international private equity and venture capital valuation ... · and a valuation methodology (such...

IN T E R N AT I O N A L PR I VAT E EQ U I T Y AN D

VE N T U R E CA P I TA L VA L U AT I O N GU I D E L I N E S

Edition October 2006

These guidelines have been developed by the Association Française des Investisseurs en Capital (AFIC),the British Venture Capital Association (BVCA) and the European Private Equity and

Venture Capital Association (EVCA) with the valuable input and endorsement of the following associations:

AIFI - Italian Private Equity and Venture Capital Association APCRI - Portuguese Private Equity and Venture Capital Association

APEA - Arab Private Equity Association ASCRI - Spanish Private Equity and Venture Capital Association

ATIC - Tunisian Venture Capital AssociationAVCA - African Venture Capital Association

AVCAL - Australian Private Equity and Venture Capital Association AVCO - Austrian Private Equity and Venture Capital Organization

BVA - Belgian Venturing Association BVK - German Private Equity and Venture Capital Association e.V.

CVCA - Canada’s Venture Capital and Private Equity AssociationCVCA - China Venture Capital Association

CVCA - Czech Venture Capital and Private Equity Association DVCA - Danish Venture Capital Association

EMPEA - Emerging Markets Private Equity AssociationFVCA - Finnish Venture Capital Association

GVCA - Gulf Venture Capital AssociationHKVCA - Hong Kong Venture Capital Association

HVCA - Hungarian Venture Capital and Private Equity AssociationILPA - Institutional Limited Partners Association

IVCA - Irish Venture Capital Association LAVCA - Latin American Venture Capital Association

LVCA - Latvian Venture Capital Association NVCA - Norwegian Venture Capital & Private Equity Association

NVP - Nederlandse Vereniging van Participatiemaatschappijen (Dutch Private Equity and Venture Capital Association)

PPEA - Polish Private Equity Association Réseau Capital - Québec Venture Capital and

Private Equity AssociationRVCA - Russian Private Equity and Venture Capital Association

SAVCA - Southern African Venture Capital andPrivate Equity Association

SECA - Swiss Private Equity and Corporate Finance Association SLOVCA - Slovak Venture Capital Association

SVCA - Swedish Private Equity and Venture Capital Association(Endorsement as of 2nd January 2007)

INTERNATIONAL PRIVATE EQUITY AND VENTURE CAPITAL VALUATION GUIDEL INES WWW.PRIVATEEQUITYVALUATION.COM

These guidelines have been developed by AFIC, BVCA and EVCA withthe valuable input and endorsement of the following associations:

AIFI, APCRI, APEA, ASCRI, ATIC, AVCA, AVCAL, AVCO, BVA, BVK, CVCA, CVCA, CVCA, DVCA, EMPEA, FVCA, GVCA, HKVCA, HVCA, ILPA, IVCA, LAVCA, LVCA, NVCA, NVP, PPEA, RÉSEAU CAPITAL, RVCA, SAVCA, SECA, SLOVCA, SVCA

(Endorsement as of 2nd January 2007)

PLEASE NOTE

The information contained within this paper has been produced with reference tothe contributions of a number of sources. AFIC, BVCA and EVCA have taken suitablesteps to ensure the reliability of the information presented. However, neither AFIC,BVCA, EVCA nor other named contributors, individuals or associations can acceptresponsibility for any decision made or action taken, based upon this paper orthe information provided herein.

For further information please visit: www.privateequityvaluation.com

4INTERNATIONAL PRIVATE EQUITY AND VENTURE CAPITAL VALUATION GUIDEL INES WWW.PRIVATEEQUITYVALUATION.COM




PREFACE

These Guidelines set out recommendations, intended to represent current bestpractice, on the valuation of private equity and venture capital investments. The term“private equity” is used in these Guidelines in a broad sense to include investmentsin early stage ventures, management buyouts, management buy-ins and similartransactions and growth or development capital.

The recommendations are intended to be applicable across the whole range ofinvestment types (seed and start-up venture capital, buy-outs, growth/developmentcapital, etc) and financial instruments commonly held by private equity funds.

The recommendations themselves are set out in bold type, whereas explanations,illustrations, background material, context and supporting commentary, which areprovided to assist in the interpretation of the recommendations, are set out innormal type.

Where there is conflict between a recommendation contained in these Guidelinesand the requirements of any applicable laws or regulations or accounting standardor generally accepted accounting principle, the latter requirements should takeprecedence.

Neither the AFIC, BVCA, EVCA nor the endorsing associations nor the membersof any committee or working party thereof can accept any responsibility or liabilitywhatsoever (whether in respect of negligence or otherwise) to any party as a resultof anything contained in or omitted from the Valuation Guidelines nor for theconsequences of reliance or otherwise on the provisions of these Valuation Guidelines.

These Valuation Guidelines should be regarded as superseding previous guidelinesissued by the AFIC, BVCA or EVCA with effect for reporting periods post1 January 2005.

INTERNATIONAL PRIVATE EQUITY AND

VENTURE CAPITAL VALUATION GUIDEL INES



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CONTENTS

INTRODUCTION 7Definitions 7

SECTION I: DETERMINING FAIR VALUE 91 The Concept of Fair Value 92 Principles of Valuation 93 Valuation Methodologies 12

3.1 General 123.2 Selecting the Appropriate Methodology 133.3 Price of Recent Investment 143.4 Earnings Multiple 153.5 Net Assets 203.6 Discounted Cash Flows or Earnings (of Underlying Business) 213.7 Discounted Cash Flows (from the Investment) 223.8 Industry Valuation Benchmarks 233.9 Available Market Prices 23

SECTION II: APPLICATION GUIDANCE 25Introduction 251 Selecting the Appropriate Methodology 252 Specific Considerations 27

2.1 Internal Funding Rounds 272.2 Bridge Financing 272.3 Mezzanine Loans 282.4 Rolled up Loan Interest 282.5 Indicative Offers 29

3 Events to Consider for their Impact on Value 294 Impacts from Structuring 31

WORKGROUP 33





INTRODUCTION

7

INTRODUCTION

Private Equity Managers may berequired to carry out periodic valuationsof Investments as part of the reportingprocess to investors in the Funds theymanage. The objective of these Guidelinesis to set out best practice where privateequity Investments are reported at “FairValue”, with a view to promoting bestpractice and hence helping investors inPrivate Equity Funds make bettereconomic decisions.

The increasing importance placed byinternational accounting authorities onFair Value reinforces the need for theconsistent use of valuation standardsworldwide and these guidelines provide aframework for consistently determiningvaluations for the type of Investmentsheld by private equity and venturecapital entities.

The accounts of Private Equity Fundsare governed by legal or regulatoryprovisions or by contractual terms. It isnot the intention of these Guidelines toprescribe or recommend the basis onwhich Investments are included in theaccounts of Funds.

However, the requirements andimplications of the Financial ReportingStandards and in particular InternationalFinancial Reporting Standards and USGAAP have been considered in thepreparation of these guidelines. This hasbeen done, in order to provide a frame-work for arriving at a Fair Value forprivate equity and venture capitalInvestments which is consistent withaccounting principles.

These guidelines are intended to representcurrent best practice and therefore willbe revisited and, if necessary, revised toreflect changes in internationalregulation or accounting standards.

It is not a requirement of accountingprinciples that these guidelines arefollowed. However compliance withthese accounting principles can beachieved by following the guidelines.These Guidelines are concerned withvaluation from a conceptual standpointand do not seek to address best practiceas it relates to investor reporting,internal processes, controls andprocedures, governance aspects,Committee oversights, the experienceand capabilities required of the Valueror the audit or review of valuations.

A distinction is made in these Guidelinesbetween a basis of valuation (such asFair Value), which defines what thecarrying amount purports to represent,and a valuation methodology (such asthe earnings multiple technique), whichdetails the method or technique forderiving a valuation.

DEFINIT IONS

The following definitions shall apply inthese Guidelines.

Enterprise Value

The Enterprise Value is the value ofthe financial instruments representingownership interests in an entity plusthe net financial debt of the entity.

Fair Value

The Fair Value is the amount for whichan asset could be exchanged betweenknowledgeable, willing parties in an arm’slength transaction. This is congruentin concept with alternately wordeddefinitions such as ‘Fair Value is theprice that would be received for an assetor paid for a liability in a transactionbetween market participants at thereporting date’.

Fund

The Fund, i.e. a private equity orventure capital fund, is the generic termused in these Guidelines to refer to anydesignated pool of investment capitaltargeted at private equity Investment,including those held by corporateentities, limited partnerships and otherinvestment vehicles.

Gross Attributable Enterprise Value

The Gross Attributable Enterprise Valueis the Enterprise Value attributable to thefinancial instruments held by the Fundand other financial instruments in theentity that rank alongside or beneath thehighest ranking instrument of the Fund.

Investee Company

The term Investee Company refers to asingle business or group of businesses inwhich a Fund is directly invested.

Investment

A Fund’s Investment refers to all of thefinancial instruments in an InvesteeCompany held by the Fund.

Marketability

Marketability is defined as the relative easeand promptness with which an instrumentmay be sold when desired. Marketabilityimplies the existence of current buyinginterest as well as selling interest.

Marketability Discount

The Marketability Discount is theconsequence of the return MarketParticipants demand to compensatefor the risk arising from the lackof Marketability.

Market Participants

Market Participants are potential oractual willing buyers or willing sellerswhen neither is under any compulsionto buy or sell, both parties havingreasonable knowledge of relevant factsand who have the ability to performsufficient due diligence in order to beable to make investment decisionsrelated to the enterprise.

Net Attributable Enterprise Value

The Net Attributable Enterprise Valueis the Gross Attributable EnterpriseValue less a Marketability Discount.

Quoted Instrument

A Quoted Instrument is any financialinstrument for which quoted pricesreflecting normal market transactions arereadily and regularly available from anexchange, dealer, broker, industry group,pricing service or regulatory agency.

Realisation

Realisation is the sale, redemption orrepayment of an Investment, in whole orin part; or the insolvency of an InvesteeCompany, where no significant return tothe Fund is envisaged.

Unquoted Instrument

An Unquoted Instrument is any financialinstrument other than a Quoted Instrument.

Underlying Business

The Underlying Business is theoperating entities in which the Fund hasinvested, either directly or through anumber of dedicated holding companies.

Valuer

The Valuer is the person with directresponsibility for valuing one or moreof the Investments of the Fund.





SECTION I: DETERMINING FAIR VALUE

9

1 THE CONCEPT OF FAIR VALUE

Fair Value is the amount for which an asset could beexchanged between knowledgeable, willing parties in an arm’slength transaction.

The estimation of Fair Value does not assume either that theUnderlying Business is saleable at the reporting date or thatits current shareholders have an intention to sell their holdingsin the near future.

The objective is to estimate the exchange price at whichhypothetical Market Participants would agree to transact.

Fair Value is not the amount that an entity would receive orpay in a forced transaction, involuntary liquidation ordistressed sale.

Although transfers of shares in private businesses are oftensubject to restrictions, rights of pre-emption and otherbarriers, it should still be possible to estimate what amount awilling buyer would pay to take ownership of the Investment.

2 PRINCIPLES OF VALUATION

Investments should be reported at Fair Value at thereporting date.

In the absence of an active market for a financial instrument,the Valuer must estimate Fair Value utilising one of thevaluation methodologies.

In estimating Fair Value for an Investment, the Valuershould apply a methodology that is appropriate in lightof the nature, facts and circumstances of the Investmentand its materiality in the context of the total Investmentportfolio and should use reasonable data and market inputs,assumptions and estimates.

In private equity, value is generally crystallised through a saleor flotation of the entire business, rather than a sale of anindividual stake. Accordingly the Value of the business as awhole (Enterprise Value) will provide a base for estimatingthe Fair Value of an Investment in that business.

The Fair Value is estimated by the Valuer, whichevervaluation methodologies are used, from the EnterpriseValue, as follows:

(i) Determine the Enterprise Value of the InvesteeCompany using the valuation methodologies;

(ii) Adjust the Enterprise Value for surplus assets, orexcess/unrecorded liabilities and other relevant factors;

(iii) Deduct from this amount any financial instrumentsranking ahead of the highest ranking instrument ofthe Fund in a liquidation scenario and taking intoaccount the effect of any instrument that may dilutethe Fund’s Investment to derive the Gross AttributableEnterprise Value;

(iv) Apply an appropriate Marketability Discount to theGross Attributable Enterprise Value to derive the NetAttributable Enterprise Value;

(v) Apportion the Net Attributable Enterprise Valuebetween the company’s relevant financial instrumentsaccording to their ranking;

(vi) Allocate the amounts derived according to the Fund’sholding in each financial instrument, representing theirFair Value.

It is important to recognise the subjective nature of privateequity Investment valuation. It is inherently based onforward-looking estimates and judgments about theUnderlying Business itself, its market and the environment inwhich it operates, the state of the mergers and acquisitionsmarket, stock market conditions and other factors.

Due to the complex interaction of these factors and often thelack of directly comparable market transactions, care should beapplied when using publicly available information in deriving avaluation. In order to determine the Fair Value of an Investment,the Valuer will have to exercise judgement and make necessaryestimates to adjust the market data to reflect the potentialimpact of other factors such as geography, credit risk, foreigncurrency and exchange price, equity prices and volatility.

As such, it must be recognised that, whilst valuations do provideuseful interim indications of the progress of a particularInvestment or portfolio of Investments, ultimately it is notuntil Realisation that true performance is firmly apparent.

Fair Value should reflect reasonable estimates andassumptions for all significant factors that parties to an arm’slength transaction would be expected to consider, includingthose which impact upon the expected cash flows from theInvestment and upon the degree of risk associated with thosecash flows.

In assessing the reasonableness of assumptions and estimates,the Valuer should:

• note that the objective is to replicate those that the parties inan arm’s-length transaction would make;

• take account of events taking place subsequent to thereporting date where they provide additional evidence ofconditions that existed at the reporting date; and

• take account of materiality considerations.

Because of the uncertainties inherent in estimating FairValue for private equity Investments, a degree of cautionshould be applied in exercising judgment and making thenecessary estimates. However, the Valuer should be waryof applying excessive caution.

Private Equity Funds often undertake an Investment witha view to effecting substantial changes in the UnderlyingBusiness, whether it be to its strategy, operations, management,or whatever. Sometimes these situations involve rescuerefinancing or a turnaround of the business in question.





Whilst it might be difficult in these situations to determineFair Value based on a transaction involving a trade purchaser,it should in most cases be possible to estimate the amount aPrivate Equity Fund would pay for the Investment in question.

The Valuer will need to assess whether, in the particularcircumstances of a specific Investment, he is able reliablyto measure Fair Value by applying generally acceptedmethodologies in a consistent manner based on reasonableassumptions.

There may be situations where:

• the range of reasonable Fair Value estimates is significant

• the probabilities of the various estimates within the rangecannot be reasonably assessed

• the probability and financial impact of achieving a keymilestone cannot be reasonably predicted

• there has been no recent Investment into the business.

In these situations, the Valuer might conclude that Fair Valuecannot be reliably measured.

In situations where Fair Value cannot be reliably measuredthe Valuer may reasonably conclude that the Fair Valueat the previous reporting date remains the best estimate ofFair Value, unless there is evidence that the Investment hassince then been impaired. In such a case the carrying valueshould be reduced to reflect the estimated extent ofimpairment.

In respect of Investments for which Fair Value cannot bereliably measured, the Valuer is required to consider whetherevents or changes in circumstances indicate that animpairment may have occurred.

Where an impairment has occurred, the Valuer should reducethe carrying value of the Investment to reflect the estimatedextent of impairment. Since the Fair Value of suchInvestments cannot be reliably measured, estimating theextent of impairment in such cases will generally be anintuitive (rather than analytical) process and may involvereference to broad indicators of value change (such as relevantstock market indices).


11

3 VALUATION METHODOLOGIES

3.1 General

A number of valuation methodologies that may be consideredfor use in estimating the Fair Value of UnquotedInstruments are described in sections 3.3 to 3.9 below.These methodologies should be amended as necessary toincorporate case-specific factors affecting Fair Value.For example, if the Underlying Business is holding surpluscash or other assets, the value of the business should reflectthat fact.

Because, in the private equity arena, value is generallycrystallised through a sale or flotation of the entireUnderlying Business, rather than through a transfer ofindividual shareholder stakes, the value of the business as awhole at the reporting date will often provide a key insightinto the value of investment stakes in that business. For thisreason, a number of the methodologies described belowinvolve estimating the Enterprise Value as an initial step.

There will be some situations where the Fund has littleability to influence the timing of a Realisation and aRealisation is not likely in the foreseeable future, perhapsbecause the majority shareholders are strongly opposed toit. In these circumstances (which are expected to be rare inprivate equity), Fair Value will derive mainly from theexpected cash flows and risk of the relevant financialinstruments rather than from the Enterprise Value. The valuation methodology used in these circumstancesshould therefore reflect this fact.

In determining the Fair Value of an Investment, theValuer should use judgement. This includes a detailedconsideration of those specific terms of the Investmentwhich may impact its Fair Value. In this regard, theValuer should consider the substance of the Investment,which takes preference over the strict legal form.

It is important conceptually to distinguish the value thatmay be ascribed to an Investment from the value that maybe ascribed to the Underlying Business. For example, invaluing the Underlying Business one may seek to estimatethe amount a buyer would pay for the business at thereporting date. In valuing an Investment stake in thatbusiness, one would not merely take the relevant share ofthe business’s value, since that would fail to recognise theuncertainty and risk involved in actually selling the businessand crystallising the Investment value, and particularly therisk that value may be eroded before a sale can be achievedunder the current market conditions.

The estimation of Fair Value should be undertaken on theassumption that options and warrants are exercised, wherethe Fair Value is in excess of the exercise price. The exerciseprice of these may result in surplus cash arising in theUnderlying Business if the exercise price is significant.

Other rights such as conversion options and ratchets, whichmay impact the Fair Value of the Fund’s Investment, shouldbe reviewed on a regular basis to assess whether these arelikely to be exercised and the extent of any impact on valueof the Fund’s Investment.





Differential allocation of proceeds may have an impact onthe value of an Investment. If liquidation preferences exist,these need to be reviewed to assess whether they will giverise to a benefit to the Fund, or a benefit to a third party tothe detriment of the Fund.

Further examples of specific matters for consideration thatmay impact valuations are set out in section II, 3 .

Movements in rates of exchange may impact the value ofthe Fund’s Investments and these should be taken inaccount.

Where the reporting currency of the Fund is differentfrom the currency in which the Investment is denominated,translation into the reporting currency for reportingpurposes should be done using the bid spot exchange rateprevailing at the reporting date.

3.2 Selecting the Appropriate Methodology

The Valuer should exercise her or his judgement to selectthe valuation methodology that is the most appropriatefor a particular Investment.

The key criterion in selecting a methodology is that itshould be appropriate in light of the nature, facts andcircumstances of the Investment and its materiality inthe context of the total Investment portfolio.

An appropriate methodology will incorporate availableinformation about all factors that are likely materially toaffect the Fair Value of the Investment. In this context,

it is also important to consider the stage of developmentof an enterprise and/or its ability to generate maintainableprofits or positive cashflow.

The Valuer will select the valuation methodology that isthe most appropriate and consequently make valuationadjustments on the basis of their informed and experiencedjudgment. This will include consideration of factors such as:

• the relative applicability of the methodologies used giventhe nature of the industry and current market conditions;

• the quality, and reliability of the data used in eachmethodology;

• the comparability of enterprise or transaction data;

• the stage of development of the enterprise; and

• any additional considerations unique to the subjectenterprise.

In assessing whether a methodology is appropriate,the Valuer should be biased towards those methodologiesthat draw heavily on market-based measures of risk andreturn. Fair Value estimates based entirely on observablemarket data will be of greater reliability than those basedon assumptions.

Methodologies utilising discounted cashflows and industrybenchmarks should rarely be used in isolation of themarket-based measures and then only with extreme caution.These methodologies may be useful as a cross-check ofvalues estimated using the market-based methodologies.

13


Where the Valuer considers that several methodologies areappropriate to value a specific Investment, the Valuer mayconsider the outcome of these different valuationmethodologies so that the results of one particular methodmay be used as a cross-check of values or to corroborateor otherwise be used in conjunction with one or more othermethodologies in order to determine the Fair Value ofthe Investment.

Methodologies should be applied consistently fromperiod to period, except where a change would resultin better estimates of Fair Value.

This may occur for example in the case of a companybecoming profitable and cash flow becoming positive ona maintainable basis a few years after the start-up phase.Any changes in valuation methodologies should be clearlystated. It is expected that there would not be frequentchanges in valuation methodologies.

The table below identifies a number of the most widely usedmethodologies.

3.3 Price of Recent Investment

Where the Investment being valued was itself made recently,its cost will generally provide a good indication of FairValue. Where there has been any recent Investment in theInvestee Company, the price of that Investment will providea basis of the valuation.

The validity of a valuation obtained in this way is inevitablyeroded over time, since the price at which an Investment wasmade reflects the effects of conditions that existed when thetransaction took place. In a dynamic environment, changes inmarket conditions, the passage of time itself and other factorswill act to diminish the appropriateness of this methodologyas a means of estimating value at subsequent dates.

In addition, where the price at which a third party hasinvested is being considered as the basis of valuation, thebackground to the transaction must be taken in to account.In particular, the following factors may indicate that the pricewas not wholly representative of the Fair Value at the time:

• a further Investment by the existing stakeholders withlittle new Investment;

• different rights attach to the new and existingInvestments;

• a new investor motivated by strategic considerations;

• the Investment may be considered to be a forced sale or‘rescue package’; or

• the absolute amount of the new Investment is relativelyinsignificant.

14

METHODOLOGY

Price of Recent Investment

Earnings multiple

Net assets

Discounted cash flows or earnings (of Underlying Business)

Discounted cash flows (from the Investment)

Industry valuation benchmarks





This methodology is likely to be appropriate for all privateequity Investments, but only for a limited period after thedate of the relevant transaction. Because of the frequencywith which funding rounds are often undertaken for seedand start-up situations, or in respect of businesses engagedin technological or scientific innovation and discovery, themethodology will often be appropriate for valuingInvestments in such circumstances.

The length of period for which it would remain appropriate touse this methodology for a particular Investment will dependon the specific circumstances of the case, but a period of oneyear is often applied in practice.

In applying the Price of Recent Investment methodology,the Valuer should use the cost of the Investment itself orthe price at which a significant amount of new Investmentinto the company was made to estimate the Fair Value ofthe Investment, but only for a limited period followingthe date of the relevant transaction. During the limitedperiod following the date of the relevant transaction, theValuer should in any case assess whether changes orevents subsequent to the relevant transaction wouldimply a change in the Investment’s Fair Value.

For example, a reduction in the Investment’s Fair Valuemay have occurred for a number of reasons, includingthe following:

• the performance and/or prospects of the UnderlyingBusiness are significantly below the expectations on whichthe Investment was based. Prima facie indicators of thisinclude a failure to meet significant milestones or to

service financial instruments, breaches of covenantsand a deterioration in the level of budgeted or forecastperformance;

• there has been a significant adverse change either inthe company’s business or in the technological, market,economic, legal or regulatory environment in which thebusiness operates;

• market conditions have deteriorated. This may be indicatedby a fall in the share prices of quoted businesses operatingin the same or related sectors; or

• the Underlying Business is raising money and there isevidence that the financing will be made under significantlydifferent terms and conditions from the original Investment.

3.4 Earnings Multiple

This methodology involves the application of an earningsmultiple to the earnings of the business being valued inorder to derive a value for the business.

This methodology is likely to be appropriate for anInvestment in an established business with an identifiablestream of continuing earnings that can be considered to bemaintainable.

This methodology may be applicable to companies withnegative earnings, if the losses are considered to betemporary and one can identify a level of “normalised”maintainable earnings.

15


This may involve the use of averaging of earnings figuresfor a number of periods, using a forecast level of earningsor applying a “sustainable” profit margin to current orforecast revenues.

In using the Earnings Multiple methodology to estimatethe Fair Value of an Investment, the Valuer should:

i. apply a multiple that is appropriate and reasonable(given the risk profile and earnings growth prospectsof the underlying company) to the maintainableearnings of the company;

ii. adjust the amount derived in (i) above for surplusassets or excess liabilities and other relevant factorsto derive an Enterprise Value for the company;

iii. deduct from the Enterprise Value all amounts relatingto financial instruments ranking ahead of the highestranking instrument of the Fund in a liquidation andtaking into account the effect of any instrument thatmay dilute the Fund’s Investment in order to derivethe Gross Attributable Enterprise Value;

iv. apply an appropriate Marketability Discount to theGross Attributable Enterprise Value derived in (iii)above in order to derive the Net AttributableEnterprise Value; and

v. apportion the Net Attributable Enterprise Valueappropriately between the relevant financialinstruments.

Guidance on the interpretation of underlined terms is givenbelow.

Appropriate Multiple

A number of earnings multiples are commonly used,including price/earnings (P/E), Enterprise Value/earningsbefore interest and tax (EV/EBIT) and depreciation andamortisation (EV/EBITDA). The particular multiple usedshould be appropriate for the business being valued.(N.B: The multiples of revenues and their use are presentedin 3.8. Industry Valuation Benchmarks)

In general, because of the key role of financial structuringin private equity, multiples should be used to derive anEnterprise Value for the Underlying Business. Therefore,where a P/E multiple is used, it should generally be appliedto a taxed EBIT figure (after deducting finance costsrelating to working capital or to assets acquired or leasedusing asset finance) rather than to actual after-tax profits,since the latter figure will generally have been significantlyreduced by finance costs.

By definition, earnings multiples have as their numeratora value and as their denominator an earnings figure.The denominator can be the earnings figure for anyspecified period of time and multiples are often defined as“historical”, “current” or “forecast” to indicate the earningsused. It is important that the multiple used correlates to theperiod and concept of earnings of the company being valued.





Reasonable Multiple

The Valuer would usually derive a multiple by reference tomarket-based multiples, reflected in the market valuationsof quoted companies or the price at which companies havechanged ownership. This market-based approach presumesthat the comparator companies are correctly valued bythe market. Whilst there is an argument that the marketcapitalisation of a quoted company reflects not the value ofthe company but merely the price at which “small parcels”of shares are exchanged, the presumption in theseGuidelines is that market based multiples do correctlyreflect the value of the company as a whole.

Where market-based multiples are used, the aim is toidentify companies that are similar, in terms of risk attributesand earnings growth prospects, to the company being valued.This is more likely to be the case where the companies aresimilar in terms of business activities, markets served, size,geography and applicable tax rate.

In using P/E multiples, the Valuer should note that theP/E ratios of comparator companies will be affected bythe level of financial gearing and applicable tax rate ofthose companies.

In using EV/EBITDA multiples, the Valuer should notethat such multiples, by definition, remove the impact onvalue of depreciation of fixed assets and amortisation ofgoodwill and other intangibles. If such multiples are usedwithout sufficient care, the Valuer may fail to recognisethat business decisions to spend heavily on fixed assets orto grow by acquisition rather than organically do have real

costs associated with them which should be reflected in thevalue attributed to the business in question.

It is important that the earnings multiple of each comparatoris adjusted for points of difference between the comparatorand the company being valued. These points of differenceshould be considered and assessed by reference to the twokey variables of risk and earnings growth prospects whichunderpin the earnings multiple. In assessing the risk profileof the company being valued, the Valuer should recognisethat risk arises from a range of aspects, including the natureof the company’s operations, the markets in which it operatesand its competitive position in those markets, the quality of itsmanagement and employees and, importantly in the case ofprivate equity, its capital structure and the ability of the Fundholding the Investment to effect change in the company.For example, the value of the company may be reduced if it:

• is smaller and less diverse than the comparator(s) and,therefore, less able generally to withstand adverseeconomic conditions;

• is reliant on a small number of key employees;

• is dependent on one product or one customer;

• has high gearing; or

• for any other reason has poor quality earnings.

17


Recent transactions involving the sale of similar companiesare sometimes used as a frame of reference in seeking toderive a reasonable multiple. It is sometimes argued, sincesuch transactions involve the transfer of whole companieswhereas quoted multiples relate to the price for “smallparcels” of shares, that they provide a more relevant sourceof multiples. However, their appropriateness in this respectis often undermined by the following:

• the lack of forward-looking financial data and otherinformation to allow points of difference to be identifiedand adjusted for;

• the generally lower reliability and transparency ofreported earnings figures of private companies; and

• the lack of reliable pricing information for the transactionitself.

It is a matter of judgment for the Valuer as to whether,in deriving a reasonable multiple, he refers to a singlecomparator company or a number of companies orthe earnings multiple of a quoted stock market sector orsub-sector. It may be acceptable, in particular circumstances,for the Valuer to conclude that the use of quoted sector orsub-sector multiples or an average of multiples from a“basket” of comparator companies may be used withoutadjusting for points of difference between the comparator(s)and the company being valued.

Maintainable Earnings

In applying a multiple to maintainable earnings, it isimportant that the Valuer is satisfied that the earnings figurecan be relied upon. Whilst this might tend to favour the useof audited historical figures rather than unaudited orforecast figures, it should be recognised that value is bydefinition a forward-looking concept, and quoted marketsmore often think of value in terms of “current” and “forecast”multiples, rather than “historical” ones. In addition, there isthe argument that the valuation should, in a dynamicenvironment, reflect the most recent available information.There is therefore a trade-off between the reliability andrelevance of the earnings figures available to the Valuer.On balance, whilst it remains a matter of judgment for theValuer, he should be predisposed towards using historical(though not necessarily audited) earnings figures or, if hebelieves them to be reliable, forecast earnings figures forthe current year.

Whichever period’s earnings are used, the Valuer shouldsatisfy himself that they represent a reasonable estimate ofmaintainable earnings, which implies the need to adjust forexceptional or non-recurring items, the impact ofdiscontinued activities and acquisitions and forecastdownturns in profits.





Appropriate Marketability Discount

The notion of a Marketability Discount relates to anInvestment rather than to the Underlying Business.Paragraph (iv) above therefore requires the discount tobe considered and applied at the level at which the Fundbegins to participate in the Enterprise Value.

Marketability will vary from situation to situation and is aquestion of judgment. It should be noted that the Fair Valueconcept requires that the Marketability Discount is to bedetermined not from the perspective of the current holder ofthe Investment, but from the perspective of Market Participants.

Some of the factors the Valuer should consider in thisrespect are as follows:

• the closer and more certain is a Realisation event forthe Investment in question, the lower would be theMarketability Discount;

• the greater the influence of the Fund over the timing ofRealisation, nature of Realisation and Realisation process,the lower would be the Marketability Discount;

• if the underlying company were not considered saleableor floatable at the reporting date, the questions arise ofwhat has to be done to make it saleable or floatable, howdifficult and risky that course of action is to implementand how long it is expected to take; and

• the impact of stock market conditions and mergers andacquisitions activity levels on the ability to achieve aflotation or sale of the Underlying Business.

In assessing the influence of the Fund over the timing ofRealisation, nature of Realisation and Realisation process,some of the factors the Valuer should consider are as follows:

• are there other like-minded shareholders with regard toRealisation and what is the combined degree of influence?

• is there an agreed exit strategy or exit plan?

• do legal rights exist which allow the Fund together withlike-minded shareholders to require the other shareholdersto agree to and enable a proposed Realisation to proceed?

• does the management team of the Underlying Businesshave the ability in practice to reduce the prospects of asuccessful Realisation? This may be the case where theteam is perceived by possible buyers to be critical to theongoing success of the business. If this is the case, what isthe attitude of the management team to Realisation?

The Valuer might consider that under specific circumstancesthe Marketability Discount is not appropriate and shouldnot be applied. When a discount is applied, the Valuershould consider all the relevant factors in determiningthe appropriate Marketability Discount in each particularsituation. A discount in the range of 10% to 30% (in stepsof 5%) is generally used in practice, depending upon theparticular circumstances.

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By way of illustration for unquoted securities:

• Where the Fund (together with like-minded shareholderswith regard to Realisation) has legal rights and the abilityin practice to initiate a Realisation process and requireother shareholders to co-operate, or there is in place anagreed Realisation strategy, a discount rate of 10% maybe appropriate.

• Where the Fund (together with like-minded shareholderswith regard to Realisation) does not have such a degree ofinfluence over Realisation, possibly by virtue of holding aminority of the equity, but the other shareholders are notstrongly opposed to a Realisation, a discount rate of 30%may be appropriate (NB. where a Realisation event is notforeseeable at all, perhaps because the Fund holds aminority equity stake and the majority shareholders aretotally opposed to a Realisation, methodologies whichinvolve an assessment of the value of the business as awhole may not be appropriate).

• Where the Fund (together with like-minded shareholderswith regard to Realisation) does not have the ability torequire other shareholders to co-operate regardingRealisation, but there is regular discussion aboutRealisation prospects and timing by the board and/orshareholders, a discount rate of 20% may be appropriate.

Apportion the Net Attributable Enterprise Valueappropriately

The apportionment should reflect the respective amountsaccruing to each financial instrument holder in the eventof a sale at that level at the reporting date. Where thereare ratchets or share options or other mechanisms (such as“liquidation preferences”, in the case of Investments in early-stage businesses) in place which would be triggered in theevent of a sale of the company at the given Enterprise Valueat that date, these should be reflected in the apportionment.

Where, in respect of financial instruments other than equityinstruments, the apportionment results in a shortfall whencompared with the amounts accruing up to the reportingdate under their contractual terms, the Valuer shouldconsider whether, in estimating Fair Value, the shortfall shouldbe applied and, if so, to what extent. If the circumstancesare such that it is reasonably certain, taking account ofthe risks attaching, that the Fund will be able to collect allamounts due according to the relevant contractual terms,then the shortfall should not be applied.

3.5 Net Assets

This methodology involves deriving the value of a businessby reference to the value of its net assets.

This methodology is likely to be appropriate for a businesswhose value derives mainly from the underlying value of itsassets rather than its earnings, such as property holdingcompanies and investment businesses.





This methodology may also be appropriate for a business thatis not making an adequate return on assets and for which agreater value can be realised by liquidating the business andselling its assets. In the context of private equity, it maytherefore be appropriate, in certain circumstances, forvaluing Investments in loss-making companies andcompanies making only marginal levels of profits.

In using the Net Assets methodology to estimate the FairValue of an Investment, the Valuer should:

i. derive an Enterprise Value for the company usingappropriate measures to value its assets and liabilities(including, if appropriate, contingent assets andliabilities);

ii. deduct from the Enterprise Value all amounts relatingto financial instruments ranking ahead of the highestranking instrument of the Fund in a liquidation in orderto derive the Gross Attributable Enterprise Value;

iii. apply an appropriate Marketability Discount tothe Gross Attributable Enterprise Value to derivethe Net Attributable Enterprise Value; and

iv. apportion the Net Attributable Enterprise Valueappropriately between the relevant financialinstruments.

Guidance on the interpretation of underlined terms is givenin the “Earnings multiple” section above.

3.6 Discounted Cash Flows or Earnings(of Underlying Business)

This methodology involves deriving the value of a businessby calculating the present value of expected future cashflows (or the present value of expected future earnings, as asurrogate for expected future cash flows). The cash flowsand “terminal value” are those of the Underlying Business,not those from the Investment itself.

The Discounted Cash Flows (DCF) technique is flexible inthe sense that it can be applied to any stream of cash flows(or earnings). In the context of private equity valuation, thisflexibility enables the methodology to be applied in situationsthat other methodologies may be incapable of addressing.While this methodology may be applied to businessesgoing through a period of great change, such as a rescuerefinancing, turnaround, strategic repositioning, loss makingor is in its start-up phase, there is a significant risk isutilising this methodology.

The disadvantages of the DCF methodology centre aroundits requirement for detailed cash flow forecasts and the need toestimate the “terminal value” and an appropriate risk-adjusteddiscount rate. All of these inputs require substantial subjectivejudgments to be made, and the derived present valueamount is often sensitive to small changes in these inputs.

Due to the high level of subjectivity in selecting inputs for thistechnique, DCF based valuations are useful as a cross-checkof values estimated under market-based methodologies andshould only be used in isolation of other methodologiesunder extreme caution. 21


In assessing the appropriateness of this methodology,the Valuer should consider whether its disadvantagesand sensitivities are such, in the particular circumstances,as to render the resulting Fair Value insufficiently reliable.

In using the Discounted Cash Flows or Earnings(of Underlying Business) methodology to estimatethe Fair Value of an Investment, the Valuer should:

i. derive the Enterprise Value of the company, usingreasonable assumptions and estimations of expectedfuture cash flows (or expected future earnings) andthe terminal value, and discounting to the presentby applying the appropriate risk-adjusted rate thatquantifies the risk inherent in the company;

ii. deduct from the Enterprise Value all amounts relatingto financial instruments ranking ahead of the highestranking instrument of the Fund in a liquidation in orderto derive the Gross Attributable Enterprise Value;

iii. apply an appropriate Marketability Discount tothe Gross Attributable Enterprise Value derivedin ii above in order to derive the Net AttributableEnterprise Value; and

iv. apportion the Net Attributable Enterprise Valueappropriately between the relevant financialinstruments.

Guidance on the interpretation of underlined terms is givenin the “Earnings multiple” section above.

3.7 Discounted Cash Flows (from the Investment)

This methodology applies the DCF concept and techniqueto the expected cash flows from the Investment itself.

Where Realisation of an Investment or a flotation of theUnderlying Business is imminent and the pricing of therelevant transaction has been substantially agreed, theDiscounted Cash Flows (from the Investment) methodology(or, as a surrogate, the use of a simple discount to the expectedRealisation proceeds or flotation value) is likely to be themost appropriate methodology.

This methodology, because of its flexibility, is capable ofbeing applied to all private equity Investment situations.It is particularly suitable for valuing non-equity Investmentsin instruments such as debt or mezzanine debt, since thevalue of such instruments derives mainly from instrument-specific cash flows and risks rather than from the value ofthe Underlying Business as a whole.

Because of its inherent reliance on substantial subjectivejudgments, the Valuer should be extremely cautious of usingthis methodology as the main basis of estimating Fair Valuefor Investments which include an equity element.The methodology will often be useful as a sense-checkof values produced using other methodologies.

Private equity risk and the rates of return necessary tocompensate for different risk levels are central commercialvariables in the making of all private equity Investments.Accordingly there exists a frame of reference against whichto make discount rate assumptions.





However the need to make detailed cash flow forecasts overthe Investment life may reduce the reliability and cruciallyfor equity Investments, there remains a need to estimate the“terminal value”.

Where the Investment comprises equity or a combinationof equity and other financial instruments, the terminal valuewould usually be derived from the anticipated value ofthe Underlying Business at Realisation. This will usuallynecessitate making assumptions about future businessperformance and developments and stock market and othervaluation ratios at the assumed Realisation date. In the caseof equity Investments, small changes in these assumptions canmaterially impact the valuation. In the case of non-equityinstruments, the terminal value will usually be a pre-definedamount, which greatly enhances the reliability of the valuation.

In circumstances where a Realisation is not foreseeable,the terminal value may be based upon assumptions of theperpetuity cash flows accruing to the holder of the Investment.These circumstances (which are expected to be rare inprivate equity) may arise where the Fund has little ability toinfluence the timing of a Realisation and/or those shareholdersthat can influence the timing do not seek a Realisation.

In using the Discounted Cash Flows (from the Investment)methodology to estimate the Fair Value of an Investment,the Valuer should derive the present value of theInvestment, using reasonable assumptions and estimationsof expected future cash flows and the terminal valueand date, and the appropriate risk-adjusted rate thatquantifies the risk inherent to the Investment.

3.8 Industry Valuation Benchmarks

A number of industries have industry-specific valuationbenchmarks, such as “price per bed” (for nursing-homeoperators) and “price per subscriber” (for cable televisioncompanies). Other industries, including certain financialservices and information technology sectors and someservices sectors where long-term contracts are a key feature,use multiples of revenues as a valuation benchmark.These industry norms are often based on the assumptionthat investors are willing to pay for turnover or marketshare, and that the normal profitability of businesses inthe industry does not vary much.

The use of such industry benchmarks is only likely tobe reliable and therefore appropriate as the main basisof estimating Fair Value in limited situations, and is morelikely to be useful as a sense-check of values producedusing other methodologies.

3.9 Available Market Prices

Private Equity Funds may be holding Quoted Instruments,for which there is an available market price.

Instruments quoted on an active stock market should bevalued at their bid prices on the Reporting Date.

For certain Quoted Instruments there is only one marketprice quoted, representing, for example, the value at whichthe most recent trade in the instrument was transacted.

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For other Quoted Instruments there are two market pricesat any one time: the lower “bid” price quoted by a marketmaker, which he will pay an investor for a holding (i.e. theinvestor’s disposal price), and the higher “offer” price, whichan investor can expect to pay to acquire a holding. A thirdprice basis for valuation purposes, as an alternative to eitherbid or offer, is the mid-market price (i.e. the average of thebid and offer prices). Where a bid and offer price exists, thebid price should be used, although the use of the mid-marketprice will not usually result in a material overstatementof value.

This methodology should apply when the bid prices are seton an active market. An instrument is regarded as quotedon an active market if quoted prices are readily andregularly available from an exchange, broker, dealer,industry group, pricing services or regulatory agency, andthose prices represent actual and regularly occurring markettransaction on arm’s length basis.

Marketability Discounts should generally not be applied toprices quoted on an active market, unless there is somecontractual, Governmental or other legally enforceablerestriction preventing realisation at the reporting date.

In determining the level of Marketability Discount to applythe Valuer should consider the extent of compensationa holder would require when comparing the Investmentin question with an identical but unrestricted holding.

In the case of a six-month lock-up period, in practice adiscount of 20% to the market price is often used at thebeginning of the period, reducing to zero at the end of theperiod.

If a different level of discount is appropriate in light of theparticular circumstances of an Investment, the Valuer shoulduse that rate and should disclose the fact that he has done sotogether with the rationale for so doing.





SECTION II: APPLICATION GUIDANCE

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INTRODUCTION

Section I sets out the guidelines and principles whichrepresent best practice for the valuation of private equity andventure capital Investments. This section sets out furtherpractical guidance to the application of those principles andmethodologies to specific cases.

1 SELECTING THE APPROPRIATE METHODOLOGY

In estimating Fair Value for an Investment, the Valuer shouldapply a methodology that is appropriate in light of the nature,facts and circumstances of the Investment and should usereasonable assumptions and estimates.

When selecting the appropriate methodology each Investmentshould be considered individually. Where an immaterial groupof Investments in a portfolio are similar in terms of risk profileand industry, it is acceptable to apply the same methodologyacross all Investments in that immaterial group. The methodologyapplied should be the same as that used for materialinvestments with a similar risk profile in that industry.

When selecting the appropriate methodology, it is importantto consider the stage of development of an enterprise and/orits ability to produce maintainable profits or maintainablepositive cash.

Set out below are the most commonly used valuationmethodologies based on the ability of the Underlying Business togenerate revenues and profits. The Valuer would be expected touse these methodologies unless there is compelling evidence thatanother methodology would provide a more reliable Fair Value.

Methodologies should be applied consistently from onereporting period to the next, unless there is a change incircumstances of the enterprise, for example the enterprisegenerating sustainable profits.

Early stage enterprises or enterprises without or withinsignificant revenues, and without either profits orpositive cash flows

For these enterprises, typically in a seed, start-up or anearly-stage situation, there are usually no current and noshort-term future earnings or positive cash flows. It is difficultto gauge the probability and financial impact of the successor failure of development or research activities and to makereliable cash flow forecasts.

Consequently, the most appropriate approach to determineFair Value is a methodology that is based on market data,that being the Price of a Recent Investment.

This methodology is likely to be appropriate for a limitedperiod after the date of the relevant transaction.

The length of period for which it would remain appropriate touse this methodology for a particular Investment will dependon the specific circumstances of the case, but a period of oneyear is often applied in practice.

After the appropriate limited period, the Valuer shouldconsider whether either the circumstances of the Investmenthave changed, such that one of the other methodologieswould be more appropriate, whether there is any evidenceof deterioration or strong defensible evidence of an increase invalue. In the absence of these indicators the Valuer will typicallyrevert to the value reported at the previous reporting date.

In the absence of significant revenues, profits or positive cashflows, other methodologies such as the earnings multiple aregenerally inappropriate. The DCF methodologies may beutilised, however the disadvantages inherent in these, arisingfrom the high levels of subjective judgement, may render themethodology inappropriate.

Enterprises with revenues, but without either significantprofits or significant positive cash flows

For these enterprises it is often difficult to gauge theprobability and financial impact of the success of developmentactivities or to make reliable future earnings or cash flowforecasts. This is seen typically in early stage enterprises,development, turnaround or recovery situations.

The most appropriate methodology is expected to be the priceof a recent investment. The continuing validity of this basis asa reflection of Fair Value needs to be considered and as a partof this consideration, industry benchmarks may provideappropriate support.

In the event that the enterprise is generating a return on itsnet assets below expectations and that greater value may berealised by the sale of the assets, a valuation based on the netassets methodology may be appropriate.

Other methodologies such as the earnings multiple aregenerally inappropriate. The DCF methodologies may beutilised, however the disadvantages inherent in these, arisingfrom the high levels of subjective judgement, may render themethodology inappropriate.

Enterprises with revenues, maintainable profits and/ormaintainable positive cash flows

For some period of time after the initial Investment, the Priceof Recent Investment methodology, is likely to be the mostappropriate indication of Fair Value.

This period of time will depend on the specific circumstances ofthe case, but should not generally exceed a period of one year.

Thereafter is it likely to be most appropriate to estimateFair Value by reference to the quoted market and to usethe Earnings Multiple methodology.





2 SPECIF IC CONSIDERATIONS

2.1 Internal Funding Rounds

The price at which a funding round takes place is a clearindicator of Fair Value at that date. When using the Priceof Recent Investment methodology, the Valuer shouldconsidered whether there are specific circumstancessurrounding that round of Investment which may reducethe reliability of the price as an indicator of Fair Value.

A round of financing that involves only existing investorsof the Underlying Business in the same proportion totheir existing Investments (internal round), may not bean appropriate basis for a change in valuation as thetransaction may not have been undertaken at arm’s length.

Nevertheless, a financing with existing investors that ispriced at a valuation that is lower than the valuationreported at the previous Reporting Date (internal downround) may indicate a decrease in value and shouldtherefore be taken into consideration.

Internal down rounds may take various forms, includinga corporate reorganisation, i.e. a significant change in theequity base of a company such as converting all outstandingshares into equity, combining outstanding shares into asmaller number of shares (share consolidation) or evencancelling all outstanding shares before a capital increase.

The objectives of the existing investors in making aninternal down round may vary. Although a down roundevidences the fact that the company was unable to raise

funds from investors at a higher valuation, the purposeof the down round may be, among others, the dilution ofthe founders or the dilution of investors not participatingin the round of financing.

Similarly when a financing is made at a higher valuation(internal up round), in the absence of new investors orother significant factors which indicate that value has beenenhanced, the transaction alone is unlikely to be a reliableindicator of Fair Value.

2.2 Bridge Financing

Funds, or related vehicles, may grant loans to an UnderlyingBusiness pending a new round of financing (Bridge loans).This may be provided in anticipation of an initial Investmentby the Fund, or ahead or a proposed follow on Investment.

In the case of an initial Investment, where the Fund holdsno other investments in the Underlying Business, the Bridgeloan should be valued in isolation. In these situations and ifit is expected that the financing will occur in due course andthat the Bridge loan is merely ensuring that funds are madeavailable early, the Valuer should value these loans at cost.

If it is anticipated that the company may have difficultyarranging the financing, and that its viability is in doubt,the Valuer should consider making a provision against thecost of that loan.

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If the bridge finance is provided to an existing Investmentin anticipation of a follow on Investment, the bridge financeshould be included, together with the original Investment,as a part of the overall package of investment being valued.

2.3 Mezzanine Loans

Mezzanine loans are one of the commonly used sourcesof debt finance for Investments. Typically these will rankbelow the senior debt, but above shareholder loans orequity, bear an interest rate appropriate to the level of riskbeing assumed by the loan provider and may have additionalpotentially value enhancing aspects such as warrants.Often these are provided by a party other than the equityprovider and as such may be the only instrument held bythe Fund in the Underlying Business. In these situations,the Mezzanine loan should be valued on a stand alone basis.The price at which the Mezzanine loan was granted is areliable indicator of Fair Value at that date. The Valuershould consider whether any indications of deteriorationin the value of the Underlying Business exist, which suggestthat the loan will not be fully recovered. In the event ofdeterioration, this should be reflected in the Fair Valueof the Mezzanine loan.

Warrants attached to Mezzanine loans should beconsidered separately from the loan. The Valuer shouldselect a methodology appropriate to valuing the UnderlyingBusiness and apply the percentage ownership that theexercised warrants will confer to that valuation. It is expectthat in most cases, the percentage ownership will be small

and that the warrant holder will be unable to significantlyinfluence the Realisation process. In these situations, a largeMarketability Discount will be appropriate.

In the event that the Mezzanine loan is one of a number ofinstruments held by the Fund in the Underlying Business,then the Mezzanine loan and any attached warrants shouldbe included as a part of the overall package of investmentbeing valued.

2.4 Rolled up Loan Interest

Many financial instruments commonly used in private equityInvestments accumulate interest which is only realised incash on redemption of the instrument (e.g. deep discountdebentures or Payment-in-Kind Notes).

In valuing these instruments, the Valuer should assess theexpected amount to be recovered from these instruments.If deterioration indicators exist, a provision against the costof the loan should be made to reflect the deterioration invalue. The consideration of recoverable amount will alsoinclude the existence of any reasonably anticipatedenhancements such as interest rate step increases.The difference between the estimated recoverable amount(if in excess of the original cost) should be spread overthe anticipated life of the note so as to give a constant rateof return on the instrument.





2.5 Indicative Offers

Indicative offers received from a third party for theUnderlying Business may provide a good indication ofFair Value. This will apply to offers for a part or the wholeUnderlying Business as well as other situations such asprice indications for debt or equity refinancing.

However, before using the offer as evidence of Fair Value,the Valuer should consider the motivation of the party inmaking the offer. Indicative offers may be made deliberatelyhigh for such reasons as; to open negotiations; gain accessto the company or made subject to stringent conditions orfuture events. Similarly they may be deliberately low if theofferor believes that the vendor may be in a forced saleposition, or to take an opportunity to increase their equitystake at the expense of other less liquid stakeholders.In addition indicative offers may be made on the basis ofinsufficient detailed information to be properly valid.

These motivations should be considered by the Valuer,however it is unlikely that a firm conclusion can be drawn.

Accordingly, typically indicative offers will provide usefuladditional support for a valuation estimated by one of thevaluation methodologies, but are insufficiently robust to beused in isolation.

3 EVENTS TO CONSIDER FOR THEIR IMPACTON VALUE

When performing the valuation, at each Reporting Date,the Valuer should consider all factors that will contribute to amaterial creation or diminution in value of the Investment.

In the absence of reliable value indicators, such as recentInvestments or the generation of profits, there are many subtlefactors which should be considered by the Valuer as these mayindicate a material change in value.

Examples of events or changes in circumstances which mayindicate that a decrease or an increase in value has occurredinclude, but are not limited to:

• the performance or prospects of the Underlying Businessbeing significantly below or above the expectations onwhich the Investment was based

• the Underlying Business is performing substantially andconsistently behind or ahead of plan

• the Underlying Business met or missed its milestones suchas clinical trials, technical developments, divisions becomingcash positive, restructurings being completed

• there is a deterioration or improvement in the level ofbudgeted performance

• whether the Underlying Business has breached any bankingcovenants, defaulted on any obligations

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• the existence of off-balance sheet items, contingent liabilitiesand guarantees

• the existence of a major lawsuit

• disputes over commercial matters such as intellectualproperty rights

• the existence of fraud within the company

• a change of management or strategic direction of theUnderlying Business

• whether there has been a significant adverse or favourablechange either in the company’s business or in thetechnological, market, economic, legal or regulatoryenvironment in which the business operates;

• significant changes in market conditions. This may beindicated by a movement in the share prices of quotedbusinesses operating in the same or related sectors;

• the Underlying Business is raising money and there isevidence that the financing will be made under conditionsdifferent from those prevailing at the time of the previousround of financing.

The Valuer will assess the impact of all positive and negativeevents and adjust the carrying value accordingly in order toreflect the Fair Value of the Investment at the Reporting Date.

Where deterioration in value has occurred, the Valuer shouldreduce the carrying value of the Investment reported at theprevious Reporting Date to reflect the estimated decrease.

If there is insufficient information to accurately assess theadjusted Fair Value, decreases in value are usually in practiceassessed in tranches of 25%. If however the Valuer believesthat they have sufficient information to more accurately assessfair value (this may occur when 25% or less or the originalvalue remains), then smaller tranches of 5% may be applied.

If there is evidence of value creation, such as those listedabove, the Valuer may consider increasing the carrying valueof the Investment. Caution must be applied so that positivedevelopments are not being valued before they actuallycontribute to an increase in value of the Underlying Business.In practice, in the absence of additional financing rounds orprofit generation, these more subtle indicators of valueenhancement are generally only used to support the reversalof a previously recognised deterioration in value.





4 IMPACTS FROM STRUCTURING

Frequently the structuring of a private equity Investment iscomplex with groups of stakeholders holding different rightswhich either enhance or diminish the value of their interests,depending on the success or otherwise of the UnderlyingBusiness.

Valuations must take account the impact of future changes inthe structure of the Investment which may materially impactthe Fair Value. These potential impacts may take severaldifferent legal forms and may be initiated at the Fund’s option,automatically on certain events taking place, or at the optionof another investor. Common clauses include, but are notlimited to:

• Stock options and warrants

• Anti-dilution clauses

• Ratchet clauses

• Convertible debt instruments

• Liquidation preferences

• Commitments to take up follow-on capital Investments;

These rights should be reviewed on a regular basis to assesswhether these are likely to be exercised and the extent of anyimpact on value of the Fund’s Investment. At each ReportingDate, the Valuer should determine whether these rights arelikely to be exercised.

In assessing whether rights are likely to be taken up bystakeholders, the Valuer should limit their consideration to acomparison of the value received by the exerciser against thecost of exercising. If the exerciser will receive an enhancementin value by exercising, the Valuer should assume that theywill do so.

The estimation of Fair Value should be undertaken on the basisthat all rights that are currently exercisable and are likely to beexercised (such as options), or those that occur automaticallyon certain events taking place (such as liquidation preferenceson Realisation, or ratchets based on value), have taken place.

Consideration should be given to whether the exercise pricewill result in surplus cash arising in the Investee Company.

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WORKGROUP

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WORKGROUP

• Marie-Fleur Bonte, Manager, PricewaterhouseCoopers

• Angela Crawford-Ingle, Partner, PricewaterhouseCoopers

• Herman Daems, Chairman, GIMV

• Jean-Yves Demeunynk, Managing Director, AFIC

• Javier Echarri, Secretary General, EVCA

• Pierre Esmein, Partner, Deloitte & Touche

• Ann Glover, CEO, Amadeus Capital

• Richard Green, Managing Director, Kleinwort Capital Limited

• Didier Guennoc, Chief Economist, EVCA

• John Mackie, Chief Executive, BVCA

• Sylvain Quagliaroli, Partner, Grant Thornton

• Monique Saulnier, Managing Partner, Sofinnova Partners

• Jean-Bernard Schmidt, Chairman, Sofinnova Partners

• Writer: Anthony Cecil, Partner, KPMG

AFIC(The Association Françaisedes Investisseurs en Capital)

AFIC is an independent organization.With 210 active members, AFIC bringstogether almost all of the private equityinstitutions in France. In addition,AFIC has 110 associate members.

In order to create a clear set of standardsfor the private equity business, AFICdrafted a "Code of Ethics", to whichall members must adhere to.AFIC regularly publishes referencedocuments, which include the "PrivateEquity Best Practices Guidelines".Lastly, AFIC issues recommendationson corporate governance which aredesigned to promote transparencyand responsibility.

AIFI(The Italian Private Equity andVenture Capital Association)

AIFI was founded in May 1986 in orderto promote, develop and institutionallyrepresent the private equity and venturecapital activity in Italy. The Associationis a non-profit organisation whose mainactivities are: to create a favourable legalenvironment for the private equity andventure capital investment activity, toanalyse the Italian private equity marketcollecting statistical data, to organizebusiness seminars and specialized coursesaddressed to institutional investors andto people interested in operating withinthe industry, to publish research papersregarding specific topics about the privateequity market, to build up stable andsolid relationships with other NationalVenture Capital Associations and keyplayers in the international privateequity market. In order to carry out theabove-mentioned activities, AIFI canrely both on its permanent staff and ondifferent Technical Committeesestablished with the task to carry outactivities of study on specific mattersand projects.

APCRI(The Portuguese Private Equity andVenture Capital Association)

APCRI was established in 1989 and isbased in Lisbon. APCRI represents thePortuguese private equity and venturecapital sector and promotes the asset class.

APCRI’s role includes representingthe interests of the industry to regulatorsand standard setters; developingprofessional standards; providingindustry research; professionaldevelopment and forums, facilitatinginteraction between its members andkey industry participants includinginstitutional investors, entrepreneurs,policymakers and academics.

APCRI’s activities cover the wholerange of private equity: venture capital(from seed and start-up to developmentcapital), buyouts and buyins.

APCRI represents the vast majority ofprivate equity and venture capital inPortugal. APCRI has 16 full membersand 5 associate members. Full membersare active in making equity investmentsprimarily in unquoted companies.





The associate membership can includethose firms who invest directly inprivate equity but for whom this is nottheir principal activity, advisory firmsexperienced in dealing with privateequity and educational or researchbased institutions closely associatedwith the industry.

APEA(The Arab Private Equity Association)

APEA is the only pan-Arab industryassociation sponsored by the EconomicUnity Council of the Arab League, theAPEA was formed to address thechallenges faced by private equity firmsas well as venture capitalists in the Arabworld. APEA believes that privateequity and venture capitalism can beimportant catalysts for the provisionof economic opportunities, increasedinvestment flows, and superior businessperformance for Arab industries.APEA's core mission is to increasethe role of this young but rapidlygrowing industry in the Arab world,and strengthen the performanceof private equity investment in theemerging Arab market.

ASCRI(The Spanish Private Equity andVenture Capital Association)

ASCRI is a non-profit making associationthat was set up in 1986, to promote anddevelop the venture capital and privateequity activity in Spain and represent,manage and defend its members’professional interests.

The Association stimulates the promotionand information analysis in the venturecapital/private equity sector in Spain,and provides the contact between OfficialOrganisations, investors, professionaladvisers, business schools and otherrelevant institutions. At the end ofMay 2005, ASCRI had 84 full membersand 28 associate members.

The ASCRI’s main activities are:Research activity, Organisation ofdifferent events such as: Annual GeneralAssembly, ASCRI Congress, TrainingSeminars and Conferences/Workshops,Communication of investmentopportunities between ASCRI members,and Institutional and lobbying activity.

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ATIC(The Tunisian Venture CapitalAssociation)

ATIC (Association Tunisienne desInvestisseurs en Capital) is a professionalassociation founded in April 2004, bymore than 30 companies operating inthe field of Private Equity and VentureCapital in Tunisia. Its main gaol is toplay the vis-a-vis with the Tunisianauthorities to introduce the appropriatelegal and fiscal measures to ease thedevelopment, and solve the problems ofthe private equity and venture capitalindustry in Tunisia.

ATIC second objective is to offer itsmembers the appropriate space fornetworking, information exchange andbusiness development to upgrade theTunisian industry by targeting highervalue added technology projects, andstronger alliances with its North Africanand European Partners.

ATIC's third objective no less importantis to inculcate the right private equityand venture capital culture to localprofessionals, to enhance the creation ofa new generation of Funds managersand to reach strategic alliances withtheir European or US counterparts.ATIC aims to reach that by enforcingthe best practices of the professionaccording to international standards,through its planned training programs.

AVCA(The African Venture CapitalAssociation)

AVCA represents the private equity andventure capital industry in Africa.AVCA was established in 2002 and itshead office is in Yaoundé, Cameroon.AVCA’s membership is drawn fromacross Africa and internationally.AVCA’s objectives are to represent theindustry within Africa and internationally,stimulate the growth and expansionof the industry throughout Africa,stimulate professional relationships andco-operation, provide opportunities forprofessional development of industrypractitioners, research, publish andcirculate industry information and insights,provide policymakers with proposals toimprove the corporate, fiscal and legalenvironment for the industry, maintainhigh ethical and professional standardsand contribute to the managementdevelopment of investors, investees andother stakeholders. AVCA’s activitiesinclude an annual industry conference, aquarterly newsletter, research, trainingand advocacy programs. For moreinformation visit the AVCA websitewww.avcanet.com.





AVCAL(The Australian Private Equity andVenture Capital Association)

AVCAL represents the interests ofAustralia’s venture capital & privateequity industry.

AVCAL’s 50 investor members haveA$10 billion under management.AVCAL’s roles include: promotion ofthe industry, education of practitioners,public policy development, stagingnetworking events, application ofvaluation & disclosure guidelines,benchmarking IRRs, development ofindustry standard Limited Partnershipagreement.

AVCAL conducts about 40 networkingevents annually across Australia, andleverages its online presence atwww.avcal.com.au for maximumefficiency.

AVCO(The Austrian Private Equity andVenture Capital Organisation)

AVCO is the National Association ofAustria's Private Equity and VentureCapital industry, which covers morethan 90% of the Austrian Private Equitymarket with its members.

• It works as a knowledgeable partnerand independ-ent information pointfor journalists, entrepre-neurs,potential investors, private and publicinstitu-tions as well as internationalbodies that are interested in Austria’sPrivate Equity industry, itsdevelopment and struc-ture as wellas its activi-ties and performance.

• It acts as the official representativeof the industry actively engaged inimproving the tax-related, legal andeconomic policy environments in closeconnection with respec-tive policymakers.

• As a proactive networking institutionit promotes co-operation inside theindustry as well as interaction withcom-plementary players from otherfields in order to intensify informationflows and create learning loops.

• In addition it takes the role of aninterface to international organisationsex-changing experience, informationand knowl-edge with other PrivateEquity and Venture CapitalAssociations in Europe, with theEuro-pean Commission and furtherrelevant institu-tions in order to putinter-national best practice at workfor Austria.

Currently AVCO is engaged to initiateinternationally favourable private equityfund structures for Austria and recentlyAVCO has published Investor RelationsGuidelines – behavioural standards for itsmembers vis-à-vis their fund investors –in order to raise transparency and faithin Private Equity as a professional assetclass in Austria. In line with these effortsAVCO welcomes the InternationalPrivate Equity and Venture CapitalGuidelines and will be eager to supporttheir introduction and accurateapplication by its members.

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BVA(The Belgian Venturing Association)

BVA was founded in 1986 as aprofessional association.Its mission is to:

1. Animate the Belgian private equityand venture capital industry bydeploying a series of activities for itsmembers and for other stakeholdersin the prosperity of the VC/PE sectorin Belgium. The objectives of the mainanimation activities are: to fosteractive networking amongst membersof the BVA and between members ofthe BVA and other third parties, toprovide extensive information to itsmembers on all topics relevant to theVC/PE industry, to improve thequality of the operation of the sector.

2. Promote the well being of the Belgianprivate equity and venture capitalindustry towards all relevant thirdparties. The objectives of thepromotional activities are: to pro-actively represent the Belgian VC/PEindustry to third parties as theindustry's recognized spokesperson,to conduct active lobbying for(i) improvements to or (ii) theremoval of obstacles from thestructural context in which theBelgian VC/PE industry operates,to contribute to the continuousdevelopment of business in ourindustry.

BVCA(The British Venture CapitalAssociation)

The BVCA represents around 170 UK-based private equity and venture capitalfirms, the vast majority of all such firmsin the UK. The BVCA is the public faceof the industry providing services to itsmembers, investors and entrepreneursas well as the Government and media.





BVK(Bundesverband DeutscherKapitalbeteiligungsgesellschaften –German Private Equity andVenture Capital Association e. V.)

BVK was founded in 1989.BVK represents most of the Germanprivate equity and venture capital firmsas well as the German branches offoreign private equity and venturecapital firms. As per March 31, 2005,BVK represented more than 180 privateequity and venture capital firms.Apart from full membership BVK offersassociate membership to companies andorganizations working in this particularbusiness sector, i. e. accountants,lawyers, consultants etc.

BVK serves as a link betweengovernment and business and representsits members’ views, needs and problemswhile supplying information anddiscussing any particular political andeconomic subject with the relevantgovernmental institutions.

Science and research are becoming moreand more interested in private equity andventure capital issues. BVK supportsuniversities, colleges and their studentswith their research activities andproblem solving.

On the international level BVKexchanges information with othernational organizations in the economicsector and other international privateequity and venture capital associations.

CVCA(Canada’s Venture Capital &Private Equity Association)

The CVCA - Canada’s Venture Capital &Private Equity Association, was foundedin 1974 and is the association thatrepresents Canada’s venture capitaland private equity industry.Its over 1100 members are firms andorganizations which manage themajority of Canada’s pools of capitaldesignated to be committed to venturecapital and private equity investments.

The CVCA fosters professionaldevelopment, networking, communication,research and education within theventure capital and private equity sectorand represents the industry in tax andregulatory matters.

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CVCA(China Venture Capital Association)

The China Venture Capital Association(“CVCA”) is a member-based tradeorganization established to promote theinterest and the development of venturecapital (“VC”) and private equity (“PE”)industry in the Greater China Region.Currently CVCA has close to 100member firms, which collectivelymanage over US$100 billion in venturecapital and private equity funds.

CVCA's member firms have long andrich experience in private equity andventure capital investing worldwide andhave made many successful investmentsin a variety of industries in China,including information technology,telecommunications, business services,media and entertainment, biotechnology,consumer products, and generalmanufacturing.

CVCA's mission is to foster theunderstanding of the importance ofventure capital and private equity to thevitality of the Greater China economyand global economies; to promotegovernment policies conducive to thedevelopment of VC and PE industry;to promote and maintain high ethicaland professional standards; to facilitatenetworking and knowledge sharingopportunities among members; andto provide research data, industrypublications and professionaldevelopment for PE and VC investors.

CVCA is incorporated in Hong Kongwith a representative office in Beijing.Funding for CVCA's activities comefrom membership dues. CVCA'smembership is open to all China-focusedprofessional venture capital and privateequity organizations and corporateventure capital investors, and is alsoopen to the related professionalcompanies, which can join as CVCAassociate members. CVCA has threeliaison officers in Shanghai, Xi'an andSilicon Valley respectively facilitatinglocal networking and communication.

CVCA(Czech Venture Capital andPrivate Equity Association)

CVCA is an association representingcompanies active in the private equityand venture capital industry in theCzech Republic. CVCA has fullmembers (private equity and venturecapital fund managers) and associatedmembers (companies providing advisoryservices to the private equity andventure capital industry). CVCA has 14full members and 16 associated membersas of May 2005.

CVCA’s priorities are: increasing theawareness about private equity/venturecapital among entrepreneurs, stateadministration and general public,promoting interests of CVCA membersin contact with the government andother state authorities, providinginformation on the private equity/venture capital industry in the CzechRepublic, providing platform fordiscussion among members of CVCA.





DVCA(The Danish Venture CapitalAssociation)

DVCA is an association with the goalof strengthening its member’s business,network, and competences.DVCA includes a broad range of hightech investors in Denmark.Furthermore the organisation covers thewhole investment chain from individualbusiness angels over venture capitalcompanies to private equity andinstitutional investors.

DVCA was founded in 2000 and was in2004 merged with the formerly knownDanish Business Angel Network.The association is situated in the OldStock Exchange, Slotsholmsgade,Copenhagen. For more informationplease visit www.dvca.dk

EMPEA(Emerging Markets Private EquityAssociation)

EMPEA is a broad-based membershiporganization formed to serve privateequity and venture capital firmsoperating in the emerging marketsof Asia, Eastern Europe, Africa, LatinAmerica and the Middle East.EMPEA believes private equityinvesting can generate strong returnsfor investors while also serving asa critical driver of economic growthand opportunity in these markets.Despite significant differences acrossemerging market regions, private equityfirms face important common challengesand opportunities. EMPEA’s programsinclude conferences, networkingopportunities, research, a quarterlypublication and advocacy.EMPEA works closely with nationaland regional venture capital associationsto achieve its mission.

EVCA(European Private Equity andVenture Capital Association)

EVCA was established in 1983 and isbased in Brussels. EVCA representsthe European private equity sector andpromotes the asset class both withinEurope and throughout the world.With well over 900 members in Europe,EVCA’s role includes representing theinterests of the industry to regulatorsand standard setters, developingprofessional standards, providingindustry research, professionaldevelopment and forums facilitatinginteraction between its members andkey industry participants includinginstitutional investors, entrepreneurs,policymakers and academics.

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FVCA(The Finnish Venture CapitalAssociation)

In 2005 the Finnish Venture CapitalAssociation (FVCA) celebrates it’s15th year anniversary. The FVCA isa non-profit organisation representingthe Finnish venture capital and privateequity industry. The FVCA´s mainmission is to promote and developthe venture capital and private equityindustry in Finland. The main tasks arepublic affairs, lobbying, networking andresearch. The FVCA has 43 full members.This represents the vast majority ofthe Finnish venture capital and privateequity companies. Full membership hasbeen approved for equity investors andrisk financiers representing private andpublic investment capital, captive fundsand corporate ventures. In addition,the FVCA has 68 associate members.Associate membership can be givento organisations and individuals withan interest in the venture capital andprivate equity industry.

GVCA(Gulf Venture Capital Association)

GVCA is a not-for-profit trade andindustry association for venture capital(VC) and private equity (PE) basedin the Kingdom of Bahrain to servethe whole region. Its prime role is topromote a risk-taking investmentculture, develop skills, facilitatenetworking, and provide relevantinformation and statistics on the venturecapital and private equity industry.

Mission:GVCA’s mission is to serve the venturecapital and private equity industry andfoster its growth in the region.

Goals:1 Promote and advocate venture capital

and private equity as a vital industry,contributing to economic growth.

2 Facilitate communication andnetworking among stakeholders.

3 Gather and disseminate industrystatistics and information.

4 Develop and promote professionaland ethical codes of conduct.

5 Foster professional developmentand learning environment.

The Association’s activities cover severalaspects of the venture capital andprivate equity industry such as trendsand strategies, legal/fiscal policies andregulations, investment models,management of fund raising andstructures, technology evaluation andvaluation, contracts and control rights,information/studies, early-stage funding,buyout, IPO, and corporate venturecapital, among others.

Membership:Members in GVCA include venturecapital and private equity companies,financial institutions, corporations, andconsultants, and business developmentorganizations, among others.For more information please see:www.gulfvca.org.





HKVCA(Hong Kong Venture CapitalAssociation)

Hong Kong Venture Capital Associationwas established on November 12, 1987with the objectives of promoting andprotecting the interests of the venturecapital and private equity industry,networking and cooperation on regionaland international front, and in raisingthe professional standards of the market.

Its 120 members are engaged in all levelsof venture capital, expansion capital andbuyout activities in China, Japan,Korea, Australia, Taiwan, Thailand,Singapore, and other markets in Asia.

It is committed to the promotion of theventure capital industry as a financialand business partner to businessesand the creation of an environmentthat creates sound partnerships.It is dedicated to developing a highstandard of professionalism in themarket to ensure investor confidencein the asset class.

The Association provides an effectivechannel of communication for membersto share information on developmentswithin the industry in Hong Kong/PRCas well as on a regional and internationallevel. It also works closely with thegovernment and various trade bodies tofurther the interests of the industry.

HVCA(The Hungarian Venture Capital andPrivate Equity Association)

HVCA represents virtually every majorsource of funds and expertise of privateequity in Hungary. HVCA aims topromote the development of theindustry, and to create and followthe highest possible professionaland ethical standards.

HCVA was set up in 1991 and hasdeveloped considerably since then:the original five members have grownto 26 full members, 29 associatemembers and 9 individual members.

The Association provides a regularforum for the exchange of ideas amongmembers, high-level discussions on thetopical issues of the venture capital andprivate equity industry and the futuretrends. As the official representative ofthe industry it is in constant discussionwith the financial and legislatorinstitutions of the Hungarian State andwith other professional organisations.

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ILPA(The Institutional Limited PartnersAssociation)

The ILPA is a non-profit organizationcommitted to serving limited partnerinvestors in the global private equityindustry by providing a forum for:facilitating value-added communication,enhancing education in the asset class,and promoting research and standardsin the private equity industry

Initially founded as an informalnetworking group, the ILPA is avoluntary association funded by itsmembers. The ILPA membership hasgrown to include more than 138 memberorganizations from 10 countries, whoin total have assets under managementin excess of two trillion U.S. dollars.Members of the ILPA manage more thanUS$300 billion of private equity capital.

The ILPA membership comprisescorporate and public pension plans,endowments and foundations, insurancecompanies and other institutionalinvestors in private equity.

The ILPA holds semi-annual meetingsfor members.

IVCA(The Irish Venture CapitalAssociation)

The IVCA is the representative body ofthe venture capital industry in Ireland.The association was established in 1985to represent the views of its membersand to promote the Irish venture capitalindustry. We seek to encourage co-operation and best practices withinthe industry and to facilitate thoseseeking venture capital. The IVCAalso continuously works with thoseindividuals and organisations committedto fostering an economic and regulatoryclimate conducive to the growth anddevelopment of an enterprising economy

LAVCA (The Latin American Venture CapitalAssociation)

The Latin American Venture CapitalAssociation (LAVCA) is a not-for-profitmembership organization dedicatedto promoting the growth of the privateequity and venture capital industryin Latin America and the Caribbean.

LAVCA's core membership consists offund managers, institutional investorsand corporate investors active in theregion. Select service providers,development finance organizations,trade associations and educationalinstitutions also participate as associatemembers of LAVCA.

LAVCA's mission – to spur regionaleconomic growth through the promotionof venture capital and private equityinvestment – is accomplished throughprograms of research, networking,education, the promotion of bestinvestment practices, and the advocacyof sound public policy.

For more information about LAVCA, itsmembers, products and activities, pleasevisit our website at www.lavca.org.





LVCA(The Latvian Venture CapitalAssociation)

To promote the development of venturecapital sector in Latvia, the six biggestcompanies that operate in the venturecapital sector in Latvia have founded apublic organization: the Latvian VentureCapital Association. The founders ofthe association are fund managementcompanies that manage investmentfunds of different value and functionprofile.

LVCA has the following missions: toinform businessmen and society aboutventure capital financing possibilities,to promote the exchange of opinionsand experience of the members of theassociation, to represent opinions andinterests of the members in negotiationswith public authorities, to organize andto ensure cooperation with internationalor other countries’ venture capitalassociations.

NVCA(The Norwegian Venture Capital &Private Equity Association)

NVCA is a non-profit associationsupporting the interests of the companiesactive in the Norwegian industry.NVCA was established in 2001 by theleading players, and represents todayaround 40 Norway-based private equityand venture capital firms, the vastmajority of such firms in Norway.The 20 associated members are serviceproviders to the industry such aslawyers, advisors, investors andcorporate finance companies.

The purpose of the association isto promote an efficient private equitymarket, to improve the regulations of theindustry, to promote entrepreneurshipand to ensure political focus on Norway’sposition as a strong and attractivecountry for international investments.

NVCA provides knowledge, analysisand general information to theGovernment and media to communicatethe importance of the industry and it’srole in the national innovation systemand the general industrial developmentin Norway.

NVCA is in this way the public faceof the industry providing services to itsmembers, investors and entrepreneursas well as the Government and media.

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NVP(Nederlandse Vereniging vanParticipatiemaatschappijen)

The Dutch Private Equity & VentureCapital Association acts in the interestsof private equity companies in theNetherlands. The aims of the NVP are: incooperation with the government, workon an adequate regulatory framework forthe private equity sector and its clients;inform entrepreneurs and businessesabout the financing possibilities of privateequity; inform investors about thecharacteristics of private equity as anasset class; raise awareness and improvethe image of private equity to achieveaforementioned goals; contribute tofurther raising the level of professionalismof the private equity sector.

The NVP has about 50 members and50 associated members. Members ofthe NVP represent 95% of the numberof private equity investments and about85% of the total invested capital in theNetherlands.

More information about the activities ofthe NVP and its members can be foundon www.nvp.nl.

PPEA(Polish Private Equity Association)

PPEA gathers private equity/venturecapital funds active in Poland. The missionof PPEA, established in January 2002, isto promote and develop the private equityand venture capital (pe/vc) industry inPoland and to represent the interests ofthe Polish pe/vc community in Poland andabroad. PPEA comprises 51 institutions:29 full members, representing most of theprivate equity firms active in poland and22 Associate Members that are law andconsulting companies working for pe/vcindustry. The full members manage morethan EUR 4.5bn and have currentlynearly 300 Polish companies and over50 companies in other CEE countries ontheir portfolios.

PPEA has established a number ofcommittees to work on PPEA policy andactions. The committees bring together fulland associate members who representtheir areas of expertise. To date, PPEAhas established committees to work on thefollowing areas: corporate governance,legal and lobbying, pension funds andother domestic investors, SME financingand innovations, and statistics.

RÉSEAU CAPITAL

(The Québec Venture Capital andPrivate Equity Association)

The Québec Venture Capital and PrivateEquity Association has more than500 members who represent public andprivate venture capital companies aswell as firms of professionals servingthe industry.

Mission and Organizational StructureRéseau Capital is an association of keyplayers in the private equity and venturecapital industry. Its mission is to fosterthe growth of the industry and theprofessional development of its membersthrough a range of services and activities,such as training, information, networkingand promotion of their interests.

Principal ObjectivesTo further the development of a businessenvironment favourable to the venturecapital community, notably, throughtraining activities; To establish an efficientnetwork of relations and communicationsbetween the industry's stakeholders;To promote venture capital as an efficienttool for the development of Québecbusinesses, and to promote otherorganizations tied into the industry.

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RVCA(The Russian Private Equity andVenture Capital Association)

RVCA was set up in 1997. The centraloffice of RVCA is situated in St.Petersburg.By today RVCA unites about 40 membersmore than half of them are private equityand venture capital funds.

RVCA’s mission is to contribute toestablishment and development ofventure industry in Russia.

RVCA’s goals are: to create a political andentrepreneurial environment favorablefor investment activity in Russia, torepresent RVCA’s interests in politicaland administrative agencies, in massmedia, in financial and industrial circlesin Russia and abroad, to provideinformational support and createcommunicative forums for Russianventure market players, to create thestratum of experts qualified to work inventure business companies. RVCA is theunique professional organization inRussia units the progressive financialinstitutions investing in private Russiancompanies. RVCA is generally acceptedin the business community and by theRussian Government.

SAVCA(The Southern African VentureCapital and Private EquityAssociation)

SAVCA is a non-profit Section 21Company based in South Africathat represents the interests of theparticipants of the Private Equity andVenture Capital industry in SouthernAfrica. All the key participants in theindustry are members of the Association.Full membership of SAVCA providesa high level of endorsement and denotesa high level of professionalism andintegrity for the member firm.

SAVCA plays a meaningful role in theSouthern African Venture Capital andPrivate Equity industry by promotingthe industry and its members, promotingself-regulation, setting professionalstandards, lobbying, disseminatinginformation on the industry, arrangingtraining for the staff of its members andresearching the industry in South Africa.

The main objectives of SAVCA are to:promote the venture capital and privateequity profession in Southern Africa;represent the profession at the nationaland international level; develop andstimulate professional and transactionalventure capital and private equityinvestments; stimulate the expansionof venture capital and private equity;collect information from markets andfrom members; circulate information;stimulate and maintain contacts withinthe membership; contribute to themanagement development of investorsand investees; provide the relevantauthorities with proposals forimprovement in the corporate, fiscaland legal environment for venturecapital and private equity in SouthernAfrica; and maintain ethical andprofessional standards.





SECA(The Swiss Private Equity andCorporate Finance Association)

SECA is the representative body forSwitzerland’s private equity, venturecapital and corporate finance industries.SECA has the objective to promoteprivate equity and corporate financeactivities in Switzerland.

Members of the SECA include equityinvestment companies, Banks,Corporate Finance Advisors, AuditingCompanies, Management Consultantsand Private Investors.

The association is a non-profitorganization and has the followingpurposes: to promote corporate financeand private equity activities in the publicand the relevant target groups, topromote the exchange of ideas andthe cooperation between members, tocontribute to the professional educationand development of the members andtheir clients, to represent the membersviews and interests in discussion withgovernment and other bodies, toestablish and maintain ethical andprofessional standards.

In addition to promoting corporatefinance in the public, SECA providesa platform to its members to exchangeinformation and experiences. The mainactivities of SECA are: seminars andevents about relevant topics, publicationof statistics about private equityinvestment and management buyoutactivities in Switzerland, quarterlyedition of a newsletter SECA News(for members only), contacts of otherassociations and state bodies.

SLOVCA(The Slovak Venture CapitalAssociation)

SLOVCA was created in 1995 withprimary purpose to increase theawareness of private equity and venturecapital to the public, such as theentrepreneurs, investment and bankinginstitutions and the economic, politicaland regulatory bodies in Slovakia.

The mission of SLOVCA includes fivekey objectives: to provide information tothose seeking capital for new and existingenterprises, to represent the interestsof members before the governmentand other related institutions/agencies,to provide a forum for networkingfor members to exchange views andpractices, to provide education andtraining for members of SLOVCAand others, to encourage the higheststandards of business practices.

SVCA(The Swedish Private Equity andVenture Capital Association)

The SVCA represents around110 private equity firms as well asbusiness angels and service providers.Sweden is one of the leading privateequity markets with annual privateequity investments over 1% of thenational GDP.

The Association was established 1985and its objective is to work towards awell-functioning private equity industryin Sweden. This is done by supplyinginformation and working for theprofessional development of theindustry. We aim to inform abouthow the industry functions and whatframeworks are needed to facilitateentrepreneurs and investors so thattogether they can help the developmentof the Swedish economy and industrythat is necessary for the country's futureprosperity. We also inform about howinvestments in private equity funds haveyielded a good profit over the long termfor pension funds and other institutionalinvestors.

We work for the professional developmentof players active in the industry througheducation, ethical guidelines,transparency and valuation principles,networking and seminars with theparticipation of international colleagues,amongst many other things.

See www.svca.se for more information.

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