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  • 22nd November 2004 pwc

    Private Equity ClubGlobal Private Equity Village

    Private Equity ClubGlobal Private Equity Village

  • 2Global Private Equity Village PricewaterhouseCoopers

    Agenda

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

    Performance Data – Keith Arundale• Discussion

  • 22nd November 2004 pwc

    BVCA Private Equity and Venture Capital Performance Measurement Survey 2003

    Damian Regan

    BVCA Private Equity and Venture Capital Performance Measurement Survey 2003

    Damian Regan

  • 4Global Private Equity Village PricewaterhouseCoopers

    BVCA Private Equity and Venture Capital

    Performance Measurement Survey 2003

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

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

  • 5Global Private Equity Village PricewaterhouseCoopers

    BVCA Survey data

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

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

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

  • 6Global Private Equity Village PricewaterhouseCoopers

    Our Response

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

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

  • 7Global Private Equity Village PricewaterhouseCoopers

    Limited Scope Procedures

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

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

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

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

  • 8Global Private Equity Village PricewaterhouseCoopers

    Limited Scope Procedures

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

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

  • 9Global Private Equity Village PricewaterhouseCoopers

    Engagement Issues Arising

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

  • 10Global Private Equity Village PricewaterhouseCoopers

    Global Investment Performance Standards

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

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

    presenting returns

  • 11Global Private Equity Village PricewaterhouseCoopers

    GIPS Requires

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

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

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

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

  • 12Global Private Equity Village PricewaterhouseCoopers

    Questions for BVCA

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

  • 22nd November 2004 pwc

    Convergence of Valuation GuidelinesVikram Krishna

    Convergence of Valuation GuidelinesVikram Krishna

  • 14Global Private Equity Village PricewaterhouseCoopers

    Agenda

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

  • 15Global Private Equity Village PricewaterhouseCoopers

    Existing valuation options under BVCA and

    EVCA guidelines

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

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

  • 16Global Private Equity Village PricewaterhouseCoopers

    IASB stance

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

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

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

  • 17Global Private Equity Village PricewaterhouseCoopers

    Comparison to property investments

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

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

  • 18Global Private Equity Village PricewaterhouseCoopers

    EVCA and BVCA working together

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

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

    reporting, namely IFRS and US GAAP.

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

  • 19Global Private Equity Village PricewaterhouseCoopers

    Defining fair value

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

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

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

    sale

  • 20Global Private Equity Village PricewaterhouseCoopers

    Convergence to fair value reporting

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

    financial reporting

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

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

  • 21Global Private Equity Village PricewaterhouseCoopers

    Specific examples of non-compliance (1)

    (1) Start-up company

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

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

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

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

  • 22Global Private Equity Village PricewaterhouseCoopers

    Specific examples of non-compliance (2)

    (2) Mezzanine investments

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

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

    separately valuing other attached financial instruments iewarrants

  • 23Global Private Equity Village PricewaterhouseCoopers

    Specific examples of non-compliance (3)

    (3) Quoted investments

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

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

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

    accepted?

  • 24Global Private Equity Village PricewaterhouseCoopers

    2005 and beyond……..

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

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

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

  • 22nd November 2004 pwc

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

    Keith Arundale

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

    Keith Arundale

  • 26Global Private Equity Village PricewaterhouseCoopers

    PE Investment, Funds Raised and

    Performance Data

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

  • 27Global Private Equity Village PricewaterhouseCoopers

    The World View: Full Year 2003

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

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

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

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

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

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

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

    from 1998 obtained from oanda.com.

  • 28Global Private Equity Village PricewaterhouseCoopers

    The World View: Investment and Fund

    Raising Trends

    70

    124

    192

    103 86

    115133

    154

    262

    177

    93 82

    0255075

    100125150

    175200225250275300

    1998 1999 2000 2001 2002 2003

    InvestmentsFunds Raised

    (US$b)

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

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

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

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

  • 29Global Private Equity Village PricewaterhouseCoopers

    The World View: Top 20 Countries (based

    on investment)

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

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

    Central & South America

    52%

    1%2%

    30%15%

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

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

    Note: Figures in brackets indicate their position in 2002

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

    Europe

  • 30Global Private Equity Village PricewaterhouseCoopers

    The World View: Top 20 Countries (based

    on investment)

    Country Ranking Investment Value

    Funds Raised

    Country Ranking Investment Value

    Funds Raised

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

    US $ Billion

  • 31Global Private Equity Village PricewaterhouseCoopers

    The World View: Cumulative Investments

    and Funds Raised (98-03)

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

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

    Region Investment Value

    Funds Raised Overhang

    Global 690.63 901.45 210.82

    North America 411.93 600.32 188.39

    Europe 182.96* 221.62 38.66 Asia Pacific 64.23 58.15 -6.08

    Middle East & Africa 13.25* 11.86* -1.39

    Central and South America 18.26* 9.50 -8.76

    US $ Billion

  • 32Global Private Equity Village PricewaterhouseCoopers

    The World View: 1st Half 2004

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

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

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

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

    the world in the first half of 2004.

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

  • 22nd November 2004 pwc

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

    Economics and PricewaterhouseCoopers

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

    Economics and PricewaterhouseCoopers

  • 34Global Private Equity Village PricewaterhouseCoopers

    €29 billion invested in Europe in 2003

    0

    5,000

    10,000

    15,000

    20,000

    25,000

    30,000

    35,000

    40,000

    1995 1996 1997 1998 1999 2000 2001 2002 2003

    € m

    BuyoutVenture Capital

    Source: EVCA / TVE / PwC private equity survey

  • 35Global Private Equity Village PricewaterhouseCoopers

    Amount Invested by Country 2000 - 2003

    1,8

    87

    1,1

    99

    4,4

    35

    2,1

    85

    3,2

    87

    6,9

    26

    96

    8

    1,7

    22

    2,5

    06

    2,6

    26

    5,8

    51

    10

    ,38

    5

    1,0

    92

    1,3

    37

    2,4

    81

    3,0

    34

    4,2

    46

    13

    ,53

    9

    0

    2,000

    4,000

    6,000

    8,000

    10,000

    12,000

    14,000

    16,000

    UKFra

    nce Italy

    Germa

    nySpa

    in

    Nether

    lands

    2001 2002 2003

    €m

    Source: EVCA / TVE / PwC private equity survey

    1,40

    4

    642

    704

    943

    435

    2,58

    8

    Venture Capital

  • 36Global Private Equity Village PricewaterhouseCoopers

    Europe: Sources of New Funds in 2003

    Insurance Companies

    8.7%

    Fund of Funds16.4%

    Banks21.5%

    Corporate Investors

    4.8%

    Pension Funds19.4%

    Private Individuals3.2%

    Other17.3%

    Academic Institutions

    1.5%

    Capital Markets0.3%

    Government Agencies

    6.8%

    Government Agencies11.1%

    Capital Markets0.1%

    Academic Institutions1.6%

    Other4.3%

    Private Individuals6.0%

    Pension Funds16.3%

    Corporate7.3%

    Banks26.3%

    Fund of Funds13.1%

    Insurance Companies13.8%

    2002

    2003

    2002

    2003

  • 37Global Private Equity Village PricewaterhouseCoopers

    Europe: Expected Allocation of Funds Raised

    Buyout76.5%

    High Tech Expansion

    3.5%

    Non-High Tech Expansion

    10.8%

    High Tech Early Stage5.9%

    Non-High Tech Early Stage

    2.2% Other1.2%

    Other2.7%

    Non-High Tech Early Stage

    2.1%

    High Tech Early Stage7.9%

    Non-High Tech Expansion

    13.4%

    High Tech Expansion

    7.5%

    Buyout66.3%

    2003

    In 2003 :

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

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

    2002

    Source: EVCA / TVE / PwC private equity survey

  • 38Global Private Equity Village PricewaterhouseCoopers

    Funds Raised and Investment - Europe

    0

    10,000

    20,000

    30,000

    40,000

    50,000

    60,000

    1990

    1991

    1992

    1993

    1994

    1995

    1996

    1997

    1998

    1999

    2000

    2001

    2002

    2003

    €m

    Funds RaisedInvestment

    Source: EVCA / TVE / PwC private equity survey

  • 39Global Private Equity Village PricewaterhouseCoopers

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

    0

    50

    100

    150

    200

    250

    300

    350

    400

    Q12002

    Q22002

    Q32002

    Q42002

    Q12003

    Q22003

    Q32003

    Q42003

    Q12004

    Q22004

    Funds Raised

    Investment

    Divestment

    Source: EVCA/Thomson Venture Economics/PricewaterhouseCoopers

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

    +28%

    +27%

    -19%

  • 40Global Private Equity Village PricewaterhouseCoopers

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

    0

    50

    100

    150

    200

    250

    300

    Q12002

    Q22002

    Q32002

    Q42002

    Q12003

    Q22003

    Q32003

    Q42003

    Q12004

    Q22004

    Total InvestmentEarly StageExpansionBuyout

    -16%

    +27%

    +44%

    +47%

    Source: EVCA/Thomson Venture Economics/PricewaterhouseCoopers

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

  • 41Global Private Equity Village PricewaterhouseCoopers

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

    0

    50

    100

    150

    200

    250

    300

    350

    400

    450

    Q12002

    Q22002

    Q32002

    Q42002

    Q12003

    Q22003

    Q32003

    Q42003

    Q12004

    Q22004

    Total Divestment

    Trade SaleWrite-Off

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

    -58%

    +5%

    +51%

    -19%

    Source: EVCA/Thomson Venture Economics/PricewaterhouseCoopers

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

  • 22nd November 2004 pwc

    UK Performance Measurement DataFrom the BVCA Performance Measurement Report

    prepared by PwC

    UK Performance Measurement DataFrom the BVCA Performance Measurement Report

    prepared by PwC

  • 43Global Private Equity Village PricewaterhouseCoopers

    UK PE Summary of Performance by

    Investment Stage (to 31.12.03)

    -18.1

    -25.1

    -12.5 -10.6-8.2

    2.7

    16.9

    2.96.7 8.49.1

    -3.7

    2.6

    -3.4

    12.217.7

    13.615.317.4

    12.5

    19.5

    14.210.212.3

    -30

    -20

    -10

    0

    10

    20

    30

    40

    2003 Three Years Five Years Ten Years

    Early Development Mid MBO Large MBO Generalist Total

    % pa

    Source: BVCA / PwC performance measurement report 2003

  • 44Global Private Equity Village PricewaterhouseCoopers

    UK PE Performance by Sub Sector

    (to 31.12.03)

    2.610.2

    14.2

    -24.4

    -10.3-6.5

    5.90.5

    9.017.614.7

    3.510.9 11.212.3

    -18.0

    -40.0

    -20.0

    0.0

    20.0

    40.0

    60.0

    80.0

    2003 Three Years Five Years Ten Years

    Total Technology UK Non UK

    % pa

    Source: BVCA / PwC performance measurement report 2003

  • 45Global Private Equity Village PricewaterhouseCoopers

    Summary of Private Equity Performance

    versus Principal Comparators

    12.3

    2.6

    10.214.2

    -6.8

    -1.1

    6.1

    17

    -2.8

    1.96.4

    20.9

    -10

    0

    10

    20

    30

    40

    2003 Three Years Five Years Ten Years

    Total Private Equity FTSE All-Share WM Pension Fund Universe

    % pa

  • 46Global Private Equity Village PricewaterhouseCoopers

    Since Inception Performance by Sub Sector

    4.7

    9.8 9.7

    16.414.1

    12.6

    7.4

    14.513.613.8

    0.0

    5.0

    10.0

    15.0

    20.0

    Ear

    ly

    Dev

    elop

    men

    t

    Mid

    MB

    O

    Lar

    ge M

    BO

    Gen

    eral

    ist

    Tot

    al UK

    Non

    UK

    Tec

    hnol

    ogy

    Non

    -T

    echn

    olog

    y

    % pa

  • 47Global Private Equity Village PricewaterhouseCoopers

    Summary: Key points for European PE

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

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

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

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

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

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

    AgendaBVCA Private Equity and Venture Capital Performance Measurement Survey 2003BVCA Survey dataOur ResponseLimited Scope ProceduresLimited Scope ProceduresEngagement Issues ArisingGlobal Investment Performance StandardsGIPS RequiresQuestions for BVCAAgendaExisting valuation options under BVCA and EVCA guidelinesIASB stanceComparison to property investmentsEVCA and BVCA working togetherDefining fair valueConvergence to fair value reportingSpecific examples of non-compliance (1)Specific examples of non-compliance (2)Specific examples of non-compliance (3)2005 and beyond……..PE Investment, Funds Raised and Performance DataThe World View: Full Year 2003The World View: Investment and Fund Raising TrendsThe World View: Top 20 Countries (based on investment)The World View: Top 20 Countries (based on investment)The World View: Cumulative Investments and Funds Raised (98-03)The World View: 1st Half 2004€29 billion invested in Europe in 2003Amount Invested by Country 2000 - 2003Europe: Sources of New Funds in 2003Europe: Expected Allocation of Funds RaisedFunds Raised and Investment - EuropeEvolution of European Private Equity Activity by amount Q1 2002 to Q2 2004INDEX Q1 2002 = 100Evolution of Private Equity Investment Activity by Amount Q1 2002 to Q2 2004INDEX Q1 2002 = 100Evolution of Private Equity Divestment Activity by Amount at Cost Q1 2002 to Q2 2004INDEX Q1 2002 = 100UK PE Summary of Performance by Investment Stage (to 31.12.03)UK PE Performance by Sub Sector(to 31.12.03)Summary of Private Equity Performance versus Principal ComparatorsSince Inception Performance by Sub SectorSummary: Key points for European PE