venture and enterprise capital: smart finance for smes ...€¦ · jargon buster | creating lasting...

Venture and enterprise capital: Smart finance for SMEs Dörte Höppner, secretary general Brussels, 6th October, 2011

| 2| Creating lasting value

Introducing EVCA

• Established in 1983 at the instigation of the European Commission

• We have 12,000 members, including 800+ venture and enterprise capital firms across 50+ countries.

• We promote the long-term interests of the venture and enterprise capital industry in Europe. Our goal is to create a more favourable environment for equity investment and entrepreneurship .


Private equity: an umbrella term for a method of owning and investing in companies.

Venture capital: this is when private equity is invested into young, entrepreneur-led, high-potential companies that are typically driven by technological innovation.

Enterprise capital: private equity investment into more established businesses that want to internationalise, professionalise or develop their products and services.

Buyouts: private equity can be used to acquire (or ‘buy out’) all or the majority of an established business. After that, the private equity method of ownership and governance kicks in.

Jargon Buster


Snapshot – European Private Equity Industry

1,700 active private equity firms:

• Employing around 29,000 people

• Managing 4,200 active funds

• With a capital under management of €524bn


Access to finance for SMEs

• 26,000 European companies have venture and enterprise capital investment

• More than 22,000 are Small and Medium Sized Enterprises


48

40

28 27 27

72

112

80 80

1820

35

2428 29

37

47

71 72

54

24

43

0

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

€ billion

Funds Raised Investments

Source: EVCA/PEREP_Analytics

Funds raised and investments - evolution



1.4%

11.8%

1.7%

3.0%

1.8%

2.7%

14.2%

5.4%

7.9%3.1%

23.0%

6.2%

2.0%

15.8%

Academic institutions

Banks

Capital markets

Corporate investors

Endowments and foundations

Family offices

Fund of funds

Government agencies

Insurance companies

Other asset managers

Pension funds

Private individuals

Sovereign wealth funds

Unknown

Funds raised by type of investor in 2006-2010



0

1

2

3

4

5

6

7

8

Unite

d Kin

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Fran

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many

Neth

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€ billion

Funds raised by country of management



0

2

4

6

8

10

12

14

Unite

d Kin

gdom

Fran

ceGer

many

Spain

Swed

enNe

ther

lands

Norw

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Belgi

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€ billion

Investment by country of destination



0.77

5%

0.75

0%

0.61

4%

0.50

0%

0.33

5%

0.33

3%

0.32

5%

0.31

7%

0.31

4%

0.27

5%

0.26

6%

0.24

6%

0.22

8%

0.22

2%

0.19

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0.18

6%

0.16

5%

0.13

3%

0.10

9%

0.10

2%

0.10

1%

0.08

5%

0.06

8%

0.05

4%

0.02

0%

0.01

5%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

0.90%

Sweden

United

Kingdo

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ayIre

land

France

Netherl

ands

Finlan

dSwitz

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peSpa

inBelg

iumAus

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aria

Luxe

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Poland

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mark

Czech

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ublic

Portug

alIta

lyRom

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Ukraine

Hunga

ryBalt

ic co

untrie

sOthe

r CEE*

Greece

% of GDP

*Other CEE consists of Ex-Yugoslavia and Slovakia

Private equity investment as % of GDP in 2010 (market statistics)



0.06

8%

0.05

5%

0.05

5%

0.04

2%

0.03

9%

0.03

8%

0.03

1%

0.03

0%

0.02

8%

0.02

8%

0.02

7%

0.02

5%

0.02

3%

0.01

9%

0.01

6%

0.01

5%

0.01

1%

0.01

0%

0.00

9%

0.00

7%

0.00

4%

0.00

4%

0.00

1%

0.00

1%

0.00

0%

0.00

0%

0.00%

0.01%

0.02%

0.03%

0.04%

0.05%

0.06%

0.07%

0.08%

Sweden

Norway

Finlan

dUnit

ed King

dom

Switzerl

and

France

Portug

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markGerm

any

Irelan

dEuro

pean

total

Netherl

ands

Belgium

Hunga

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Baltic

coun

tries

Luxe

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ndGree

ceUkra

ine

% of GDP


Venture investment as % of GDP in 2010 (market statistics)



0.70

8%

0.70

8%

0.55

9%

0.47

2%

0.30

8%

0.29

6%

0.28

7%

0.27

8%

0.27

1%

0.26

4%

0.24

4%

0.23

1%

0.22

5%

0.21

6%

0.19

1%

0.15

8%

0.13

5%

0.11

7%

0.09

8%

0.09

1%

0.08

5%

0.07

8%

0.05

0%

0.04

5%

0.02

0%

0.01

5%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

United

Kingdo

mSwed

enNorw

ayIre

land

Netherl

ands

France

Europe

an to

talSwitz

erlan

dFinl

and

Spain

Belgium

Austria

Bulgari

aLu

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ndGerm

any

Denmark

Czech

Rep

ublic

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Roman

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inePort

ugal

Hunga

ryBalt

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untrie

sOthe

r CEE*

Greece

% of GDP


Enterprise capital investment as % of GDP in 2010 (market statistics)



80%83%

86% 84%

95% 97% 98% 98%

64%

55%

69% 70%

49%

55%58%

54%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010

All Private Equity Venture Growth Buyout (excl Growth)

Investments in SMEs by European private equity firms, as a % of total number of companies financed



• 16,700 European SMEs financed, of which:• 12,550 in venture

• 4,150 in enterprise capital

• €46.5bn provided to European SMEs• €17.5bn went to venture-backed companies

• €29bn went to enterprise-capital-backed companies

Private equity investments in SMEs in 2007-2010


Pension funds, insurance policies, family offices and endowments

Seeking strong and diversified returns

Whose money is it?


• Invest directly in a ‘venture capital fund’ Unquoted (‘Limited partnership’)

• Invest through a ‘fund of funds’

• Co-invest directly into companies, alongside VC fund.

Source: EVCA

How to access ‘venture capital’


Source: EVCA

VC firm(General partner)

Investors (Pension funds etc)(Limited partner)

Venture capital fund(Limited Partnership)

Company Company Company CompanyCompany

Direct fund investment: the Limited Partnership


• Fixed life, ten-year limited partnership

(terms negotiated between GP and LP)

• Strong alignment of interest from company managers, VC fund managers, to fund

• Manager receives a performance based

compensation (carried interest) based on performance targets

• Illiquid investments but there is a small market for secondary interests

Characteristics of limited partnership funds


Source: EVCA

Investors(Limited partner)

VC fund

Co Co Co CoCo

Fund of funds

VC fund

Co Co Co CoCo

VC fund

Co Co Co CoCo

Fund of funds investment


• Enables large pension funds to access much smaller venture capital and enterprise capital funds – many pension funds need to allocate more capital in single investments than venture capital funds can cope with

• Provides “instant access” to venture capital without having to have knowledge of market

• Provides a learning opportunity for investors as they monitor the progress of their investments through the limited partnership structure

• Provides diversification, reducing risk, across a number of venture capital funds

Advantages of Fund of funds


• Dedicated team of professionals (the GP) trusted to identify, invest, support and sell stakes in high potential, private businesses

• Active and informed ownership (both strategic and financial support) driving value creation

• Medium to long term strategy and holding period

• Months, even years spent finding companies with the ‘X’ factor and conducting deep due diligence

The investment and governance model


Venture capital is not suitable for every start up with an idea

Throwing money at a large group of companies does not increase the chance of success and will only decrease overall profits

Venture capital relies on an existing pool of new ideas and technologies and entrepreneurs that want to pursue them

Venture capital is highly selective


• Businesses can be listed through “IPOs” on the stock market

• Many hi-tech growth companies are bought by larger corporations – this is common in venture capital

• Companies can be sold to other venture capital and enterprise capital funds – this is common in enterprise capital funds as funds often specialise in certain sizes of companies

How do Venture and Enterprise Capital firms sell?


Venture capital faces structural barriers to fundraising

There is an absence of a class of long-term investors with skills and interest in innovation & entrepreneurship. (e.g. university endowments, foundations and family offices).

For example there are only 2, 500 family offices in the EU, and 11, 000 in the US. There is a similar ratio in respect to pension funds and university endowments.

University Endowments within the EU allocate less than 2% of their assets to private equity as a whole, so even if the number or size of endowments grew significantly this would not be material to addressing the gap in financing for European venture.

In March 2010 EVCA published a white paper outlining a solution. Public sector financing could be used to attract private sector financing through a funds of funds scheme.

Main Challenges for the industry: structural barriers to fundraising


– Capital Requirement Adequacy Based Regulation for investors• Solvency II for insurance companies• IORP (Institutions for ocupational retirment provision) Directive

Review – the potential reproduction of solvency II for IORPs• CRD III for Banks – CRD II has already seen many banks turn away

from the industry

– Alternative Investment Fund Managers Directive• Although fund managers with less than €500 million do not fall

under the directive this causes two problems:– They do not have access to a fund raising passport– They do not have the credibility with investors such as

pension funds as they are not regulated.

Regulatory uncertainty can cause as many problems as the regulation itself with many investors, particularly insurance firms, freezing

investment programmes.

Main Challenges for the industry: increased and cumulative effect of direct and in-direct regulation


EU:

1. Multiannnual programme for fund of funds

2. EU passport for small funds’ managers

Where can EU policy efforts help?


• Venture and Enterprise capital cross many industry sectors and geographies. Its potential can not be fulfilled with narrow geographical, sectoral or stage oriented investment boundaries.

• To the help the industry to become sustainable, funding alone is insufficient, it is the smart deployment of capital that will build know-how which is critical.

• Private sector’s involvement is necessary to bring in know-how.

• EU public policy efforts to be oriented to attract the private sector that would have significant impact on many EU companies by increasing the supply of VC.

Conclusions

venture and enterprise capital: smart finance for smes ...€¦ · jargon buster | creating lasting...

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