Announced Geneva, 13 March 2002: The impact of the uncertain economic environment of recent years is reflected in the one-year horizon returns of the private equity asset class in Europe with a pooled IRR (internal rate of return) of -2.3% for total private equity. Long term overall returns remain robust in 2001 at 14.2% annualised IRR for total private equity with 31.7% for top quarter funds.
The preliminary results from the latest Investment Benchmarks Study carried out by Venture Economics, with the full cooperation of the European Private Equity and Venture Capital Association (EVCA), were presented at the Annual EVCA International Investors Conference, 13-15 March 2002 in Geneva, Switzerland.
The sample data include a total of €107 billion of committed capital in 649 funds (of which 571 are mature, i.e. formed 1980-1999) reflecting continued improvements in the representativeness of this sample. This year’s Investment Benchmarks Study includes data through December ’01, providing the latest and most representative pan-European performance measurement information, and allowing for comparison with other asset classes.
Long-term versus short-term
Whilst private equity is a long-term business and short term numbers have but an indirect correlation with global performance, total private equity mirrored the impact of recent economic challenges returning a -2.3% one-year horizon IRR (short-term) versus a 16.5% ten-year horizon IRR (long-term). All stages of investment saw a decrease in one-year horizon IRR with the main drop being seen in early stage at -8.9%. For development and buyout, one-year returns -whilst positive at 11.4% and 2.2%- were inferior to long-term returns, which at 13.8% and 18.7% respectively, for ten-year horizon, remained healthy.
Long term overall returns robust in all stages
2001 saw a 14.2% annualised pooled IRR since inception of fund for total private equity, with particularly strong numbers for buyouts (18.5% IRR). Venture stages also demonstrated favourable performance with 12.6% IRR since inception. Although early stage companies were at the forefront of recent economic challenges, long-term returns for this stage remained resilient with a 9.2% IRR since inception.
Lower company valuations led by the technology sector, difficulties in exit routes and a weak European economic climate contributed to this decrease in returns in European private equity.
“This exercise is key in improving the transparency of this industry.” comments Max Burger-Calderon, chairman of the EVCA investor relations committee, “..and the findings show us the clear impact of the economic environment on short term returns. No doubt this difficult year has supplied many valuable lessons to private equity practitioners, which can be applied in coaching tomorrow’s promising growth companies. Nevertheless, the results published today also confirm the long-term robustness of the European private equity asset class to weather storms and to produce sustained returns throughout economic cycles.”
“We are working to continuously improve the coverage of this study,” comments Gillian Middleton, head of European private equity research at Venture Economics. “The results published today are very interesting and provide a good insight into what we can expect from the final figures in June.”
The 2002 edition of the Investment Benchmarks Report will be released in the coming months. It is the only independent, commercial study on pan-European private equity performance available. Undertaken by Venture Economics in cooperation with EVCA, this annual initiative, which began in 1996, has established benchmarking measures for European private equity that are directly comparable with those available in the US. It allows private equity players to compare themselves with overall performance and investors to measure one asset class against another.
For further information, please contact:
Gillian Middleton, head of European private equity research, Venture Economics, Europe, tel 44 1892 51 54 54 or email@example.com or Jesse Reyes, vice president, Venture Economics, US, tel 1/973 645 97 34 or Reyes@tfn.com or Charlotte Amiri, EVCA communications coordinator, tel: 32 2 715 00 33, Charlotte.Amiri@evca.com
IRR: Internal Rate of Return
The IRR is the interim net return earned by investors (Limited Partners), from the fund from inception to a stated date. The IRR is calculated as an annualised effective compounded rate of return using monthly cash flows to and from investors, together with the Residual Value as a terminal cash flow to investors. The IRR is therefore net, i.e. after deduction of all fees and carried interest. In cases of captive or semi-captive investment vehicles without fees or carried interest, the IRR is adjusted to created a synthetic net return using assumed fees and carried interest.
Pooled IRR: The IRR obtained by taking cash flows from inception together with the Residual Value for each fund and aggregating them into a pool as if they were a single fund. This is superior to either the average, which can be skewed by large returns on relatively small investments, or the capital weighted IRR which weights each IRR by capital committed. This latter measure would be accurate only if all investments were made at once at the beginning of the funds life.
Horizon IRR: The Horizon IRR allows for an indication of performance trends in the industry. It uses the fund’s net asset value at the beginning of the period as an initial cash outflow and the Residual Value at the end of the period as the terminal cash flow. The IRR is calculated using those values plus any cash actually received into or paid by the fund from or to investors in the defined time period (i.e. horizon).
5 year Rolling IRR: The 5 year Rolling IRR shows the development of the five year Horizon IRR, measured at the end of each year.
Median IRR: The value appearing halfway in a table ranking funds by IRR in descending order.
Quartile IRR: The IRR value which lies a quarter from the bottom (lower quartile point) or top (upper quartile point) of a table ranking individual funds in descending order.
Top Quarter: Comprises funds with an IRR equal to or above the upper quartile point.
Upper Half: Comprises funds with an IRR equal to or above the median point.
DPI – Distribution to Paid-In: The DPI measures the cumulative distributions returned to investors (Limited Partners) as a proportion of the cumulative paid-in capital. DPI is net of fees and carried interest. This is also often called the “cash-on-cash return”. This is a relative measure of the fund’s “realised” return on investment.
RVPI – Residual Value to Paid-In: The RVPI measures the value of the investors’ (Limited Partner’s) interest held within the fund, relative to the cumulative paid-in capital. RVPI is net of fees and carried interest. This is a measure of the fund’s “unrealized” return on investment.
Residual Value: The estimated value of the assets of the fund, net of fees and carried interest.
TVPI – Total Value to Paid-In: TVPI is the sum of the DPI and the RVPI. TVPI is net of fees and carried interest.
Mature funds: Funds that have been in existence for over two years.
Early Stage Fund: Venture capital funds focused on investing in companies in the early part of their lives.
Development Fund: Venture capital funds focused on investing in later stage companies in need of expansion capital.
Balanced Fund: Venture capital funds focused on both early stage and development with no particular concentration on either.
Buyout Fund: Funds whose strategy is to acquire other businesses; this may also include mezzanine debt funds which provide (generally subordinated) debt to facilitate financing buyouts, frequently alongside a right to some of the equity upside.
Generalist Fund: Funds with either a stated focus of investing in all stages of private equity investment, or funds with a broad area of investment activity.
Venture Capital refers to early stage (=seed and start-up) and expansion finance.
Private Equity providing equity capital to enterprises not quoted on a stock market, refers to all stages of industry, i.e. Venture Capital and Buyouts.
Venture Economics, a Thomson Financial company, is the foremost information provider for private equity professionals worldwide. Venture Economics offers an unparalleled range of products from directories to conferences, journals (including European Venture Capital Journal), newsletters, research reports, and the VentureXpert ™ database. For over 35 years, Venture Economics has been tracking the venture capital and buyouts industry. Since 1961, it has been a recognized source for comprehensive analysis of investment activity and performance of the private equity industry. Venture Economics maintains long-standing relationships within the private equity investment community, in-depth industry knowledge and proprietary research techniques. Private equity managers and institutional investors alike consider Venture Economics information to be the industry standard. For further information about Venture Economics, visit www.ventureeconomics.com
The European Private Equity and Venture Capital Association (EVCA)
EVCA was established in 1983 to represent, promote and facilitate the development of the European private equity and venture capital industry. As the industry’s pan-European representative body with over 900 members, EVCA supports a wide range of initiatives designed to encourage an entrepreneurial environment in Europe, promote the industry to institutional investors worldwide, encourage the development of equity markets appropriate to the needs of private equity investors and investees and to establish high standards of business conduct and professional competence. The association stimulates promotion, research and analysis of private equity and facilitates contacts with policy-makers, investors, research institutions, universities, trade associations and other relevant organisations. For further information visit www.evca.com
EVCA International Investors Conference
EVCA invites representatives from key institutional investors to meet with private equity practitioners at this conference, which for the first time runs over one and a half days. This event is a forum, which aims to stimulate debate and provide for an open exchange of views between institutional and other professional investors, and private equity fund managers. This year, 600 delegates will be taking part, of which 200 (35%) are investors. This is the fourth EVCA International Investors Conference, which takes place every March in Geneva, Switzerland.
Investment Benchmarks Report – Preliminary Results 01
Annualised IRR from inception to 31 Dec 01
Stage/ No/ Pooled/ Upper Quartile/ Median/ DPI/ RVPI/ TVPI
Early/ 123/ 9.2/ 15.8/ 5.4/ 0.65/ 0.73/ 1.38
Development/ 102/ 11.8/ 13.0/ 5.0/ 1.03/ 0.76/ 1.79
Balanced/ 80/ 15.9/ 20.0/ 6.0/ 0.93/ 0.87/ 1.80
All Venture Capital/ 305/ 12.6/ 15.8/ 5.4/ 0.87/ 0.79/ 1.66
Buyouts/ 194/ 18.5/ 20.3/ 10.2/ 0.82/ 0.78/ 1.60
Generalist/ 72/ 11.6/ 11.0/ 2.7/ 0.93/ 0.55/ 1.48
All Private Equity/ 571/ 14.2/ 16.9/ 6.5/ 0.86/ 0.72/ 1.58
Horizon IRR to 31 Dec 01
Stage/ 1 YR/ 3 YR/ 5 YR/ 10 YR
Early Stage/ -8.9/ 10.6/ 11.7/ 11.3
Development/ 11.4/ 16.2/ 17.0/ 13.8
Balanced/ -3.2/ 25.7/ 36.8/ 22.5
All Venture Capital/ -0.9/ 17.5/ 20.8/ 15.8
Buyouts/ 2.2/ 21.9/ 23.1/ 18.7
Generalist/ -12.8/ 19.2/ 15.3/ 14.2
All Private Equity/ -2.3/ 20.1/ 20.4/ 16.5
Annualised IRR from inception to 31 Dec 01 – Results for funds in TOP QUARTER
Stage/ No/ Pooled/ Median/ DPI/ RVPI/ TVPI
Early Stage/ 30/ 25.1/ 23.0/ 1.10/ 1.18/ 2.28
Development/ 24/ 21.6/ 22.0/ 1.73/ 0.82/ 2.55
Balanced/ 20/ 47.3/ 50.9/ 2.64/ 1.39/ 4.03
All Venture Capital/ 77/ 27.0/ 25.6/ 1.76/ 1.08/ 2.84
Buyouts/ 48/ 36.9/ 33.1/ 2.13/ 0.79/ 2.92
Generalist/ 18/ 13.0/ 19.5/ 0.95/ 0.57/ 1.52
All Private Equity/ 143/ 31.7/ 26.7/ 1.79/ 0.90/ 2.69
Horizon IRR to 31 Dec 01 – Results for funds in TOP QUARTER
Stage/ 1 YR/ 3 YR/ 5 YR/ 10 YR
Early Stage/ -7.7/ 32.0/ 24.1/ 29.7
Development/ 29.8/ 30.1/ 32.0/ 25.3
Balanced/ 5.3/ 82.5/ 93.2/ 52.3
All Venture Capital/ 9.2/ 44.2/ 44.3/ 32.6
Buyouts/ 8.4/ 68.8/ 58.5/ 35.6
Generalist/ -13.2/ 22.2/ 18.1/ 16.1
All Private Equity/ 11.4/ 55.6/ 50.7/ 35.0
Annualised IRR from inception to 31 Dec 01 – Results for funds in UPPER HALF
Stage/ No/ Pooled/ Median/ DPI/ RVPI/ TVPI
Early Stage/ 60/ 15.1/ 15.8/ 0.96/ 0.77/ 1.72
Development/ 50/ 14.6/ 12.9/ 1.22/ 0.77/ 1.99
Balanced/ 41/ 22.2/ 19.5/ 1.25/ 0.97/ 2.22
All Venture Capital/ 152/ 17.6/ 15.9/ 1.18/ 0.85/ 2.04
Buyouts 97/ 28.5/ 20.3/ 1.56/ 0.74/ 2.31
Generalist/ 35/ 12.4/ 11.0/ 0.96/ 0.55/ 1.51
All Private Equity/ 286/ 18.3/ 16.9/ 1.13/ 0.71/ 1.84
Horizon IRR to 31 Dec 01 – Results for funds in UPPER HALF
Stage/ 1 YR/ 3 YR/ 5 YR/ 10 YR
Early Stage/ -2.6/ 20.3/ 20.1/ 17.7
Development/ 14.2/ 18.1/ 20.8/ 16.6
Balanced/ 5.0/ 36.9/ 48.9/ 30.5
All Venture Capital/ 6.3/ 26.5/ 29.8/ 21.3
Buyouts/ 10.2/ 49.3/ 44.5/ 30.4
Generalist/ -12.7/ 20.5/ 16.1/ 15.4
All Private Equity/ 0.4/ 29.9/ 28.8/ 21.3