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29th March 2004 pwc

Private Equity in EuropePrivate Equity in Europe

2Private Equity in Europe PricewaterhouseCoopers

Agenda

• Introduction and welcome – Angela Crawford-Ingle• Latest trends in European Private Equity – Keith Arundale• The EU Savings directive – Bob Harland• Private Equity deal structuring in Europe – Duncan Cox

29th March 2004 pwc

Latest trends in European Private Equity activityKeith Arundale

Latest trends in European Private Equity activityKeith Arundale


Latest Trends in European Private Equity

Activity

• Global private equity overview• Latest European private equity and venture capital activity• European investment trends • Where are we in the private equity cycle?


The World View:

Investment and fund raising trends

90

159

206

103 102

132 152

250

165

88

0

25

50

75

100

125

150

175

200

225

250

1998 1999 2000 2001 2002 2003

InvestmentsFunds Raised

(US$b)

Source: The PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree™ Survey / Buyout Newsletter / Private Equity Analyst / CVCA Annual Statistical Review / EVCA Yearbook / AVCJ Guide to Venture Capital in Asia / Latin American Private Equity Analyst / SAVCA Private Equity Survey

Investment: Compound average growth rate = 3.39%Funds Raised: Compound average growth rate = -9.58%

Source: PwC/3i GPE Rpt 2003

(1st half)

57

24


The World View:

% Distribution of Investments

Note: % share based on 3 main regions – North America, Western Europeand Asia Pacific

2835

6374

1010

7

9

4136

231221 18

8 5

0

20

40

60

80

100

2000 2001 2002 2003

Early stage (inc.seed/start-up)

Expansion

Late Stage

Buyout

Total Invested $100.5$155.0 $199.4 $57

(1st half)

(%)

Source: The PricewaterhouseCoopers / Venture Economics / National Venture Capital Association MoneyTree™ Survey / Buyout Newsletter / CVCA Annual Statistical Review / EVCA Yearbook / AVCJ Guide to Venture Capital in AsiaSource: PwC/3i GPE Rpt 2003


The World View: Top 20 Countries - Based

on Investment

2. United Kingdom (2)3. France (5)4. Italy (7)6. Germany (3)8. Netherlands (11)10. Sweden (9)14. Spain (17)17. Finland (-)20. Belgium (19)

1. USA (1)9. Canada (4)

Middle East & Africa13. Israel (12)18. South Africa (-)

Central & South America

1%2%

25%

<1%Asia Pacific

5. Japan (6)7. Korea (10)11. Australia (14)12. India (15)15. Hong Kong (8)16. Indonesia (-)19. China (13)

Note: There is no published data on Asia Pacific countries for 2002, therefore estimates from the AVCJ are shown

63%9%

Note: (-) indicates that the country was not in the top 20 last year.


North America Western Europe


The World View: Top 20 Countries - Based

on Growth (CAGR 98-02)

2. Sweden (57%)3. Denmark (50%)7. France (29%)8. Italy (24%)9. Spain (22%)10. Finland (19%)14. Netherlands (8%)15. Switzerland (5%)16. UK (5%)17. Belgium (4%)18. Germany (2%)19. Norway (1%)

13. Canada (9%)20. USA (<1%)

Middle East & Africa11. Israel (14%)

Central & South America

Asia Pacific1. India (82%)

4. Australia (39%)

5. South Korea (39%)

6. Japan (31%)

12. China (11%)

Note: There is no published data on Asia Pacific countries for 2002, therefore estimates from the AVCJ are shownOnly Countries with investments of at least $0.225 billion in 2002 are shown


North America Western Europe


The EVCA European Private Equity Survey

• 21 countries surveyed included in European tables, including 4 Central European : Poland, Hungary, Czech Republic and Slovakia

• Overall response rate of around 70% based on 1,600 private equity firms surveyed

• 7 additional Central European countries included as pilots• Only investments derived from private equity funds are included• All secured debt is excluded, unless derived from PE funds.

Unsecured debt is included, if derived from PE funds

Source: EVCA/PwC


Types of European private equity

organisations

• Independents - raise funds from more than one source - not legally connected to sources

• Captives - owned by banks, pensions funds, other financial institutions

• Semi-captives - as captives, but also manage independently raised funds


European PE Funds Raised in 2003

(preliminary : €27.7 billion)

0

10,000

20,000

30,000

40,000

50,000

60,000

1995 1996 1997 1998 1999 2000 2001 2002 2003

€ m

Amount Raised byCaptives and CapitalGains Independent FundsRaised

Prel

imin

ary

Source: EVCA Survey of Pan-European Private Equity and Venture Capital Activity 2003. Conducted by Thomson Venture Economics and PricewaterhouseCoopers


Europe: Origin of Funds Raised by Country

2001-2002

9,594

5,105

6,817

6,664

4,339

2,444

4,197

2,803

1,662

1,984

1,616 2,063

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

€m

USA UK Germany France Italy Netherlands

2001 2002

Source: EVCA/PwC


Sources of New Funds

Government Agencies

6.0%

Academic Institutions

2.2%

Capital Markets0.5%

Other3.7%

Banks24%

Pension Funds26.8%

Private Individuals

6.6%

Corporate5.8%

Fund of Funds12.2%

Insurance Companies

12.3%

2002

2001

Insurance Companies

13.8%

Fund of Funds13.1%

Banks26.3%

Corporate7.3%

Pension Funds16.3%

Private Individuals6.0%

Other4.3%

Academic Institutions

1.6%

Capital Markets0.1%

Government Agencies11.1%

Source: EVCA/PwC


European PE Investments in 2003

(preliminary : €23.1 billion)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

1995 1996 1997 1998 1999 2000 2001 2002 2003

€ m

BuyoutVenture Capital

Prel

imin

ary



Europe: Stage Distribution of Investments

by Amount

Buyout67%

Replacement Capital

5%

Expansion21%

Start-up6%

Seed1%

Buyout65%

Replacement Capital

2%

Expansion23%

Start-up9%

Seed1%

2003

2002



Europe: Stage Distribution of Investment by

Number of Investments

2003

2002


Buyout21%

Replacement Capital

3%

Expansion45%

Start-up28%

Seed3%

Buyout14%Replacement

Capital3%

Expansion45%

Start-up33%

Seed5%

2003

2002


Europe: Amount Invested by Country 2000-

2002

13,180

6,92610,385

5,3043,287

5,851

2,9692,185

2,626

4,767

4,435

2,506

1,9161,887

1,722

2,300

2,0431,468

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

UK France Italy Germany Netherlands Sweden

2000 2001 2002In €m

Source: EVCA/PwC


Annual Funds Raised and Investment

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

€m

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Funds RaisedInvestment

PRELIMINARY

Source: EVCA/PwC


European PE Divestments by Amount

(at cost) in 2003 (preliminary : €9.5 billion)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1995 1996 1997 1998 1999 2000 2001 2002 2003

Divestments (IPOs, trade sales etc)

Write-off

Prel

imin

ary€m



European PE Divestments by Number

of Companies in 2003 preliminary : 3,037)

0

1,000

2,000

3,000

4,000

5,000

6,000

1997 1998 1999 2000 2001 2002 2003

No o

f co

mpan

ies

Divestments (IPOs, trade sales etc)

Write-off

Prel

imin

ary



Preliminary EVCA data for 2003

In summary:

• Fundraising steady at € 27.7b• Investments down 16% at € 23.1b• Buyouts continue to dominate• Divestments down 23% at € 9.5b• Write-offs getting back towards “normal” levels



But what are the trends?


Total European PE Investment

by Quarter in 2003 (preliminary)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Q1 Q2 Q3 Q4

€m



USA Venture Capital Investments

Q1 1997 – Q4 2003

$4.9$4.4$4.5

$6.0$6.7

$26.5$28.3

$28.5

$23.8

$13.1$11.1

$6.6$6.1

$5.4$5.7$4.1$4.5

$3.6$3.7

$3.0

$22.6

$12.9$11.2

$8.5$7.9

$4.3$4.2$4.7

$0.0

$8.0

$16.0

$24.0

$32.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

($ in billions)1997 1998 1999 2000 2001

# ofDeals

2002 2003

768 747 852 916 923 1,444 2,151 1,975 1,306 814 6761,048 650 685769 901 924 1,003 1,337 1,904 2,161 1,795 1,258 988 721824 701 679

Source: PricewaterhouseCoopers/Thomson Venture Economics/ National Venture Capital Association MoneyTree™ Survey


Volume of large global M&A transactions

0

25

50

75

100

125

150

175

200

1998 1999 2000 2001 2002 2003

Num

ber o

f dea

ls

0

10

20

30

40

50

% o

f tot

al v

alue

Deals >€500m Deals >€1bn Top ten deals as % total value


Number of European IPOs

36

66

3537

14

23

37

69

0

10

20

30

40

50

60

70

80

Q1 Q2 Q3 Q42002

Q1 Q2 Q3 Q4

2003Source: PwC IPO Watch Europe 2003


Summary : Key points for European PE

• Europe’s significance in the world private equity market continues to increase

• Despite so-called “wall of money”, European funds available are currently around 1 ½ years’ supply

• Investments held up well in 2003, mainly due to buyouts• Portfolio rationalisation and write-offs now largely complete• Improving M&A market, IPOs in pipeline, increased spending

forecast on IT• European PE industry well positioned for increase in activity in

2004.

29th March 2004 pwc

EU Savings DirectiveBob Harland

EU Savings DirectiveBob Harland


Aim of the Directive

“The ultimate aim of the Directive is to enable savings income in the form of interest payments made in one

Member State to beneficial owners, individuals, resident for tax purposes in another Member State to be made

subject to effective taxation in accordance with the national laws of the latter Member State.” [Article 1]


Territorial Scope

• EU Member States• EU Accession countries• EU Members’ dependant territories

– Jersey, Guernsey, Isle of Man, Cayman Islands, Anguila, Montserrat, British Virgin Islands and the Netherlands Antilles

– Switzerland, Liechtenstein, Andorra, San Marino, Monaco• BUT NOT• Bahamas, Bermuda, The United States


Scope of the Directive

• Only interest payments• Only to EU resident individuals (if they

are beneficial owners)• Only when made by EU paying agents• Only when payment is cross-border

Total EU savings income

Savings incomewithin the scope of

the Directive?


When might it apply?

Fund receives an interest payment

and it has investorswho are or it has

Executive RemunerationArrangements (Co-investment

or Carried Interest)

Individuals

or

Residual entities

NB A fund may be a Partnership, Trust or Company or other corporate entity


Directive operate?

ReportingWithholding

Member State ITax authority

Member State IITax authority

75% of withholding

beneficial ownerinformationPaying Agent

“established” in Member State I

withholding Member State ITax authority

(annual, automatic)

Member State IITax authority

beneficialowner

information

interest payment

Individual beneficialowner “resident” in

Member State II

Domestic WHT or reporting regimes continue to apply


Illustration of possible impact on Private

Equity Structures

Limited PartnershipCo-Investors

Equity Debt

Lux. Hold co

Equity Debt

Investment


Key Dates

• June 2003 – Agreement and final draft of Directive • December 2003 – Target date for each EU state to have

implemented Directive in local law • January 2004 – new information requirements for new customers• June 2004 – final decision on Directive timing based on 3rd

country readiness• January 2005 – Directive expected to apply to interest

payments from this date• June 2005 – first reports due from UK paying agents• Spring 2006 – first reports due from other EU paying agents• 2005 to 2007 (for WHT countries) – 15% tax (rising ultimately to

35% in 2011)


Typical Reactions so Far

• Is this really going to happen?• Surely the BVCA can do something about this?• What is everybody else doing?• Can’t I lay this off onto someone else?• Can’t I just wait until the next big deal?• What is the least I can get away with?


Key questions to address – internal issues

Can the Private equity house’s current systems:• Segregate corporates, residual entities and individuals within its fund

structures and investors• Identify all reportable interest payments• Produce required identity and tax residence information about payees• Identify interest payments to residual entities• Handle both withholding and reporting requirements• Generate the required reports on time for the revenue authorities in the

UK and elsewhere• Handle both withholding and reporting requirements• Generate reports for paying agents on origin and nature of income


Key questions to address – internal issues

• How should a Private equity house manage its relationship with other organisations that may be paying agents:

– fund custodians– payers of interest on deposit/loans– fund administrators


Key questions to address – external issues

• What is the potential impact of the Directive on:– investment returns– executive remuneration– the attractiveness of funds to individuals

• What should Private equity houses be telling their customers about the Directive

• How should terms of business with investors and information suppliers be amended

• Is there a commercially acceptable way for Private equity housesto avoid/mitigate the effects of the Directive on their own business and on customers


What can go wrong?

• Failure to file return– fine £3,000 pa– Higher penalties elsewhere

• Risk of reputational damage with– Inland Revenue– suppliers of services– investors

• Cost of remedying/enhancing systems later• Differing classifications by member states of the same entity• Unexpected tax withholding in complex structures


Action required

• Review the entities and investors in your fund structure– which entities in the structure do, or may, pay interest– is the UK view of non-UK fund vehicles the same as that

under local law– are any of your investors individuals or residual entities

• Identify the paying agent (eg fund or administrator) if your fund is not paying agent, understand the relationship with the paying agent (eg funds of funds)

• Decide how to deal with residual entities• Understand what are your obligations if your funds make

payments to other residual entities

•• TAKING CONTROLTAKING CONTROL


The European Savings Directive – Project

stages - I

Stage 2 Stage 3 Stage 4 Stage 5Stage 1

Scoping the scale of the project

ImplementationActionplan

ImpactStudy

Analyse the Directive

TIMESCALE

3 – 5 days ? Your choice

You have a lot to think about….

29th March 2004 pwc

Private Equity deal structuring in EuropeDuncan Cox

Private Equity deal structuring in EuropeDuncan Cox


Private Equity Deal Structure

• Main objectives of Private Equity Deal Structure;– Ability to pay interest – Reduce effective tax rate going forward– Exit strategy– Limit withholding tax leakage– Minimise tax costs of setting up structure– Ensure tax attributes are maintained– Investor requirements considered

• Debt push down is key to nearly all of these points


Why does debt push down help?

Impact on the effective tax rate• It is not possible to apply a flat tax rate of say, 35%, to cross

border European deals due to the complexity of profits and losses arising in different countries.

ABC plcUK France Germany Spain US Group

EBIT 200 - 50 100 10 360

Interest (100) (100) - (25) (70) (295)

Profit/(Loss) 100 (100) 50 75 (60) 65

Tax rate 30% 34% 40% 35% 39% -

Tax 30 - 20 26 - 76

Effective Rate of Tax 117%


How do we complete a debt push down?

Four main ways• Refinance existing borrowing• Borrow to pay out a dividend• Borrow to redeem share capital• Sale to a new local holding company which is debt funded


How do we complete a debt push down?

Key Issues• Distributions• Thin capitalisation• Transfer pricing• Tax grouping


Risks on debt push down

Distributions• Disallow tax deductions for interest • Certain types of instrument are particularly at risk in the UK;

– Convertible debt– Debt with warrants attached– Debt which is “linked” to the company’s equity



Thin Capitalisation and Transfer Pricing• Finance should be on on arm’s length terms, such that gearing

levels are commercially justifiable and not abusive. • If a company is deemed to be thinly capitalised, the interest may

be disallowed, reclassified as a dividend and potentially liable to additional withholding tax.

• Very topical• New legislation being introduced all over Europe in response to

EU legislation



Tax Grouping• Usually the majority of senior and mezzanine debt is received by

investment companies that do not have trading activities. It is important to be able to offset interest expenses against trading profits to utilise the tax shield.

• Different countries have different rules to achieve this.

• Excess interest (i.e loss) of Debt Co surrendered to Target Co

• Debt Co and Target Co file one joint tax return, so interest automatically offsets trading profit

• No tax grouping, so excess interest in Debt Co may not be offset against profits in Target

UK France Switzerland

Target Co(profit)

Debt Co(loss)

Debt Co(loss)

Target Co(profit)

Target Co(profit)

Debt Co(loss)

Losssurrendered

One taxgroup

Co


Local Issues

Local Issues• France – Interest rate on debt is capped• Switzerland – Rulings procedure allows you to agree on the

treatment of debt deductibility and mergers etc• Sweden – No thin capitalisation but cannot erode company’s

equity to below 50% of ordinary share capital• Belgium – Major differences in withholding tax rates • Netherlands – Thin capitalisation calculated on consolidated

basis but does not allow leverage against newly acquired Dutch participations

• UK – Thin capitalisation between UK companies


Tax Efficient Exit

Holding Companies• A good holding company location will usually have certain tax

attributes;– Favourable capital gains legislation– Dividend income received from subsidiaries is exempt from

tax– Wide network of tax treaties to benefit from reduced

withholding tax rates– Withholding tax not applied to distributions to shareholders

• Must be able to demonstrate that it is managed and controlled inthe territory.

• Key that ongoing management ensure the tax residence of these companies.


Tax Efficient Exit (cont’d…)

Popular Holding Company Jurisdictions Belgium Sweden

Luxembourg Netherlands Switzerland UK

Capital gains exemption Dividend income exempt No thin capitalisation rules

Tax grouping No Capital Duty

Notes: All the above reflect what can be achieved. To benefit from these exemptions the company is likely to have to meet various conditions (e.g hold certain percentage of shares for a certain period of time).UK - The capital gains exemption in the UK is very difficult to achieve and is not usually available in a private equity exit.


EU Legislation – current issues

• Withholding tax on dividends and interest• Thin capitalisation• Losses exchanged cross border between EU companies

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