Private Equity Investor Presentation by qdx12511

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									                      Investor Reporting
22nd September 2003                        pwc

 • Introduction and welcome – Angela Crawford-Ingle
 • The Investors’ Perspective - Sandra Robertson
 • International Financial Reporting Standards - Mark Pugh
 • Investment Performance Standards - Louise Spencer
 • Discussion

Investor Reporting                                 PricewaterhouseCoopers
                 The Investors’ Perspective
                     Sandra Robertson
22nd September 2003                     pwc
    International Financial Reporting Standards
                     Mark Pugh
22nd September 2003                pwc
 EU Adopted IFRS Timeline

                 Need closing       Need         Need full
                  balances at   comparatives    disclosure at
                   this date     at this date     this date

                     31.12.03    31.12.04          31.12.05

      “Only applies to the consolidated accounts of
      listed companies”
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 IFRS – Does it really apply
 to us?
  • How does IFRS affect Private Equity:

          • Required for captives in a listed group
          • Listed funds with consolidated accounts (Investment
            Trust structures)
          • Reporting to Limited Partners
          • Transactions: Exits and acquisitions
          • New BVCA valuation guidelines

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 IASB/ASB Convergence

9 FREDS                                  Consultation paper: 6 Standards

FRED 23 – Financial instruments:         IAS 1 – presentation of financial
           Hedge accounting
FRED 25 – related parties                IAS 8 – accounting policies…
FRED 26 – EPS                            IAS 17 – leases
FRED 27 – PBSE                           IAS 27 – consolidations
FRED 28 – stock and LTC                  IAS 28 – associates
FRED 29 – fixed assets                   IAS 40 – investment property
FRED 30 – Financial instruments:
FRED 31 – Share Based Pay

                     ..and also IASB / FASB Convergence
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 What are the key changes?

                                     Is the investment
         Is this investment a                                    Fair
                                        an associate?
              subsidiary?                                     valuation

                                No                       No

                IAS 27                    IAS 28                IAS 39

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 What is meant by
 Fair Value in IFRS?
           The amount for which an asset could be exchanged between
           knowledgeable, willing parties in an arm’s length transaction

   IAS 39 is not prescriptive but recommends the following
   “estimation techniques”
    • When a quoted market price is available:“Current bid price”
    • When a quoted market price is not available

             • “Reference to the current market value of another instrument that is
               substantially the same”

             • “Discounted cash flow analysis”

             • “Option pricing models”
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 The new BVCA guidelines
 are broadly consistent
  Recommends a number of different methodologies:
          •    Earnings multiple
          •    Price of recent investment
          •    Net assets
          •    Discounted cash flows (of the underlying business or
          •    Industry valuation benchmarks
                     Risk of
             financial                  Regulatory
               crime Discount” allowed for quoted investments
       • “Marketability
               under BVCA but not in draft IFRS

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 Increase in transparency – for
 better or for worse
• Investors have called for greater transparency

• Change to a fair value environment

• Will it give the desired results to investors?

• Will it impact on exit values?

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 Financial reporting for private
  • Development of an industry standard in financial
    reporting for private equity?

  • PEARL accounts

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Investment Performance Standards in Private Equity
                 Louise Spencer
 22nd September 2003              pwc
 Reporting Performance

      Existing Clients   Prospective Clients

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 Methods of Calculating

 There are a number of methods in the market place, mostly based
 around an Internal Rate of Return Calculation.
 •     Net IRR
 •     Gross IRR
 •     Time Zero IRR
 •     Arithmetical Average IRR
 •     Weighted Average IRR

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 Example of Performance
 Returns                     Deal IRR   Fund IRR

 Gross IRR                              34%

 Net IRR                                24%

 Time Zero IRR                          41%

 Deal Weighted IRR           45%

 Deal Weighted Average IRR   56%

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 Problems arising with no
 industry performance standard
 • Private Equity houses can mix and match return calculations
   methodologies to present their returns in the best light.
 • Disclosures can be obscured or absent, creating difficulty in
   knowing what is being compared.

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 GIPS Standards

 • The Global Investment Performance Standards (“GIPS” or
   the “Standards”) provide a set of ethical guidelines for the
   measurement and presentation of investment performance.
 • The aim is to provide investors with information that is
   relevant, complete and not misleading – the underlying
   principle is one of full and fair disclosure.
 • They are not compulsory, but they have become widely
   accepted as best practice, certainly in the institutional arena,
   where compliance has come to be demanded of managers
   by the institutions themselves.

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 The benefits of compliance

 • Boosts the credibility of investment performance reports
 • May meet an increasing demand amongst clients (as the
   institutional managers have found)
 • Improved controls and procedures over the investment
   measurement and reporting areas

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 GIPS Private Equity Standards

 Proposed Effective Date 1 January 2005
 These provisions supplement required and recommended
 elements of GIPS, with overrides for:
 • valuation
 • calculation methodology and fees
 • presentation and reporting of returns

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 GIPS overview

 • Firm-wide compliance
 • Consistent presentation
 • Complete track record
 • Minimum periods of historical data
 • The underlying principle of full and fair disclosure
 • Performance belongs to the firm

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 1           Valuation

 Private equity investments must be valued according to the
 GIPS Private Equity Principles:
 • Fair value basis
 • Valued at least annually (recommended quarterly)
 • Supporting detail provided by BVCA, EVCA guidelines
 • Net of fees returns must be net of manager fees, carried
   interest and transaction expenses

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 2 Calculation Methodology

 • Annualised ‘Since Inception Internal Rate of Return (SI-
 • Daily/monthly cash flows
 • Period end valuation of unliquidated remaining holdings
      Returns                     Deal IRR   Fund IRR

      Gross IRR                              34%

      Net IRR                                24%

      Time Zero IRR                          41%

      Deal Weighted IRR           45%

      Deal Weighted Average IRR   56%

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 3           Disclosure Requirements

 • Vintage year of composite
 • Valuation methodologies
 • Definition of investment strategy
 • Benchmark calculation methodology (or reason for not
   using a benchmark)
 • Daily/monthly cash flow assumptions
 • Net and Gross of fees annualised SI-IRR of composite for
   each year since inception
 • Multiples including TVPI, DPI, PIC, RVPI
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 What sort of issues might you
 • Defining the firm
 • Fee structures
 • Quality of historical records
 • Measurement methodology
 • Systems
 • Culture change
 Is the Private Equity Market ready for this?

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