banks18%

Funds of funds16%

Insurance companies

11%

Government agencies

9%Private individuals

7%

Corporate investors

5%

Other (capital markets-Fund of funds,etc)

11%

Europe60%

USA25%

Asia and the rest of the

world15%

Source: EVCA/Thomson Financial/PricewaterhouseCoopers

What is the strategic asset allocation of institutional investors to private equity?

Source: 2005-2006 Russell Survey on Alternative Investing

3.6

1.7

4.03.6

8.3

4.55.3

9.8

6.1

7.2

10.5

0

2

4

6

8

10

12

14

Private Equity Hedge Funds Real Estate

% o

f To

tal

Asse

ts

2001 2003 2005 2007 Forecast

North American Investors

7.5

2.5

7.57.1 7.17.0

7.7

6.77.6

9.1

7.3

0

2

4

6

8

10

12

14

Private Equity Hedge Funds Real Estate

% o

f T

ota

l A

ssets

2001 2003 2005 2007 Forecast

Note: 2001 North American hedge fund allocation is represented by the median.

European Investors

Why and how to invest in private equity? Demonstrated persistence of outperformanceof the best teams, but selection process isparamount

Evolution of Private Equity and Public Market Comparators10-Year Rolling IRR for 2000-2006

-10

-5

0

5

10

15

20

25

30

35

40

2000 2001 2002 2003 2004 2005 2006

IRR

%

Morgan Stanley Euro Equity

HSBC Small Company

JP Morgan Euro Bonds

European Private Equity

Top Quarter European Private Equity Funds

Source: Thomson Financial/EVCA

From a regulatory perspective

• The fund manager or the fund or both are regulated in most of the Member States (e.g. 60% of the capital under management is regulatedby the UK FSA)

• Institutional investors are also regulated

• Retail investors can have access to the asset class through quotedvehicles having to comply with stock market regulation

• Funds raised, management fees, carried interest and other terms and conditions result from market forces in a market which is not oligopolistic

• Risk diversification imposed by investors on funds (maximum share for one single investment in non-leveraged, closed-end funds with a duration of 10 to 12 years)

Facts about buyout investments


commitments

divestments

pensions savings


investments


Companies








European buyout investments(transaction value - €bn)

13.118.6

10.9 10.2 10.7 10.1 13.7 15.322.8

35.943.9

59.7

74.565.5 67.6 65.3

80.8

128.5

166.7

91.8

0

20

40

60

80

100

120

140

160

180

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 H12007

Source: CMBOR

Mega buyouts vs. total buyouts in Europe2003 – 2006

% of Amount invested (equity value)

Mega Buyouts

27%

Other Buyouts

73%

% of Number of Investments

Mega Buyouts

1%

Other Buyouts

99%


Relative weight of buyout investments(equity value) as % of GDP(Data 2006)

1.68

6%1.

156%

0.46

0%0.

453%

0.36

1%0.

194%

0.16

4%0.

144%

0.13

1%0.

112%

0.10

7%0.

087%

0.08

2%0.

065%

0.06

5%0.

063%

0.02

7%0.

010%

0.00

7%0.

000%

0.00

0%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

United

Kin

gdom

Swed

enFr

ance

Euro

peNet

herla

nds

SpainIta

lySw

itzer

land

Belgi

umGer

man

yPo

land

Denm

ark

Norway

Portu

gal

Finla

ndRo

man

iaAu

stria

Czec

h Re

publ

icIre

land

Greec

eHun

gary


Relative size of buyout transactions in the European M&A market

Buyout share (%) of total M&As in Europe(% of total transaction value)

7.6%

15.7%16.7%

14.8%

12.5%11.5%

9.4%

5.0%

0

2

4

6

8

10

12

14

16

18

1999 2000 2001 2002 2003 2004 2005 2006

%

Source: EVCA based on CMBOR and Dealogic data

Share of European P to P transactions as percentage of total buyout investment2003 – 2006

% of Value invested

Public to Private22%

Other Buyout78%

% of Number of Investments

Public to Private

3%

Other Buyouts

97%

Source: CMBOR

Evolution of deal origination

0

100

200

300

400

500

600

2000

2001

2002

2003

2004

2005

2006

Family & Private Foreign parent Local parentPublic to Private Receivership Secondary buyout

Source: CMBOR

By number of deals

Private equity investment by industrial SectorsAmount Invested (Equity)

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000

Agriculture

Ind. Automation

Biotechnology

Other Electronics

Construction

Energy

Transport

Chemical

Finance

Other Manuf.

Computer Related

Medical/Health

Ind. Products/Services

Communications

Other Services

Consumer

€m

2006

2005


The buyout model

Value growth depending on four mechanisms:

• Market price evolution• Use of debt / leverage• Reduction of agency costs• Growth strategy

Leverage loan market activity in Europe

Debt to EBITDA Multiples

4.8

4.4

1

4.2

8

4.2

4

4.3

8

4.6

4 5.2

1 5.4

9 5.9

8

3.6

8

3.6

3

3.4

7

3.3

9

3.5

6

3.6

5 4.0

7

4.2

8

5.2

4

0

1

2

3

4

5

6

7

1999

2000

2001

2002

2003

2004

2005

2006

H1 20

07

Total Debt/ EBITDA

Senior Debt/ EBITDA

Average Equity Contribution (% of total transaction value)

33.8

1%

33.7

0%

33.7

0%

35.9

0%

37.2

9%

38.6

2%

37.4

0%

35.9

0%

37.6

1%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

1999

2000

2001

2002

2003

2004

2005

2006

H1 20

07

Source: S&P LCD

Impact of macro-economic environment on PE business…PE price maker or price taker?

0

1

2

3

4

5

6

2001

2002

2003

2004

2005

2006

YTD

2007

(est

)

World GDP growth Real interest rate (Libor 12 months - inflation) Total Debt/ EBITDA

Source: EVCA based on data provided by S&P, IMF, Eurostat and British Bankers Association

Annual % for World GDP and real interest rate

Multiple for Total DEbt/Ebitda

Problem with the debt as sole factor of value creation

• Macro-economic impact

• Financial engineering is a commodity, i.e. no differentiation factor in itself

Reduction of agency costs and growth strategy

• The PE corporate governance model: alignmentof interest – strong involvement at Board level

• Growth strategy: the FT reported on a recentstudy mandated by the European Parliamentshowing that out of 1,000 buyout companies, 91% implemented growth strategies, againstonly 54% with restructuring initiatives

• Average holding period of PE houses: 3 to 5 years. Longer than block holders in quotedsecurities, but the nature of implementedstrategies is more important

From a regulatory perspective

• Long termism vs. short termism: up to regulators to qualify strategies or are the buyers of PE backedcompanies better suited for this task?

• Asset stripping? Not confirmed by independent research atthe level of portfolio companies

• Adopting a systemic approach regarding the use of debt: portfolio company level, overall financial system but alsopositive impact on the balance sheet of the seller!

• The debate about employment: A Deutsche Bank researchpaper demonstrated that a rise in buyout investmentequal to 0.1% of GDP translates in an increase in real economic growth of 0.2%.

For more information…

Didier GuennocEVCA Director – Large Buyout [email protected]://www.evca.eu

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