Financing new ventures and established enterprises 07

Winter 2013/14

In pursuit of prosperity: How Europe can climb the growth curve 2

EuropeanCOMPETITIVeNESS

success. Alliance , Moleskine They reveal that companies and Applus+ are three other under private equity ownership businesses we profile in this issue often display the characteristics of the EVCA Briefing. required for long-term growth. A contributing factor to this is These companies share a core set the mix of strategies private of characteristics – innovation, equity brings to the table: productivity and competitiveness helping companies operate more – recognised and nurtured under efficiently, launching products and Entrepreneurs like David Marcus prove private equity ownership. Europe services and expanding overseas. how much business talent Europe has 2020, the European Union’s plan to offer. for sustainable economic growth, Encouraging though the findings lists these areas as priorities. At are, they just scratch the surface. Born in France, Marcus became a the 25 October 2013 meeting of Further research is needed to serial tech entrepreneur. His last the European Council, EU heads improve our understanding of start-up – Zong – is now a core of states and government agreed private equity’s impact on growth. part of PayPal’s offering and he is that “investment in research and President of this 13,000-employee innovation fuels productivity and But we believe the report is a good online payment company. growth and is key for job creation”. start to the discussion about how private equity can contribute to the Marcus made this incredible Earlier this year, the EVCA goals of Europe 2020 and beyond. journey with the help of venture commissioned research on the capital (VC) backing. VC is part impact of private equity on of the larger private equity economic growth in Europe. Drawn industry, which has guided many from 60 recent academic and other companies, at different professional studies, the findings Dörte Höppner, development stages, to similar form the basis of this Briefing. Secretary-General

I N S U MM AR > Productivity, innovation and competitiveness are central to the EU’s plan for long-term economic growth; innovation and the digital agenda are European Council priorities > Private equity backing improves the operating performance of firms by up to 8.5% in the first three years of investment > In the private sector, private equity-backed firms employ less Y than 6% of workers yet account for up to 12% of innovation > Private equity-backed companies are more focused on expanding overseas, making them more competitive > Private equity is a major provider of risk capital – one indicator of an economy’s competitiveness – contributing to the creation of up to 5,600 new businesses each year

Source for figures: Frontier Economics 3

Innovating for growth

A new independent report, commissioned by the EVCA, underlines private equity's contribution towards making Europe more innovative, productive and competitive

The private equity industry that private equity-backed Supporting innovation and the is playing a key role in firms invest more in innovation digital agenda are priorities supporting Europe 2020, and achieve better results for the European Council. But the European Commission’s than their peers, securing Kamall says: ‘We need to make ten-year strategy to drive patents worth up to an sure the players in that sector growth in the EU and create estimated €350bn in the five perform to the best of their a more ‘smart, sustainable years to 2011. ability — or our competitors and inclusive’ economy. will out-compete us.’ That’s one of the main This is an important example conclusions of a new report, of private equity’s role in the Exploring the impact of European economy, says private equity on economic Syed Kamall, MEP for London growth in Europe. and a member of the European Parliament’s Europe 2020 sets five Economic and Monetary headline targets for the EU Affairs and International to achieve by the end of this Trade committees. decade, covering employment, research & development ‘Private equity needs to tell (R&D), climate change and more and more of those sorts energy sustainability, of stories, particularly where education and fighting poverty they concern new technology We need to make and social exclusion. companies or job creation,’ he sure the players says. ‘How has it invested in or [in Europe’s digital, The report, produced by grown the R&D function in a modern economy] Frontier Economics, company where it had been perform to the best demonstrates how private neglected, for example?’ of their ability – or equity can help in achieving our competitors will these goals (for the main Kamall believes private findings, see page 6). equity’s ability to take a out-compete us dispassionate view of firms Syed Kamall, Innovation impetus and turn them around is MEP for London The research highlights important for Europe’s growth private equity’s contribution sectors. ‘In the EU we are towards Europe 2020’s R&D constantly talking about how target, which requires 3% of we want to create a digital, the EU’s GDP to be invested in modern economy in an R&D by 2020. It demonstrates information society.’

Source for figures: Frontier Economics 4

Cause and effect

Employing methodology traditionally used to assess economic policy, it is possible to trace the path linking private equity activity to economic growth

Attracts Offers investors Invests in SMEs Provides managerial functions, investable alternative and larger business standards and know-how funds investment companies to opportunities support their...

- start-up - growth Corporate Management PRIVATE EQUITY ACTIVITY EQUITY PRIVATE - recovery governance and industry - succession expertise

Increased Additional New business Improved management methods capital asset class creation and

OUTCOMES investment and attractive sustainable in the EU investment employment returns New products Improved Improved and processes corporate corporate recovery performance

IMPACT Greater innovation Increased productivity Enhanced competitiveness

ECONOMIC GROWTH

Source: Frontier Economics 5

A productive relationship

The Carlyle Group contributed to improved performance at Barcelona-based Applus+ by helping it to run more efficiently

When The Carlyle Group bought The group’s statutory vehicle Applus+ in November 2007, inspection business also saw it spied the potential for Improving the improvements in efficiency impressive growth. Since then, productivity and and customer service. ‘Clients staff numbers have jumped by financial performance in Catalonia used to wait five nearly 10,000 and income at the of a number of or six days for an appointment, global company, which tests, under-performing which they had to book by inspects and certifies industrial business units formed phone,’ says Wagenberg. equipment and vehicles, has a significant part of ‘Now the waiting times are increased from around ¤650m the growth plan less than a day and about to ¤1.5bn in 2012. 30% of bookings are done on the internet.’ To achieve this, Carlyle helped the Barcelona-based business Today, Applus+ employs more improve managers’ performance than 18,000 people and is a and focus its efforts on three global company, operating in areas where it could be world performance has improved and 65 countries. It boasts Shell leader: inspections for industrial it is expanding internationally. and Mercedes among its clients. clients in the energy industry; ‘It’s now one of the top two Wagenberg believes there’s vehicle inspections required by players in Europe for the further scope for productivity law; and testing vehicles for inspection of aerospace improvements as the major automotive makers. A composites for Airbus,’ says company’s scale grows. ‘That’s series of takeovers, particularly Alex Wagenberg, a Managing already happening business by in the energy division, has Director at Carlyle and a business – but there’s more to helped it to expand into member of the Applus+ board. come,’ he says. countries across the globe and pursue that world-leader status.

Improving the productivity and financial performance of a number of under-performing business units formed a significant part of the growth plan. The company’s loss-making laboratories business was restructured to focus on a reduced number of core activities. Its financial 6

Winning numbers

Did you know that private equity contributes to the creation of 5,600 businesses in Europe every year? Or that private equity-backed firms are up to 50% less likely to fail than similar companies under alternative ownership? The main findings of Frontier Economics’ new report show private equity can be a key ally in Europe’s quest for competitiveness and growth

¤250bn

In the 12 largest private equity markets in Europe, private equity invested almost ¤250bn in more ¤50bn than 19,400 companies from 2007-2012. Of this, an estimated ¤50bn came from outside Europe. 8.5%

Private equity backing improves the operating performance of portfolio companies by 4.5% to 8.5% during the first three years of investment.

12% ¤350bn Private equity-backed companies account for less than 6% of total private sector employment in Europe, yet they account for up to 12% of all private sector 25% innovation and 8% of all R&D spending in the private sector. 7

5,600

Private equity contributes to the creation of up to 5,600 new businesses in Europe annually, either through direct investment or via a ‘spillover’ effect, caused by knowledge sharing, networking and inspiring role models.

6.9% 6 In large companies, private years equity backing leads to improved productivity (measured by EBITDA per employee) of 6.9% over a six-year period.

Patents granted to private equity- Private equity- backed businesses from 2006-2011 backed companies are likely to be worth up to ¤350bn. are up to 50% less likely to fail than Private equity participation increases non-private-equity- the number of patent citations (a measure of a patent’s technological % backed companies significance and market value) by 25%. with similar characteristics. 8

From Nottingham to Nanjing

In partnership with private equity, has used innovation and internationalisation to become one of the world’s biggest players in health and beauty

When John Boot opened a Still based in Nottingham, Boots small herbalist shop in UK is now a key business within Nottingham in 1849, little did the Alliance Boots Group. In I have often said that he know that more than 160 2007 it became the first FTSE KKR could not have years later the business that 100 company to be taken been a better partner bears his name would employ private when Kohlberg Kravis for me and for Alliance over 108,000 people in more Roberts (KKR) acquired it in Boots. They share my than 25 countries worldwide. partnership with Alliance Boots’ vision for the group, and then Deputy Executive they have supported me Chairman . Stefano Pessina, Alliance Boots Patchwork of entities ‘Back in 2007, Alliance Boots was a patchwork of entities,’ says Yves Romestan, the company’s Director of Group 2007 Communications. ‘But our Alliance Boots becomes the first focus and strong executive FTSE 100 company to be taken management team has unified They share my vision for private after it is bought by a the company. For example, the group, and they have partnership between its Deputy Executive Chairman Stefano has been supported me through all the Pessina and private equity firm transformed from trading steps towards creating a global Kohlberg Kravis Roberts under 21 names into one industry player. They really strong healthcare brand, are the partner of choice.’ Alliance Healthcare.’ Away from the public markets, £2bn Pessina, now Executive KKR and Pessina have been Chairman, agrees the deal was able to shift the focus to Alliance Boots invested in a transformational. ‘I have often long-term value gain and £2bn development programme which involved revamping stores, said that KKR could not have create an ownership culture overhauling the distribution system been a better partner for me that encourages innovation and updating the brand and for Alliance Boots. and entrepreneurship. 9

A £2bn development Alliance Boots’ international programme has included ambitions were boosted in 2012 smartening up stores, when US chemist Together with Alliance overhauling the distribution bought a 45% stake in the Boots and Walgreens, system and updating Alliance business, with an option to we have created Boots’ group of brands. acquire the rest in 2015. the world’s biggest ‘Together with Alliance Boots buyer of prescription Developing new products and and Walgreens, we have drugs and the world’s technologies has also been at created the world’s biggest largest pharmacy-led the forefront of the business’s buyer of prescription drugs and health and wellbeing agenda, having hit the jackpot the world’s largest pharmacy- enterprise with No7’s Protect & Perfect led health and wellbeing range, which has grown into a enterprise,’ says Murphy. Dominic Murphy, leading UK skincare brand. Kohlberg Kravis Roberts John Boot would no doubt have ‘The achievement of No7 been proud to lend his name to products speaks volumes about such success. the innovation potential within the company,’ says Dominic Murphy, Member and Head of KKR’s Health Care Industry team in Europe. And more recently, has entered the digital age, Moleskine: adapting introducing an Eye Check app. through innovation From West to East Since 2007 the focus has been on growing internationally with the group’s presence increasing Can traditional notebook makers survive the across Europe, the US, Russia, rise of personal electronic devices? Luxury the Middle East and Asia. Italian brand Moleskine has – through innovation ‘Alliance Boots has used its and expansion. position as the largest integrated wholesaler in the With the backing of private equity firm Syntegra market as the platform for Capital, Moleskine partnered with notetaking international expansion,’ says Murphy. ‘We see this as a very software and service provider Evernote to create natural value creation driver for an app that digitalises ideas and sketches onto the business.’ a computer, phone or tablet so that they can be saved, searched and shared. Alliance Boots has also focused on China, where it has been It also diversified from its Ernest Hemingway- since 2008. The group has inspired black notebooks to offer pads in bought a minority stake in numerous sizes and colours across 90 countries. Nanjing Pharmaceutical, China’s Some notebooks have themes such as style, fifth-largest pharmaceutical music and pets. wholesaler, and worked with Guangzhou Pharmaceuticals, its In April 2013 the company debuted on the Milan third-largest drug company. In addition, management is Stock Exchange and is now expanding. Six store reported to be considering openings are planned by the end of the year – expansion into South America. two in China, two in the US and two in Europe. 10

A global success story

Advent Venture Partners helped Zong become a credible international competitor. Now the start-up is a jewel in eBay’s crown

In 2004, venture capital than Europe at the time,’ says investor Frédéric Court met Court. ‘To increase the chances entrepreneur David Marcus in of success, David moved to Geneva. Marcus was pitching Silicon Valley within the first We aimed at winning for financing to grow his year of our investment.’ over the US market, an brainchild Echovox – a company ambitious strategy that that helped media firms ‘We aimed at winning over the Advent supported. It interact with consumers via US market, an ambitious mobile technology. strategy that Frédéric and was like having a great Advent supported,’ says partner on board Today, Marcus is President of Marcus. ‘It was like having a David Marcus, PayPal PayPal, one of the world’s great partner on board.’ (formerly of Zong) biggest online businesses. His incredible journey, made with Soon, Zong was signing up the support of Court’s Advent prestigious customers such as Venture Partners, shows how Facebook. To cope with this private equity can help growth, Advent helped Zong transform European companies raise finance from US venture into global success stories. capital firm Matrix Partners. Within just 18 months, eBay Court. In particular, European US springboard subsidiary PayPal bought Zong corporates could be less risk Advent backed Echovox in for $240m. Marcus has averse about investing in 2007. It morphed into Zong, advanced quickly there, with innovative start-ups. which allowed people to pay for mobile one of the main reasons online services with just their behind PayPal’s growth. Championing innovation in the mobile phone number and a wider economy is one way to secure PIN code. Could Zong have enjoyed tackle that risk aversion. similar success if Marcus had Venture capital is well placed to ‘Very quickly, we focused on stayed in Europe? ‘We have a do this, helping Europe’s supporting Zong’s expansion in lot of talent for innovation in economy to grow at the same Europe but also tried to get a Europe but we need to be more time, but the industry needs foothold in the US, a very large aggressive in terms of taking support from policymakers to mobile market but less mature that innovation to market,’ says help it make a difference. 11

In conversation with Vincenzo Morelli

Private equity’s ‘unique advantages’ make it a more effective form of governance for delivering company and industry growth, says the former chairman of the EVCA

What’s the most important company – and that brings match private sector funds conclusion of Frontier Economics’ great discipline. and co-invest in the riskier recent report? part of venture capital An FT report argued that the investment. That would be an That the private equity industry Frontier Economics research interesting catalyst for contributes disproportionately reviewed a thin body of literature investment in start-ups and to company and industry and didn’t deliver strong enough higher-growth opportunities. growth in Europe by helping to proof of private equity’s develop innovation, productivity contribution. What’s your and competitiveness to a response to that? greater degree than other forms of ownership. Many I think that’s a bizarre individual academic studies contention. The report looked have pointed in the same at more than 60 studies. If you direction but were all quite go back to 2009, another fragmented. Frontier secondary report, by the Economics’ report uses a robust Swedish academic Per OECD methodology to join Strömberg, summarised the the dots. conclusions of almost 90 studies. That’s tens of Why is private equity doing this thousands of data points over more effectively than other forms long periods of time. Few The private equity of governance? things have been studied to industry contributes that degree. disproportionately to Because it has unique growth in Europe by advantages. We start with a How could private equity make helping to develop clear strategy: we buy a an even greater contribution innovation, productivity company only after extensive towards European growth and and competitiveness due diligence and based on an the Europe 2020 agenda? to a greater degree explicit investment case. Second, the incentives are I think there will be even more than other forms aligned: management is successful results if we work of ownership involved in developing strategy constructively with the Vincenzo Morelli, and shares the rewards of European Commission and Former Chairman of the EVCA ownership. Third, the partners national governments to or advisers of private equity orient our investments firms typically have a significant towards higher-growth areas degree of specialisation or of the economy. For example, experience. Lastly, we the Commission is currently eventually have to sell the looking into a programme to 07 The EVCA is the voice of European private equity. Our membership covers the full range of private equity activity, from early- stage venture capital to the largest private equity firms, investors such as pension funds, insurance companies, fund-of-funds and family offices and associate members from related professions. We represent 700 member firms and 500 affiliated members. The EVCA shapes the future direction of the industry, while promoting it to stakeholders such as entrepreneurs, business owners and employee representatives. We explain private equity to the public and help shape public policy, so that our members can conduct their business effectively. The EVCA is responsible for the industry’s professional standards, demanding accountability, good governance and transparency from our members and spreading best practice through our training courses. We have the facts when it comes to European private equity, thanks to our trusted and authoritative research and analysis. The EVCA has 25 dedicated staff working in Brussels to make sure that our industry is heard.

For more information please contact: Michael Collins Director of Public Affairs, EVCA Tel +32 2 715 00 20

European Private Equity & Venture Capital Association Bastion Tower, Place du Champ de Mars 5, B-1050 Brussels, Belgium Tel +32 2 715 00 20 www.evca.eu