Eleonora CalzavaraThe Global Financial System and the Credit Crisis Zurich, 1stApril 2009University of ZurichPrivate EquityAgenda:1.What is Private Equity?2.History of Private Equity3.Charts4.Investments in Private Equity5.Structure of a generic Private Equity Fund6.Private Equity Investments6.1Leveraged Buyout6.2Venture Capital6.3Growth Capital6.4Distressed and Special Situations6.5Mezzanine Capital6.6Secondaries7.Other Strategies8.Liquidity in the Private Equity Market9.Typical Risks10.Private Equity FirmsWhat is Private Equity?Private Equity is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange.Investments in Private Equity can be investment of capital into an operating company or the acquisition of the company.Capitals for Private Equity are given for a large part from Institutional Investors.This kind of investments need a long time-horizon, usually 10-15 years.There a lot of type of Private Equity and the term Private Equity has different type of connotations among different counties. Usually returns in the first years are very low because there will bea liquidity return later when the company that is the objective ofthe investment will be sold.History of Private Equity(1)The beginning of Private Equity rises again in 1946 with two venture capital firms in the USA:⏹American Research and Development Corporation (ARDC)⏹J.H. Whitney & CompanyARDC was founded by Georges Doriot with capital raised from institutional investors to encourage private sector investments in businesses run by soldiers who were returning from World War II. The investment in Digital Equipment Corporation (DEC) is its most important investment because the initial price was70.000$ in 1957 and in 1968 after the company’s initial pubblicoffering it was valued at over $355 million.History of Private Equity(2)J.H. Whitney & Company was founded by John Whitney in 1946 after the World War II to finance entrepreneurs with business plans who were unwelcome at banks. Its most important investment was in Florida Foods Corporation which developed an innovative method for delivering nutrition to American soldiers that was called Minute Maid orange juice and was sold to the Coca-Cola Company in 1960.Chart on European PrivateEquityThis chart describes the development of Private Equity in Europe:Source: CMBOREurope=Austria, Belgium, Denmark, France, Finland, Germany, Ireland (Eire), Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, UK.The last column regards the first half of 2008.Investments in Private Equity(1)Institutional Investors provide private equity capital because they hope to achieve risk adjust returns that are higher that the possible that they can obtained in the public equity markets. Most institutional investors don’t invest directly in privately held companies but they invest through a private equity fund. In some cases the institutional investors develop a Private Equity Fund.Investments in Private Equity(2)Usually Private Equity Firms receive a return in one of this way:⏹Initial Public Offering (IPO): when shares are offered to themarket the financial sponsor as the public market have animmediately return.⏹Merger or Acquisition: the company is sold for either cash orshares in another company.⏹Recapitalization: cash is distributed to the shareholders and itsprivate equity funds either from cash flow generated by thecompany or through raising debt or other securities to fund the distribution.Structure of a generic Private Equity Fund:Private Equity Investments(1)Private Equity Investments can be:⏹Leveraged Buyout⏹Venture Capital⏹Growth Capital⏹Distressed and Special Situations⏹Mezzanine Capital⏹SecondariesLeveraged Buyout(1):It is a strategy of making Equity Investments as part of a transaction in which a company, business unit or business asset is acquired from the current shareholders typically with the use of financial leverage. Usually, the companies involved in these transactions are typically mature and generate operating cash flows.There is usually a financial sponsor agreeing to an acquisition without itself committing all the capital required for the acquisition. Acquisition debt in a LBO is often non-recourse to the financial sponsor and has no claim on other investment managed by the financial sponsor; an LBO is attractive to a fund’s limited partners allowing them the benefits of leverage but greatly limiting the degree of recourse of that leverage.Leveraged Buyout(2):This kind of financing structure leverage benefits to an LBO‘s financial sponsor in two ways:(1)the investor itself only need to provide a fraction of thecapital for the acquisition(2)the returns to the investor will be enhanced (as long as thereturn on asset exceeds the cost of the debt).Venture CapitalVenture Capital are investments made in less mature companies for the launch, early development or expansion of a business. It is made in the most often cases of application of new technology, new marketing concepts and new products that have to be proven.Usually it is sub-divided by the stage of development of the company ranging from early stage capital used for the launch of start-up companies to late stage and growth-capital that is often used to fund expansion of existing business that are generating return but may not be profitable or generating cash flow to fund future growth.Venture capital is most suitable for businesses with large up-front capital requirements which cannot be financed by cheaper alternatives such as debt.Growth CapitalThis strategy is referred to equity investments that in this case are minority investments in relatively mature companies that need capital to expand, restructure operations, enter in new markets or finance a major acquisition without a change of control of the business.Usually companies that use this kind of capital want to finance a transformation in their lifecycle.Another typical target for the use of growth capital is restructuring of a company’s balance sheet in order to reduce the amount the leverage.Distressed and SpecialSituationsThis kind of investment is a big category referring to investments in equity or debt securities of financially stressed companies.The distressed category encompasses also these two sub-strategy:⏹“Distressed-to-Control" or "Loan-to-Own" strategies where theinvestor acquires debt securities in the hopes of emerging from a corporate restructuring in control of the company's equity ⏹"Special Situations" or "Turnaround" strategies where an investorwill provide debt and equity investments, often "rescue financings"to companies undergoing operational or financial challenges.Mezzanine CapitalMezzanine capital refers to subordinated debt or preferred equity securities that often represent the most junior portion of a company's capital structure that is senior to the company's common equity.SecondariesSecondary investments refer to investments made in existing private equity assets including private equity fund interests or portfolios of direct investments in privately held companies through the purchase of these investments from existing institutional investors.Other Strategies(1):There are other strategies that can be considered Private Equity or a close adjacent market:⏹Infrastructure⏹Energy and Power⏹Merchant BankingOther Strategies(2):Infrastructure:investments in various public works that are made typically as part of a privatization initiative on the part of a government entity.Energy and Power:investments in a big variety of companies engaged in the production and sale of energy, fuel extraction, manufacturing, refining and distribution.Merchant Banking:negotiated private equity investment by financial institutions in the unregistered securities of either privately or publicly held companies.Market(1)The private equity secondary market (also often called private equity secondaries) refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds. Sellers of private equity investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds. By its nature, the private equity asset class is illiquid, intended to be a long-term investment for buy-and-hold investors. For the vast majority of private equity investments, there is no listed public market.Market(2)Secondary transactions can be generally split into two basic categories:⏹Sale of Limited Partnership Interests: this categoryincludes the sale of an investor's interest in a private equity fund or portfolio of interests in various funds through the transfer of the investor's limited partnership interest in the fund.Nearly all types of private equity funds (e.g., including buyout, growth equity, venture capital, mezzanine, distressed and real estate) can be sold in the secondary market. The transfer of the limited partnership interest typically will allow the investor to receive some liquidity for the funded investments as well as a release from any remaining unfunded obligations to the fund.⏹Sale of Direct Interests: this category refers to the sale ofportfolios of direct investments in operating companies, rather than limited partnership interests in investment funds. These portfolios historically have originated from either corporate development programs or large financial institutions.Typical Risks(1)⏹Excessive Leverage: the amount of credit that lenders arewilling to extend on private equity transactions has risensubstantially. This lending may not be entirely prudent. Given current leverage levels and recent developments in the credit cycle, the default of a large private equity backed company seems inevitable.⏹Unclear ownership of the economic risk: the duration andpotential impact of any credit event may be exacerbated by operational issues which make it difficult to identify whoultimately owns the economic risk associated with a leveraged buyout and how these owners will react in a crisis.Typical Risks(2)⏹Reduction in overall capital market efficiency:the quality, sizeand depth of the public markets may be damaged by the expansion of the private equity market. An increasing proportion of companies with growth potential are being taken private and fewer private companies are going public.⏹Market Abuse:the significant flow of price sensitive informationin relation to private equity transactions creates considerable potential for market abuse. The involvement of participants in both public and private markets and the development of related products traded in different markets, e.g. CDS (Credit Default Swaps) on leveraged loans, increases the potential for abuse.Typical Risks(3)⏹Conflicts of Interest:material conflicts arise in private equityfund management between the responsibilities the fund manager has to itself (including its owners/staff), the investors in the separate funds/share classes it manages and the companies owned by the funds.⏹Market Access Constraints:retail investors currently only havelimited access to the private market via venture capital trusts (which offer access to arguably the riskiest part of the market) and a small number of private equity investment trusts. This enhances the perceived complexity and reduces the internal rate of return associated with private equity investing.Typical Risks(4)Market Opacity:although transparency to existing investors is extensive, transparency to the wider market is limited and is subject to significant variation in methodology (e.g. for valuation, fee disclosure etc) and format. This makes relative performance assessment and comparison complex, which may deter investment by various professional investors who may not be comfortable interpreting the information.Private Equity Firms:According to an updated 2008 ranking created by industry magazine Private Equity International, the largest private equity firm in the world today is The Carlyle Group, based on the amount of private equity direct-investment capital raised over a five-year window. As ranked in this article, the 10 largest private equity firms in the world are:⏹The Carlyle Group⏹Goldman Sachs Principal Investment Area⏹TPG⏹Kohlberg Kravis Roberts⏹CVC Capital Partners⏹Apollo Management⏹Bain Capital⏹Permira⏹Apax PartnersThe Blackstone Group。
外文翻译《Private Equity》私募股权投资Word文档见同（本）上传账号出处：Investment Banking,2010:19-43,DOI:10.1007/978-3-540-937 65-4-2作者：Professor Giuliano Iannotta译文：私募股权投资一、引言人们可能不知道为什么一本投资银行的书包含了私人股本的章节。
我可以提供两种不同的答案。
首先，私募股权基金是投资银行日益重要的客户。
Fruhan （2006）报告说，私人股本占主要投资银行总收入的25%以上，2005年私人股本占美国并购收入20%。
在德国的比例则更高（约35％）。
2001-2006年期间701次美国上市中有70%进行了首次公开发行私募基金。
其次，投资银行是私募股权行业的日益重要的参与者。
几乎所有主要的投资银行都管理一些私募股本基金。
例如，Morrison and Wilhelm(2007)报告说，高盛比其他私人股本参与者有更多的资本投资于私人股本。
这两个原因也解释了人力资源从投资银行流向私人股本行业的流动性日益增加。
本章旨在分析私人股权业务的主要技术问题。
本章的过程如下。
2.2节提供了一个私人股本活动分类。
2.3节分析了提供资金的投资者和管理资金的专业人士之间的协议。
2.4节介绍了如何衡量私募基金的业绩。
2.5节总结了长期负债表的主要特点以规范私人股权投资。
第2.6和2.7节说明估价方式用于私人股本专业人士来决定他们的投资方法。
第2.8节是结论。
二、定义私人股本行业可能分成两个主要领域：（一）风险资本（VC）和（二）买断。
界定风险投资的主要特点是迅速地预期备份公司的“内部增长”：即所得款项用于建立新的业务，而不是收购现有业务。
风险投资行业，可以进一步细分为：（一）早期阶段，（二）扩展阶段，以及（三）后期阶段。
早期阶段的投资，包括一个产品的初始商品化所通过的一切事物。
也许根本就不存在公司。
两种类型的早期投资通常被确定为：（一）种子投资即通过提供的少量资金，以证明一个概念及可以获得创业启动资金;（二）创业投资，旨在完成目标产品开发，市场研究，组装密钥管理，制定商业计划。
PE（私募股权投资简称PE）编辑本词条缺少概述、信息栏、名片图，补充相关内容使词条更完整，还能快速升级，赶紧来编辑吧！1定义▪广义私债股权▪狭义私债股权▪项目选择和可行性核查▪法律调查▪投资方案设计▪退出策略▪监管2PE的主要特点3私募股权基金特征4PE相关书籍定义编辑私募股权投资（Private Equity）简称PE，是通过私募形式募集资金，对私有企业，即非上市企业进行的权益性投资，从而推动非上市企业价值增长，最终通过上市、并购、管理层回购、股权置换等方式出售持股套现退出的一种投资行为。
在结构设计上，PE一般涉及两层实体，一层是作为管理人的基金管理公司，一层则是基金本身。
有限合伙制是国际最为常见的PE组织形式。
一般情况下，基金投资者作为有限合伙人（Limited Partner,LP）不参与管理、承担有限责任；基金管理公司作为普通合伙人（General Partner,GP）投入少量资金，掌握管理和投资等各项决策，承担无限责任。
广义私债股权广义的PE为涵盖企业首次公开发行前各阶段的权益投资,即对处于种子期、初创期、发展期、扩展期、成熟期和Pre-IPO各个时期企业所进行的投资，相关资本按照投资阶段可划分为创业投资(Venture Capital)、发展资本(development capital)、并购基金(buyout/buyin fund)、夹层资本(Mezzanine Capital)、重振资本(turnaround)，Pre-IPO资本(如bridge finance)，以及其他如上市后私募投资(private investment in public equity,即PIPE)、不良债权distressed debt和不动产投资(real estate)等等。
狭义私债股权狭义的PE主要指对已经形成一定规模的，并产生稳定现金流的成熟企业的私募股权投资部分，主要是指创业投资后期的私募股权投资部分，而这其中并购基金和夹层资本在资金规模上占最大的一部分。
2.7Private Equity and Venture CapitalProfessor Colin Mason, Hunter Centre for Entrepreneurship, University of Strathclyde, GlasgowIntroductionPrivate equity can be defined as the equity financing of unquoted com-panies at various stages in the life cycle of a company, from start-up to expansion, as well as management buyouts (MBOs) and buy-ins (MBIs) of parts of established companies or even entire companies. The key features of private equity are as follows:●investments in unquoted companies;●providing equity capital;●medium- to long-term investment horizon;●targeted at companies with growth potential;●returns mostly realized through a trade sale or flotation on the pub-lic market;●generally a hands-on investment style, with investors seeking to addvalue to their investee companies.In the past, the term ‘venture capital’ was used to describe this form of investing. However, the term venture capital is now confined to the seed to expansion stages of investment, while ‘private equity’ is used for investments in established companies that are undergoing various forms of restructuring, notably the MBO or MBI of divisions or sub-sidiaries of larger companies, businesses in receivership, family busi-nesses with succession problems, and privatizations.1Increasingly, private equity firms are now often involved in leading such investment opportunities rather than waiting to be approached by management teams (institutional buyouts). Private equity firms are also funding public to private deals, which involve buying out the shareholders of smaller, publicly listed companies where a public listing is no longer useful, to take them into private ownership for subsequent re-sale.Venture capitalists and private equity investors, therefore, have very different skill sets. Venture capitalists invest in young businesses with the potential to become significant companies in their markets.The skills of venture capitalists are, therefore, in opportunity evalua-tion, the assessment of management teams and the provision of ‘hands on’ support to their investee companies. Private equity investors, on the other hand, are investing in established companies in situations where there is the potential to achieve growth and unlock value. Their skill sets are financial engineering and deal crafting. However, in both cases the objective is to achieve returns through capital gains.Given this focus on investing in companies with growth potential, it is not surprising to find that venture capital and private equity (VC/PE)-backed companies make a significant contribution to the economy.Research published by the British Venture Capital Association 2reveals the performance of VC/PE-backed companies in the five years to 2003/04:●Their sales rose 23 per cent per annum, more than twice the rate of FTSE100 companies.●Their exports rose by 20 per cent per annum compared with a national growth of 3.3 per cent per annum.●Their investment rose five per cent per annum compared with a national increase of 1.9 per cent.●Their employment increased by an average of 19 per cent per annum (82 per cent of which was organic rather than due to acquisition),just over five times that of FTSE100 companies and three times that of FTSE mid-250 companies.Private equity-backed companies in the UK employ 2.7 million people – 18 per cent of the private sector workforce. In view of this, it is not surprising that government is supportive of the industry, with the Chancellor of the Exchequer recently noting that ‘a flourishing British venture capital and private equity industry is vital to growth’.Principal Investment Sectors92Private Equity and Venture Capital93 StructureThe UK’s VC/PE industry is both the longest established and the largest outside of the United States. The industry was established with the creation of the British Venture Capital Association (BVCA) in 1983, with 34 founding members. However, some venture capital firms existed before the creation of the BVCA, notably Charterhouse Indus-trial Development Company, which was formed in the 1930s, and ICFC, the precursor of today’s 3i plc, which was created in 1945. Cur-rently, there are over 170 full members of the BVCA.There are two main types of VC/PE firm. The larger category is independent firms that are structured as limited partnerships and raise their funds from the financial institutions and other investors (for example, companies, wealthy families, government). The other main category is ‘captives’, which are the in-house private equity sub-sidiaries of financial institutions (for example, banks).However, private individuals can invest in private equity through any of the 18 publicly quoted ‘Venture and Development Capital Investment Trusts’ and also through Venture Capital Trusts (VCTs) (discussed later) that are quoted on the London Stock Exchange. Many of the larger fund managers are hybrids, operating both captive and limited partnership funds (and sometimes quoted Venture and Devel-opment Capital Investment Trusts and VCTs as well).Private equity firms are characterized by a great range in size in terms of their funds under management, from under £1 million to over £5 billion. The smaller funds tend to focus on venture capital and have an investment focus that is restricted to a specific geographical area, whereas the larger funds focus on MBOs/MBIs and related invest-ments and operate on a pan-European basis. Over time, private equity has come to dominate in terms of the volume of funds invested. SizeIn terms of its size, The PricewaterhouseCoopers/3i Global Private Equity2004 report identifies the UK as being the second largest mar-ket for VC/PE in the world in 2003 (see Table 2.7.1), based on both investment value (US$15.86 billion) and funds raised (US$17.56 bil-lion). This report also identifies the UK as being the second largest private equity market in terms of high-tech investment (US$4.8 bil-lion), expansion investment (US$2.3 billion) and buy-out investment (US$11.1 billion) (see Table 2.7.2). To further emphasize the relative size of the UK’s private equity market, it accounted for 28.1 per centof private equity invested in Western Europe in 2003 and 56 per cent of the amount raised.3Table 2.7.1 The 20 largest countries for private equity based on investments and funds raised in 2003Country ranking for investment Investment value (US$ billion)Funds raised (US$ billion)1US 59.2043.982UK 15.8617.563Japan 7.19 1.364France 4.98 2.395Italy 3.56 2.276Australia 2.930.207Germany 2.91 1.408Korea 2.840.279China 1.670.3410Spain 1.57 1.0311Netherlands 1.28 2.4012Sweden 1.19 2.5213Canada 1.00 1.3514India 0.86 1.1115South Africa 0.82 1.1116Israel 0.77-17Indonesia 0.65-18Singapore 0.540.1019Finland 0.520.1820Denmark0.480.25Source: PricewaterhouseCoopers: Global Private Equity 2004Principal Investment Sectors94Table 2.7.2 High-tech, expansion and buyout investment in 2003High-tech investment (US$ billion)Expansion investment(US$ billion)Buy-out investment(US$ billion)1US19.61USA9.91USA41.0 2UK 4.82UK 2.32UK11.1 3Japan 2.53France 1.23Japan 3.5 4France 1.84Japan 1.04France 2.9 5Italy 1.55Spain 1.05Italy 2.6 6Korea 1.16Italy0.76Germany 2.1 7China 1.17Germany0.57Korea 1.9 8Sweden0.88Netherlands0.58Australia 1.4 9Germany0.89Canada0.49Netherlands0.7 10Australia0.510Australia0.410Sweden0.7 Source: PricewaterhouseCoopers: Global Private Equity 2004Furthermore, the UK accounted for 42.1 per cent of Western Europe’s technology investments by value and 41.7 per cent of its buy-out invest-ments by value in 2003.4 Private equity investments in the UK in 2002 were equivalent to 0.62 per cent of its GDP, compared with just 0.29 per cent for Western Europe as a whole, and much higher than for France (0.39 per cent), the Netherlands (0.39 per cent), Italy (0.21 per cent) and Germany (0.12 per cent).5Investment trendsThe UK VC/PE industry, like its counterparts in other parts of the world, expanded at a massive rate during the 1990s. Institutional investors were attracted by the high returns that VC/PE funds were generating from the mid-1990s, while demand for VC/PE was fuelled by the growing numbers of technology companies and financial pres-sures on the corporate sector that created opportunities for MBOs and MBIs. Indeed, since the mid-1990s the bigger funds have begun to take an active, rather than passive, role in seeking investment opportuni-ties by pioneering institutional buy-outs (in which they lead the trans-action rather than backing a management team), and public to private deals, taking publicly listed companies private. Secondary buy-out funds6 have also emerged. Table 2.7.3 demonstrates that, although accounting for only a small proportion of investments, because of theirPrivate Equity and Venture Capital95huge size, these types of investment account for a disproportionate share of the amount invested.Table 2.7.3 MBO and MBI investments above £100 million in 2004Buy-out name Value (£m)Buy-out source Saga Group1350Secondary buy-out Chelsfield Group (Duelguide)896Public-private New Look (Trinitybrook)699Public-private DFS Furniture 507Public-private Swift Advances 314Founder Regent Medical173SSL International Southern Cross Healthcare 162Secondary buy-out Jarvis Hotels (Kayterm)159Public-private Survitec Group/SGL Holdings 146Secondary buy-out Amalgamated Metal Corp 139TUI AG (Germany)Morris Homes/Morris Group 127Secondary buy-out Swarfega/Deb Group/Dualwise 120Secondary buy-out Hillary’s Blinds/Hillary’s Group 115Secondary buy-out Delaware International 112Lincoln National Corp Hobbs111Secondary buy-out Cabot Financial 107Secondary buy-out Burndene Investments 102Public-private Red Funnel Group 102Secondary buy-out Iris Software102Secondary buy-outSource: Centre for Management Buyout Research, Nottingham Business SchoolThe amounts raised by independent VC/PE funds, shown in Table 2.7.4, rose enormously during the 1990s, up from £749 million in 1995 to a peak of £13.6 billion in 2001, before falling back in subse-quent years. Pension funds have been the biggest single source of investment in VC/PE funds, followed by banks and insurance compa-nies. However, the main feature has been the increasing inflow of funds from overseas – especially US investors. From accounting for under half of the funds raised by independent VC/PE funds in the UK in the mid-1990s, the overseas investors’ share rose to around 70 per cent by 2001 and has remained close to this proportion in subsequent years.Principal Investment Sectors96The fall in equity markets, which has reduced the commitment by pension funds, in particular, to equity-based investments, created dif-ficult fundraising conditions for VC/PE firms in the immediate after-math of the technology downturn. However, fund managers report that the climate for fundraising has improved since the start of 2004.7 Table 2.7.4 Investors in UK independent private equity firms1995199619971998199920002001200220032004Amount raised (£m)UK pensionfunds1707346225534378171,64079681359Overseaspensionfunds1915191,3971,8751,6102,7593,8531,0432,080512UKinsurancecompanies1312211,16015253345745173920874Overseasinsurancecompanies121045051933839311,022*********UKcorporateinvestors3229376831382991952363072Overseascorporateinvestors1851428432447414100410138119UK banks7682383833503326611,051473108 Overseasbanks421534676407865751,376495676373UK funds-of-funds*n/a n/a n/a n/a587994742821,05498Overseasfunds-of-funds*n/a n/a n/a n/a3524271,705778925497UKgovernmentagencies*n/a n/a n/a n/a n/a6131284795Overseas government agencies n/a n/a n/a n/a n/a2415618271,16375Private Equity and Venture Capital971995199619971998199920002001200220032004Amount raised (£m)UKacademic institutions 45610529138655325Overseas academic institutions 63822344341224739410318096UK private individuals 436816415717536321410867220Overseas private individuals 41081421521002114291197578UK other sources 25207228182561251739011779Overseas other sources 745525329237179287113330291UK total 4121,3832,7981,5151,7763,2113,9073,4852,8091,110Overseas total 3371,0623,6984,0554,0375,7849,7274,3426,0802,189Grand total7492,4456,4965,5705,8138,99513,6347,8278,8893,299Note: * Earlier years were included as part of ‘Other Sources’.Sources: BVCA Report on Investment Activity 2002, Appendix 6O and BVCA Report on Investment Activity 2004, Summary, Table 18.The scale of investment activity by UK VC/PE funds has reflected this massive increase in fundraising and is exhibited in Table 2.7.5. Total funds invested (including non-UK ) rose from £1.4 billion in 1992 to £4.9 billion in 1998, and then – driven by rising valuations – almost doubled to a peak of £8.3 billion in 2000, before falling back to £5.5 billion in 2002 in the aftermath of the stock market crash. The industry has recovered since then, reaching a new peak of £9.7 billion in 2004. Paralleling the rise in investment activity during the 1990s,has been the increasing share of funds that have been invested outside the UK, rising from around 14 per cent in the early 1990s to 45 per cent in 2004. Investment in the UK has followed the same trend as for over-all investment, rising from £1.3 million in 1992 to peak at £6.4 million in 2000, and falling back to £4.1 million in 2003 as both valuations and investment activity dropped. The rise in both the number of invest-ments and in the amounts invested in the UK in 2004 suggests that the industry is now at the start of a new cycle of investment activity.Principal Investment Sectors98Table 2.7.5 Investment trends 1992–2004Year No of companiesfinanced in theUK Amountinvested in theUK (£m)Amountinvestedoverseas (£m)Total amountinvested (£m)19921,1471,2511831,43419931,0661,2311911,42219941,1011,6684062,07419951,0302,1403952,53519961,0602,8064333,23919971,1163,0661,1184,18419981,1223,7751,1444,91919991,1096,1691,6787,84720001,1826,3711,8858,25620011,3074,7521,4126,16420021,1964,4809865,46620031,2744,0742,2836,35720041,3015,3364,3439,679Sources: BVCA Report on Investment Activity 2002, Appendix 6A 6O and BVCA Report onInvestment Activity 2004, Summary, Tables 2 and 3.Stage of investmentThe dichotomous nature of the VC/PE industry is evident from recent investment trends. Table 2.7.6 shows that early-stage investments account for around one-third of all investments but only around five per cent of the amount invested. In contrast, MBOs/MBIs and related types of investment have represented 15–20 per cent of investments in recent years but because many of these investments are large, they accounted for over 70 per cent of the total amount invested. Indeed, as Table 2.7.7 demonstrates, large MBOs (over £50 million) accounted for just seven per cent of all MBOs in 2003 but 44 per cent of the amount invested in MBOs and almost one-third of the total amount invested.However, early stage investments increased in significance in the late 1990s, rising from 16 per cent of investments in 1995 to around one-third since 2000. In terms of value, early stage investments have risen from under five per cent in 1995 to peak at 11 per cent in 2000, but have fallen back since then to five per cent in 2004. At the same time, MBO/MBI investments became slightly less dominant for a whilePrivate Equity and Venture Capital99but have increased in dominance again since 2002. Their share of investment activity accounted for 20 per cent of the total in 2004, while in terms of value they accounted for 77 per cent. Although the relatively small number of big MBO investments dominate in terms of the amount invested, the ‘typical’ VC/PE-backed company is an SME (a business with less than 250 employees) that raises less than £5 million (89 per cent; 67 per cent less than £1 million).8Table 2.7.6 UK investment by stage(a) Amount invested (£m)Early stageExpansion MBO/MBI Total 1992823628071,2511993693937691,2311994764801,1121,6681995854951,5602,140199613159220832,80619971599072,0003,06619982888222,6653,77519993471,1564,6666,16920007032,1223,5466,37120013901,6362,7264,75220022951,3742,8114,48020032638672,9444,07420042849544,0985,336(b) Number of UK companiesEarly stageExpansion MBO/MBI Total 19951675283351,03019961845203561,06019972195483491,11619982415613201,12219992605393101,10920004095482251,18220014086532461,307Principal Investment Sectors10020023986191791,196 20034276452021,274 20044545802671,301Note: Before 1995, data were calculated on the basis on number of ‘financings’. This is not comparable because companies can have more than one financing in a year.Sources: BVCA Report on Investment Activity 2002, Appendix 6Ci and Cii 6O and BVCA Report on Investment Activity 2004, Summary, Table 4Table 2.7.7 MBO investments in 2003 by sizeSize of investment Number Amount investedNo%£m%Under £2m5436803£2m–£10m45302409£10m–£50m362484632Over £50m15101,49356Total1501002,659100 Source: BVCA Report on Investment Activity 2003, Table 5a Sectoral investment patternsInvestments occur across virtually all sectors of the economy. However, the sectors containing the most VC/PE-backed companies in 2004 were software and computer services, pharmaceuticals and biotechnology and support services. The most significant sectors in terms of the amount invested – reflecting the sectoral composiiton of MBOs – are retail, support services and financial services. Technology sectors have withstood the worst of the post-2000 downturn in VC/PE investing. Although the number of technology investments fell 15 per cent between 2000 and 2004, even in 2004, they still accounted for half of all investments (Table 2.7.8). Virtually all of these investments were either early-stage (54 per cent) or expansion-financing (42 per cent). However, the amount invested in technology sectors dropped by over half over the same period, although the effect of this drop is simply to bring technology investing back to the level of the 1990s before the boom.9 Computer software was the technology category that attracted most investments.Table 2.7.8 Trends in technology investments 2000–0420002001200220032004 No of companies772690641701657 % of all UK companies6553545550 Amount invested (£m)1,6151,658546817678 % of amount invested in all UK companies2535122013 Source: BVCA Report on Investment Activity 2004, Table 8Geographical characteristicsVC/PE displays distinctive geographical characteristics. The majority of private equity firms are based in London and investment activity has tended to favour London and the South East. During the 1990s, however, there was significant growth in investment activity in some of the English regions – notably the East and West Midlands and the North West – although London and the South East continued to attract a disproportionate share of investments. The growth of VC/PE outside of the South East is clearly linked to the emergence of small clusters of VC/PE firms in such cities as Birmingham and Manchester.However, the growth of private equity investments in the regions has been largely driven by MBO and MBI investments: early stage invest-ing has continued to be disproportionately concentrated in London and the South East (38 per cent of investments and 49 per cent of the amount invested in 2003). The investment downturn since 2000 has had less of an impact on London, the South East and the East of England.10Investment performanceThe latest BVCA Performance Measurement Survey (conducted in con-junction with PricewaterhouseCoopers and Capital Dynamics) notes that UK independent private equity funds have outperformed the Total UK Pensions Assets over three, five and 10 years.11 Looking at returns from fund inception, the best performers, for which data are given in Table 2.7.9, have been the large MBO funds and non-technology funds, whereas early stage funds and technology funds have performed poorly. This differential investment performance clearly helps to explain the dominance of private equity funds over venture capital funds.Table 2.7.9 Overall performance of independent UK private equity firms by investment stage: returns since inceptionNo. of funds To Dec2004To Dec2003To Dec2002To Dec2001To Dec2000To Dec1999To Dec1998Earlystage31-2.9 4.711.514.115.09.88.3Develop-ment458.29.810.19.710.012.29.1MidMBO5011.39.711.014.216.316.716.5LargeMBO4016.016.416.818.818.717.119.2Gener-alist4513.213.815.416.216.416.813.5 Total21113.013.614.616.216.415.914.9 UK17513.614.114.515.416.216.515.5 Non-UK3611.812.615.118.717.512.49.8 Tech-nology490.97.410.712.112.89.58.4Non-tech-nology16214.214.515.317.017.316.515.6 Source: PricewaterhouseCoopers/BVCA (2002) Performance Measurement Survey 2004 Government support for the early-stage venture capital marketThe UK is well served for larger private equity deals. However, there has been periodic concern that there is a lack of early-stage funding available, especially for technology-based firms, and for amounts of under £250,000. Over the years, these concerns have prompted gov-ernment intervention. The present government has been particularly active in establishing various funding initiatives to ensure the supply of early-stage finance.12University Challenge FundsFirst, it has established University Challenge Funds (UCFs). They are seed funds that help the commercialization of university research and were established in response to a perceived funding gap for bringing university research discoveries to a point where their commercial use-fulness can be demonstrated to a sufficient extent that successful approaches can be made to investors for finance or to companies to take out a licence. They were funded by two charities (The Wellcome Trust, which contributed £18 million, and the Gatsby Charitable Foundation, which contributed £2 million) and the government (£25 million). In June 1998, universities were invited to bid on their own or in consortia for a share of the money. Each recipient had to match 25 per cent of the amount awarded from its own resources. A total of 15 seed funds were established (involving 31 universities and six institutes). In 2000, the government contributed a further £15 million, which was awarded to five funds involving 38 institutions. The funds are all professionally managed. UCFs have invested £36 million in 186 university spin-outs over the past three years, which has led to the development of 102 patents and 15 licences.13 However, because of the investment down-turn a number of the fund managers have reported difficulties in attracting follow-on funding for the investments that they have already made.Regional Venture Capital FundsSecond, the government has established Regional Venture Capital Funds in each of the nine English regions, to focus on sub-£500,000 investments. They are profiled in Table 2.7.10. The devolved nations of Scotland, Wales and Northern Ireland have their own separate pub-licly supported institutional arrangements for early-stage venture cap-ital. The funds have commercial objectives and are professionally managed. Their aims are threefold:●to increase the amount of equity-based finance for growing SMEs;●to ensure all regions have access to viable regionally-based venturecapital funds;●to demonstrate to potential investors that commercial returns canbe made by funds that invest in the SME ‘equity gap’.Table 2.7.10 The Regional Venture Capital FundsRegion Fund manager Size offund (£m)No of investments Total invested(£m) at May2003North West North WestFund Manager35.57 1.834North East NorthernEnterprise Ltd1512 1.775Yorkshire and the Humber YorkshireEnterprise2510.250East of England Create PartnersLtd20––West Midlands Midven Ltd2030.450East Midlands CatapultVentureManagers Ltd3011 1.433South West South WestVentures2510.250South East South EastGrowth Fund3012 2.900London London FundManagers5010.250Source: PricewaterhouseCoopers (2003) Early Evaluation of the Regional Venture Capital Funds: Report to the Small Business ServiceThe funds have raised a total of £250 million, ranging from £15 million to £50 million. In each fund approximately 50 per cent of the finance has been contributed by the European Investment Bank (EIB) and the UK government, with the remainder raised by the fund managers from private sources (mainly banks and local authority pension funds). To help the fund managers attract private capital, the government has subordinated its investment position by putting a ‘cap’ on its invest-ment return, thereby boosting the anticipated returns to the private sector and the EIB, and agreed to act as ‘first loss’. In other words, in the event of the erosion of the fund’s capital base the government’s investment will suffer the first loss. The funds, which have to be the first external investor in a business, are limited to a maximum invest-ment of £250,000, with up to a further £250,000 in a follow-up invest-ment. If the investment is syndicated, the total deal size cannot exceed £250,000. Eight of the nine funds were established during the 2002/03 financial year. By May 2003, these funds had made 48 investments intotal, averaging £195,000, which suggests that the majority of invest-ments have been close to the £250,000 limit.14The Early Growth programme and the UK High Technology FundTwo further initiatives complement the Regional Venture Capital Funds. The Early Growth programme provides smaller amounts of risk capital (average of £50,000) for start-ups and early-stage businesses.The initiatives funded under this programme have mainly been in the form of co-investment schemes. The UK High Technology Fund, a fund-of-funds, supports early-stage high technology businesses by investing in technology-oriented funds. Using £20 million of government fund-ing, it has leveraged £100 million of private sector money. To date, it has committed £123 million to nine specialist venture capital funds, which have made over 110 investments throughout the UK.15 Venture Capital TrustsThird, the government has continued with Venture Capital Trusts (VCTs), which were established in 1995 by the previous Conservative government. The aim is to help individuals invest in small higher-risk trading companies whose shares are not listed on a recognized stock market. VCTs, which are listed on the London Stock Exchange, are similar to investment trusts. They are run by fund managers. Investors subscribe for shares in VCTs, which use the money that is raised to invest in unquoted companies and companies listed on the Alternative Investment Market (AIM) and over-the-counter markets, providing them with the finance to start up and grow. There are four types of VCTs: (i) generalist funds, which invest in a number of industry sec-tors, mainly in unquoted companies; (ii) specialist funds, which invest in specific sectors; (iii) technology funds, investing mainly in unquoted technology companies; and (iv) AIM funds, which invest mainly in AIM stocks.UK-based companies (with certain restrictions) can raise up to £1 million a year from VCTs. Investors gain both income tax and cap-ital gains tax relief. This comprises 20 per cent (the basic rate) relief on amounts invested in new VCT shares up to a maximum of £200,000 per year. However, the average investment is £25,000. Shares must be retained for a minimum of three years. Investors also receive relief on any dividends paid by VCTs. Capital gains can also be deferred if re-invested in VCTs. However, capital gains arising on the disposal of VCT shares are no longer free of tax, following changes made in the 2003 Finance Act.。
