investments in private equity: the role of pension funds
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16 June 2004. INVESTMENTS IN PRIVATE EQUITY: THE ROLE OF PENSION FUNDS. GIANNIS PAPADOPOULOS Managing Director, Attica Ventures. Presentation by :. 1. The aim of VC investments. High returns Risk spread. 2. Main features of PE/VC investments. - PowerPoint PPT PresentationTRANSCRIPT
INVESTMENTS IN PRIVATE EQUITY: THE ROLE OF PENSION FUNDS THE ROLE OF PENSION FUNDS
GIANNIS PAPADOPOULOS Managing Director,
Attica Ventures
16 June 2004
Presentation by :
Main features of PE/VC investments
Medium to long-term investments (5 years +)
Above average risk
Above average rate of return
Supplementary and distinct form of investment
Investment choice of institutional investors (more than 90%)
Closed-end investment product
Control over investments
Investments in non-listed companies with growth potential
2
Features and rationale of pension funds´ investments
Investment safety
Control over investments
Medium- to long-term investment horizon
Return on capital
High cash levels – investment spread
3
Common features of both PE and Pension funds
YESYESRisk spread
YESYESLong-term focus
YESYESInvestment spread
YESYESReturn on capital
YESYESControl over investments
PE
Pension Funds
4
YESYESMutual Funds
NOYESPE/VC
YESYESReal Estate
YESYESBonds
YESYESStock Exchange
GREECEEU
Comparison of Pension fund investment options5
6 Pension Funds and Private Equity. Why? (1)
StageEuropean
Private Equity Return
Morgan Stanley Euro
Index
HSBC Small Company
index
JP Morgan EuroBonds
Early stage 4,9 -0,1 -4,2 7,4Development 10,3 7,7 3,9 8,0
Balanced 10,7 -0,2 -4,1 6,5All Venture 9,2 3,0 -1,3 7,3
Buyouts 12,9 -7,1 -8,7 4,0Generalist 10,0 7,1 0,3 7,7
All Private Equity 10,8 -2,3 -5,7 7,2
*Comparisons based on the internal rate of return (IRR).
High rates of return The long-term rates of return on investments in VC – PE exceed those of
shares listed on exchanges in the EU and America Better rates of return mean greater potential to cover costs
31-Dec-2002
(1=most favourable, 3=least favourable)
7 Pension Funds and Private Equity. Why? (2)
New favourable tax and legal regime
New structure for venture capital Taxation on non-listed companies: 5% compared to 16.3% in
the EU Tax breaks for investment via venture capital funds Incentives for R&D, mainly for expenses Greece comes 4th in the PE investment environment evaluation
among EU countries Country 2004UK 1.26
Luxembourg 1.49Ireland 1.53Greece 1.75
Netherlands 1.76Portugal 1.81Belgium 1.82Hungary 1.86Italy 1.86
France 1.89Switzerland 1.95
Spain 1.962003 average 1.972002 average 2.03
8 Pension Funds and Private Equity. Why? (3)
Conclusion: Investment in PE reduces instability and improves the risk profile in an investment portfolio.
Reduced risk via spread
In a balanced portfolio, introducing PE investments spreads risk even further.
Statistical data (source: Venture Economic, Salomon, MSCI) show a low correlation between profits and return on investments on Stock Exchanges and investments in non-listed companies (investments made by VC funds).
Small investments in PE Funds compared to overall cash available and spread across many Funds further reduce risk.
9 Pension Funds and Private Equity. Why? (4)
Long-term focus
Investments in PE have a long-term focus, which suits the objective and rationale of pension fund investments.
Common Investment Option
Pension funds, along with banks, are the largest PE investors worldwide (22% and 24%)
Control over investments
PE managers actively and substantively participate in their portfolio companies, monitoring the progress of investments
There is a high degree of transparency and insider information Monitoring market and company highs
10 Pension Funds and Private Equity. Why? (5)
The social surplus of investments in PE
Increase in jobs (90% of portfolio companies increased their staff levels) and in the job growth rate (19% compared to 0.5% for other companies). It is thought that 18% of the UK work force has jobs thanks to PE.
Increase in sales at a rate of ~21% in the UK and EU; corresponding increase in exports.
Increase in profits (77% of PE investees achieved rates higher than competitors).
Increase in competitiveness and support of entrepreneurship (81% of PE investees stated they would not exist without PE)
Increase in direct tax revenues (UK: € 40 billion) and other indirect taxes (VAT, payroll tax, etc.)
Distribution of wealth to more factors of production
11 Pension Funds and Private Equity. Why? (6)
Increase in employment Increase in taxable revenue Business growthIncrease in competitiveness Increase in profitsWealth distribution
Robust pension funds
Capital raised in Europe per investor category (1999-2003)
Banks 24.40%
Government Agencies 6.70%
Private Investors 6.20%
Capital Markets 0.70%
Fund of funds 11.50%
Academic institutes 1.20%
Corporate investments
8.00%
Ν#A 6.70%
Insurance companies
12.50%Insurance
Funds 22.10%
Pension Funds22.1%
12
Banks 50%
Insurance companies 4%
Insurance Funds 0%
Government agencies 4%
Private investors 11%
Capital Markets 0%Corporate investments 8%
Academic institutes 0%
Fund of funds 24%
Capital raised in Greece per investor category (1999-2003)
Pension Funds0%
13
3.6% of European pension fund reserves are invested in venture capital/private equity.
For US pension funds, the figure is 7.5%; for the UK, 3.7%.
22.1% of capital invested in PE in Europe comes from pension funds, namely € 37 billion (for the 5-year period 1999-2003)
The corresponding figures and percentages for Greek pension funds are ZERO.
A tentative overview .....14
Tentative conclusions....
1. PE: a well-developed institution2. The role of pension funds is primary3. Developed markets / competition
Europe:
Greece: 1. PE not developed as an institution 2. Pension funds still seeking their role3. Under-developed markets / competition
16
Reasons for PE´s absence as an investment vehicle
Legal regime-Management rationale of pension funds Complex legal regime Asphyxiating control Interest-free deposits of their reserves until the beginning of the 1990s
Development perspective for PE market in Greece (developing positively) Structure and incentives for creating PE funds Legal regime governing mergers & acquisitions Entrepreneurial environment Corporate taxation(35% compared to 28% in the EU)
Greek economy development model Lack of entrepreneurial incentives Role of the State Competition Policy priorities
Idiosyncrasy and culture
17
18The legal regime on pension fund reserve management
Unclear and overlapping
Numerous laws and ministerial decrees Unclear which apply and which have been repealed It is possible to interpret that pension funds can invest in PE
based on Article 13 of Law 1902/1990: ΄΄.....Likewise they are permitted to purchase and sell all types of shares with
a prior joint decision of the Ministers of National Economy and Social Security and the Governor of the Bank of Greece.
More accurately, through investments via funds incorporated according to Article 12 of Law 1902/90
10% of the fund´s value may be invested in non-listed shares, after obtaining permission from the Hellenic Capital Market Commission.
19 From theory to practice.....
In the winter of 2003 the TSMEDE Pension Fund became the first to decide an investment in a PE fund following a decision by its Board of Directors to participate in the VC fund managed by Attica Ventures.
In March 2004 the ZAITECH fund, a venture capital fund, was set up under the management of Attica Ventures. Its shareholders/investors are Bank of Attica and the New Economy Development Fund (TANEO).
To date it has not been possible for TSMEDE to carry out its investment decision due to the reasons set out above.
Up until the mid- to late-1970s pension funds in America were prohibited from investing in PE. A clarification of the ‘prudent man’ rule by the U.S. Labor Department in 1978 was needed to radically change that picture.
Similar reforms followed in several European countries; in 2003, a total of € 29.1 billion were invested and € 27 billion were raised.
The low inflation environment and competitive regime with its open markets have contributed to the transfer of capital to PE funds since the 1990s and to a further market boom.
20 Learning a lesson from history.....
21 Conclusions
The role of PE in economic growth and development is important and this is also clearly described in the Lisbon decision.
The role of pension funds in PE market development is fundamental.
The momentum for PE market development is positive (2003 saw the second highest level of investments in VC)
PE covers the fundamental objective of investors to achieve high returns with risk spread.
The advantages of investments in PE and the operating regime, particularly with the establishment of VC funds in line with Law 2992/2002, provide incentives for investments.
A change in the legal regime governing PE operations is necessary to allow pension funds´ investment in PE funds.
Further improvement – supplementing the operating regime for various forms of PE funds and identification of policies to achieve a well-rounded PE market.
Implementation of wide-ranging policies to support competitiveness and entrepreneurship.
22 The actions needed
23 ATTICA VENTURES
Attica Ventures is a VC fund management company established in line with the provisions of Article 7 of Law 2992/2002.
Attica Ventures is a subsidiary of Bank of Attica.
Its share capital is € 600,000 (minimum required by law: € 100,000).
Wide ranging professional
experience (VC, consulting, finance,
retail, corporate management).
Network of business contacts and excellent knowledge of the Greek
market
Complementary academic
backgrounds
24 ATTICA VENTURES – Investment Team
Initial capital: € 30 million Duration: 10 years (extendable for another 2 years) Maximum investment per company: up to 15% of the Fund Investment limit per financing round: € 1 million
Expected IRR: 20%
Minimum participation: € 300,000
Investment period: 5 years
Target companies: SMEs as defined by the European Commission
25 Managed fund:
Capable and collaborative managers with levels of commitment to the firm
Successful background in the sector
Clear development strategy
Alternative development plans - scenarios
Products or services that meet real market / consumer needs
Developing market, or market “in the making”
Synergies with other companies or strategic partners
Full financing framework
Return proportionate to risk and investment stage
Clear link between investment and overall portfolio
Visible exit routes
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26 Investment criteria
Peop
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trate
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Retu
rns
Akadimias 34, GR-10672, ATHENSTel.: +30 210 3637663Fax: +30 210 3637859
www.attica-ventures.gr