BVCA Private Equity and Venture Capital Performance Measurement Survey 2008
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Asset Management BVCA Private Equity and Venture Capital Performance Measurement Survey 2008 A survey of independent UK-based funds that raise capital from third-party investors The British Private Equity and Venture Capital Dynamics PricewaterhouseCoopers LLP Capital Association (BVCA) 9th Floor Hay’s Galleria 1st Floor North 9 Colmore Row 1 Hay’s Lane Brettenham House Birmingham London Lancaster Place B3 2BT SE1 2RD London WC2E 7EN Tel: 0121 200 8800 Tel: 020 7583 5000 Fax: 0121 200 8899 Fax: 020 7804 1001 Tel: 020 7420 1800 Fax: 020 7420 1801 www.capital-dynamics.com www.pwc.com [email protected] www.bvca.co.uk Contents Overall performance Foreword 02 Introduction – performance through sustainable investing 04 Highlights 06 The UK private equity industry 12 Analysis: Venture capital returns 14 Returns by investment stage – IRR and multiple 16 Returns by vintage year – IRR and multiple 20 Returns by vintage year (1996 onwards) and investment stage – IRR and multiple 24 Range of returns Range of returns (IRR and multiple) since inception – investment stage and subcategory 26 Range of returns (IRR and multiple) since inception – vintage year 29 Range of returns (IRR and multiple) since inception – investment stage (1996 onwards and vintage year) 32 Capital raised and realised By investment stage and subcategory 35 By vintage year 36 Appendices Appendix I Methodology 38 Appendix II Glossary of terms 40 Appendix III Principal comparators and asset class overview 42 Appendix IV Range of returns (IRR) medium to long term 46 Appendix V Since inception range of returns – vintage year band and investment stage 50 Appendix VI Worked examples 59 Appendix VII List of responding managers 61 Appendix VIII Frequently asked questions 63 BVCA private equity and venture capital performance measurement survey 2008 1 Foreword This year’s survey demonstrates, This survey, produced by As members will be well aware, economic The BVCA – The British Private Equity and PricewaterhouseCoopers1 in association conditions are currently as vexed as they Venture Capital Association – is the industry once again, the long-term benefits with Capital Dynamics, is the most have been in a generation – perhaps body for the UK private equity and of private equity investment. comprehensive and detailed review of longer. Portfolios across the board are venture capital industry. Our membership The downturn has affected most of over 450 members represents the private equity, anywhere in the world. feeling the strain. However, the total overwhelming number of UK-based private asset classes and investment Full member firms of the BVCA – the return to investors from all private equity equity and venture capital providers and strategies, and private equity British Private Equity and Venture Capital funds is still a very healthy 15.4% pa over their advisers. The BVCA has over 26 years has not been immune to this. Association – were wholly supportive of a ten-year period. Although this is a 4.7 of experience representing the industry, Nevertheless, the long-term returns open reporting and supplied complete percentage point decline from last year’s which currently accounts for 40% of the that are derived from private equity data sets for this research. The data they survey, returns from private equity are still whole of the European market, to supplied reveals evidence of excellent far in excess of the FTSE All-Share, which government, the European Commission put other asset classes in the shade long-term investment performance returned just 1.2% pa to investors over and Parliament, the media, regulatory and and serve as a reminder that other statutory bodies at home, across among member firms, tempered by the same period. Returns from private Europe and around the world. We promote investment performance is based some reduction in levels of return over equity funds since inception are even the industry to entrepreneurs and on patience and commitment. the short-term. more impressive, at 16.4% pa. investors, as well as provide services and best-practice standards to our members. 1 ‘PricewaterhouseCoopers’ refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. 2 BVCA private equity and venture capital performance measurement survey 2008 So while the short-term outlook for ‘Despite claims that the banks are still Simon Havers Ashley Coups private equity is unclear, what is certain lending, this is clearly not the case. BVCA Chairman, August 2009 Private Equity Assurance Leader, is that over long time periods – those Debt is scarce and expensive, covenant PricewaterhouseCoopers, August 2009 favoured by pension funds and other breaches are used by banks to change portfolios that focus on long-term returns terms or secure fees, and alternative – private equity outperforms other assets. financing structures will become necessary – including the use of vendor It remains to be seen to what extent the loan notes or equity-only deals.’ turmoil in capital markets will impact the industry in the longer term. There is Nevertheless, the BVCA remains already a reduction in the amount of confident that UK private equity – with its large MBO deals and in the returns from collective knowledge and ingenuity – will outstanding MBO investments, amid a weather this storm, as it has many times dire financing environment. A manager before, and produce returns that continue taking part in the survey commented: to satisfy investors. BVCA private equity and venture capital performance measurement survey 2008 3 Introduction – Performance through sustainable investing Until recently corporate responsibility significant potential liabilities that have to effects on exit values. Indeed, as appeared to offer few advantages for be managed. The move towards a cleaner sustainability becomes more accepted for private equity. It was chiefly seen as world is opening up whole new product its relationship to a business’s value, it may markets, while at the same time gradually also help private equity firms to differentiate having a brand or investor relations forcing companies to pay for their pollution. themselves – both to prospective portfolio benefit for companies in the public companies and investors. In a tough arena. Now this is changing, as Although climate change is currently the fund-raising climate, differentiation and sustainability issues look likely to have most urgent issue within the sustainable enhanced propositions can only by positive. development agenda, other issues such a major impact on the performance of as poverty, natural resource depletion Some private equity firms have already taken portfolio companies, their valuations and scarcity, population increase and a lead in managing environmental, social and and, therefore, private equity owners. demographic changes may also governance (ESG) issues. One, Doughty affect the prospects of private equity Hanson, has now appointed a dedicated Additionally, major fund providers, such portfolio companies. head of sustainability. Doughty Hanson’s Guy as the large pension funds and sovereign Paisner put the business case for action on wealth funds, are starting to take this Specific benefits sustainability this way: ‘Underpinning all our area seriously, asking questions of The value of sustainability-related ESG activities is the belief that companies fund managers and focusing their programmes can be demonstrated that engage in sustainable investment investment strategy around more through the following benefits: practices not only de-risk their business ‘sustainable’ propositions. Furthermore, models, but can also achieve greater cost acknowledgement of a wider stakeholder • Adding to cash flow in the long term efficiencies and profitability, resulting in higher group has resulted in private equity through ‘eco-efficiencies’ and valuations in the capital markets.’ becoming more open through initiatives operational cost reductions; such as the guidelines on transparency Data shows clearly how energy technology and disclosure in private equity proposed • Ensuring easier access to finance by investments are multiplying as countries by Sir David Walker. reducing risk, therefore achieving a lower strive to achieve ambitious targets for weighted average cost of capital; and greenhouse gas reductions under the For private equity firms, then, sustainability Kyoto Protocol framework. A total of $6 is showing signs of affecting their ability – • Creating major new ‘green’ product lines, billion was raised for ‘cleantech’ both positively and negatively – to deliver with opportunities for increased revenue, investments across 29 new funds last returns for investors. For example, especially through ‘clean technology’. year, and the number of private equity environmental issues are creating both Evidently, then, for private equity firms, funds starting to invest in the sector is opportunities for businesses to grow and factors such as these could have significant expected to reach a record high this year.1 1 Private Equity News – 4 June 2009. 2. The Index tracks companies deriving more than one-tenth of their revenue from climate-related activities. 4 BVCA private equity and venture capital performance measurement survey 2008 Furthermore, such investments are clearly investments, which by themselves appear a useful starting point for strategic corporate • liaise