Presentation on Venture Capital

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Presentation on Venture

April 7 2003
Tanya Roberts / Omar Ali
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What is Venture Capital?
  • Generally – investment in private (ie unquoted) companies.
  • Specifically:
    - Growth / Acquisition Funding (inc. start ups)
    - MBOs / MBIs / IBOs / LBOs / SBOs ……..
    - Private Placement
    - (Turnarounds)
  • General criteria are the same – growth and the management to deliver
      the growth
  • How do VCs make their money?
   - Profit Growth
   - Leverage
   - Selling well
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Market Trends
 Since Inception (European Point of View):
 More than €125 billion has been raised for                 US VC Market2
 investment in Europe's most promising growth
 companies since private equity emerged in Europe
 in the 1980s. In 1999 alone, €25.1 billion was
 poured into more than 11,000 investments.1

 The Last Couple of Years:
 The European and American VC markets have
 witnessed a substantial decrease in fund raising, an
 increase in divestments, and a dry-up of the capital
 markets as an exit strategy. Nonetheless, large
 buyouts are fuelling the investment climate and
 keeping the market active. Essentially, an economic
 downturn is not necessarily a bad thing for the
 private equity market. It offers the opportunity to turn
 around bargain companies.
 1   European Venture Capital Association
 2   Venture Economics – Thomson Financial Group
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So what’s it like?
  • Analysis – so don’t worry about the numbers! It’s the
    management who matter….
  • Fierce Competition Marketing, Marketing, Marketing...
  • BUT – it’s about long term relationships

  The Good Bits:
  • Variety / Responsibility / Long term view

  The Bad Bits:
  • Peaks and troughs / Tough decisions
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The UK VC Market (
 It’s tough……
 LBOs: Alchemy / CVC / Cinven

 Mid Market Private Equity :
 UK Regional Specialists: 3i / LDC / Bridgepoint….
 Sector Specialists: Graphite / Apax
 The Best of the Rest: ABN / HSBC / Permira…..

 Venture Capital :
 Small funds / specialist divisions within the main firms
 The European VC Market (
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Types of PE/VC Funds
    There are numerous industry focuses within venture capital and private equity.
    The largest sector investments over the last year in the US, for instance, have
    been the following1:
           1)   software
           2)   telecommunications
           3)   medical devices
           4)   biotechnology
           5)   network and equipment

    Funds are often organized by having a specific geographic region constraint in
    regards to making investments.

    Size of Funds:
    Funds vary in size; anywhere from €50 million to €5 billion. Nonetheless,
    originators of funds normally seek at a minimum €100 million.

1   PWC Money Tree
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Structure of PE/VC Funds
 General Partners (GP):
 Are the managers and originators of a fund. It is rare that GPs put their own
 capital into the fund and thus, seek management fees and carried interest within
 the fund structure. The industry standard for carried interest is 20%.

 Limited Partners (LP):
 Are the actual investors that commit capital to the fund. Investors tend to be
 mainly institutions (financial intermediaries) such as, Pension Funds, Insurance
 Companies, Investment Banks, etc. Since LPs actually supply the fund with
 money, they are usually rewarded with preferred returns and a “catch-up” clause
 (repayment of 100% capital before other dividends are to be distributed.)

 Time Periods:
 • Investment Period – is the amount of years that the fund will utilize to make
   portfolio investments. The industry standard is between 3 to 5 years.
 • Fund Life – is the amount of years that fund exists for. The industry standard is
   10 years to 12 years with maximums reaching 20 years.

 Note: See Next Slide for Further Detail
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Industry                                            Fund Requirements
standard’s for   Timing
investment       Fund Start Date                                                                        January 1, 2004
periods. Fund    Fund Investment Period - (Years)                                                                     3
lives are 3      Fund Life - (Years)                                                                                 10
and 10 years,    Fund Size                                                                                   US$, 000s
respectively.    Cash Needed for Fund - (Equal to Total of Portfolio Investments)                             200,000

                 Capital Structure of Fund                                             % of Structure        US$, 000s
                 Equity - (Committed Capital)                                            100.00%              200,000
                 Debt - (Borrowed Capital)                                                 0.00%                    0
                 Total                                                                   100.00%              200,000

                 Debt Financing
                 Loan Commitment - (US$, 000s)                                                                       0
                 Amortization Term - (Years)                                                                         10
                 Grace Period for Principal - (Years)                                                                 0
                 Net Interest Rate                                                                              10.00%
Fee is applied   Management Fee Schedule                                                                   Percentage
                 Management Fee During Investment Period                                                        2.00%
on committed
                 Management Fee After Investment Period                                                         1.00%
capital.                                                                                                                  Additional
                 Additional Fees and Expenses                                           Percentage           US$, 000s    fees that are
                 Offering & Organizational Expenses - (% of Total Capital Needed)         0.50%                 1,000     applied on a
                 Subscription Fee - (% of Invested Capital)                               2.00%                 4,000
                 Third Party Due Diligence Costs - (US$, 000s)                              0                       0
Preferred                                                                                                                 basis.
Returns to LPs   Distributions
                 Limited Partner Catch-up - (Priority of Distributions)                                       100.00%
and Catch Up
                 Preferred Return on Capital to Ltd. Partners                                                   8.00%
terms and        General Partner Catch-up - (Calculated as % of LPs Accrued Preferred Return)                  25.00%
arrangements.    General Partners Carried Interest - (Subordinate to LPs Catch-up & Preferred Return)          20.00%
                 Ltd. Partners Interest - (Post Catch-up & Preferred Return)                                   80.00%
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Useful Websites
 European Venture Capital Association:

 National Venture Capital Association:

 British Venture Capital Association:

 Italian Private Equity and Venture Capital Association:

 Venture Economics (Thomson):

 Private Equity Online:

 PWC Money Tree:

 The Journal of Private Equity: