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<ul><li><p>20/10/2011</p><p>1</p><p>Venture Capital and Private EquityResearch at Vlerick</p><p>Prof. Sophie Manigart / Prof. Miguel Meuleman / David Devigne / Bart Van Hoe</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Overview presentation</p><p>Intro to venture capital and private equity</p><p>Why interesting as a research setting?</p><p>Theoretical perspectives</p><p>Overview datasets</p><p>Current research projects</p><p>Discussion</p><p>2</p></li><li><p>20/10/2011</p><p>2</p><p>Intro to venture capital and private equity</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Facebooks valuation (January 4, 2011)</p><p>Goldman Sachs and Digital Sky Technologies (UsmanovsRussian investment fund) pay $500 mio for 1% stake in Facebook Facebook value = $50 bio</p><p>3 times more than what Microsoft paid three years ago</p><p>Company is 7 years old</p><p>500 mio users (valuing each user at $100 !)</p><p>Huge growth</p><p>Comscore: Q3 2010: showed 300 bio ads</p><p>Cooperation with Zynga (Farmville game) is very valuable</p><p>2010: sales 2 bio, profits 400 mio (P/E: 125!)</p><p>IPO is expected...</p><p>4</p></li><li><p>20/10/2011</p><p>3</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Facebooks valuation (January 4, 2011)</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>What do private equity players and venture capitalists do? </p><p>Private Equity Invests in equity </p><p>instruments of private companies</p><p> Invests in equity related instruments</p><p> Invests in equity instruments of private </p><p>companies Invests in equity </p><p>related instruments</p><p> Replaces existing shareholders:</p><p> Completely Buyouts Buyins</p><p> Partially Replacement capital</p><p> Brings additional resources Growth capital</p><p>Venture capital Joins with other venture </p><p>capitalist to provide risk capital in successive rounds</p><p>The objective is to create value through capital gains. </p><p>Take the risks on a business plan and on the growth of the </p><p>firmMobilize and allocate capital in the economy</p><p>6</p></li><li><p>20/10/2011</p><p>4</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Just in case</p><p>The private equity and venture capital industry...</p><p>Raises funds from several sources</p><p>Invests professionally in equity and equity related </p><p>instruments of private companies</p><p>Grows the value of the companies</p><p>Creates liquidity for the investments</p><p>7</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Private equity activity in Europe</p><p>8 |</p><p>0</p><p>20</p><p>40</p><p>60</p><p>80</p><p>100</p><p>120</p><p>Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2</p><p>Funds raised</p><p>Investments</p><p>Divestments at cost</p><p>Source: EVCA/PEREP_Analytics</p></li><li><p>20/10/2011</p><p>5</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>European private equity divestments exit route trends</p><p>Index Q1 2007 = 100</p><p>Source: EVCA/PEREP_Analytics</p><p>0</p><p>20</p><p>40</p><p>60</p><p>80</p><p>100</p><p>120</p><p>140</p><p>160</p><p>180</p><p>Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2</p><p>Trade sale</p><p>Sale to PE firms</p><p>Write-offs</p><p>Other</p><p>Total divestment</p><p>2007 2008 2009 2010 2011</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School |</p><p>European divestments by segment in Q2 2011</p><p>Venture Capital</p><p> 186 m</p><p># companies divested</p><p> 72 m</p><p> 42 m</p><p>Buyout &amp; growth</p><p># companies divested</p><p> 1.3 bn</p><p> 1.5 bn</p><p> 0.3 bn</p><p>Q2 2011 Top Exit routes (more than 400 Cexited)</p><p>Secondary</p><p>buyout (62)</p><p>Trade Sale (50)Write-Off (27)</p><p>Source: EVCA/PEREP_Analytics</p><p>Sale of QuotedEquity (7)</p><p>Trade Sale (55)</p><p>Secondarybuyout (7)</p></li><li><p>20/10/2011</p><p>6</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>PE returns</p><p>| 19-1-2010 |11 |</p><p>Source: Thomson Reuters / EVCA Performance Survey</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>PE variation in returns</p><p>| 19-1-2010 |12 |</p><p>Source: Thomson Reuters / EVCA Performance Survey</p><p>Top performing funds generate positive risk-adjusted returns</p></li><li><p>20/10/2011</p><p>7</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>In Europe: many different type of players in the industry</p><p>Funds</p><p>FUND</p><p>LP</p><p>GP</p><p>Investee companies</p><p>Captive</p><p>Invest-ment</p><p>manager</p><p>Investee companies</p><p>Private investment co.</p><p>Co</p><p>Investee companies</p><p>FUND</p><p>Institutionalinvestor</p><p>Listed investment firms</p><p>Co</p><p>Investee companies</p><p>Stock market</p><p>APAXCVCPermira</p><p>3IGIMVDBAGEurazeoCapman</p><p> Fortis Private Equity</p><p> Family offices</p><p>13</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>The business system</p><p>Inst</p><p>itut</p><p>iona</p><p>l inv</p><p>esto</p><p>rs: p</p><p>ensi</p><p>on </p><p>fund</p><p>s, in</p><p>sura</p><p>nce </p><p>com</p><p>pani</p><p>es, </p><p>fam</p><p>ily </p><p>offi</p><p>ces</p><p>Fund offunds</p><p>Fund offunds</p><p>Fund</p><p>Fund</p><p>Fund</p><p>Fund</p><p>Fund</p><p>Company</p><p>Company</p><p>Company</p><p>Company</p><p>Stock market</p><p>Strategic acquirer</p><p>FundOr </p><p>Secondary Fund</p><p>Fundraising Investment Exit</p><p>Placementagents</p><p>IntermediariesInvestment</p><p>bankers14</p></li><li><p>20/10/2011</p><p>8</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Interesting research setting</p><p>1. Information on (almost) full population</p><p>a) Over 1 (Europe) to 2 (US) decades, currently also Asia and RoW</p><p>b) Numerous linkages between actors</p><p>2. Individual projects</p><p>a) Clear begin and end dates</p><p>b) No confounding factors: individual performance observed</p><p>3. Extreme risk</p><p>4. Numerous different actors, different roles,</p><p>15</p><p>Theoretical perspectives</p></li><li><p>20/10/2011</p><p>9</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Theoretical perspectives</p><p>Agency theory / multiple agency theory</p><p>Social netwerk theory</p><p>Human capital theory</p><p>Resource-based theory</p><p>Decision making theory</p><p>Conflict theory</p><p>Institutional theory</p><p>Finance and law</p><p>Contracting theory</p><p>Ethics</p><p>17</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Agency theory / multiple agency theory</p><p>18</p></li><li><p>20/10/2011</p><p>10</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Agency theory / reputation</p><p>19</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Social netwerk theory</p><p>20</p></li><li><p>20/10/2011</p><p>11</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Social netwerk theory/agency theory</p><p>21</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Human capital theory</p><p>22</p></li><li><p>20/10/2011</p><p>12</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Resource-based theory/agency theory</p><p>23</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Decision making theory</p><p>24</p></li><li><p>20/10/2011</p><p>13</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Decision making</p><p>25</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Finance and law</p><p>26</p></li><li><p>20/10/2011</p><p>14</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Governance</p><p>27</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Learning theory / institutional theory</p><p>28</p></li><li><p>20/10/2011</p><p>15</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Contracting theory</p><p>29</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Conflict theory</p><p>30</p></li><li><p>20/10/2011</p><p>16</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Ethics</p><p>31</p><p>Datasets used</p></li><li><p>20/10/2011</p><p>17</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>VICO dataset</p><p>7 European countries: </p><p>Belgium, France, Italy, Germany, Spain, Finland, U.K.</p><p>Sample criteria: </p><p>Independent at start-up </p><p>Active in high-tech industry: aerospace, biotech, energy, ICT manufacturing, internet, nanotech, pharmaceutical, robotics, software, telecom, web publishing and other R&amp;D</p><p>Created between 1984-2004</p><p>Including successful and unsuccessful investments</p><p>=&gt; 7611 companies that did not receive venture capital</p><p>Maximum 10 years old at initial investment</p><p>Initial VC investment 1994 2004</p><p>=&gt; 759 venture capital backed companies</p><p>Full detailed description: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1904297</p><p>33 |</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>VICO data sources</p><p>VentureXpert (1, 5)</p><p>Investor annual reports (1, 5)</p><p>Investor websites (1, 5)</p><p>Press releases (1, 3, 5)</p><p>Press clippings (1, 3, 5)</p><p>Venture Capital Association yearbooks (1, 5)</p><p>ZEW Foundation Panel (1, 3, 5)</p><p>VC Pro-Database (1, 5)</p><p>BVK Directory (1, 5)</p><p>Zephyr (1, 3)</p><p>RITA directory (1)</p><p>Private Equity Monitor (1) </p><p>Italian Private Equity (1)</p><p>Jos Mart Pelln Database (1, 3, 5)</p><p>WebCapitalRiesgo.com (1, 3, 5)</p><p>Library House (1, 3, 5)</p><p>Amadeus (2, 3)</p><p>Belfirst (2, 3)</p><p>34 |</p><p>Creditreform (2)</p><p>RITA directory (2, 3, 5)</p><p>AIDA (2)</p><p>TELEMACO (2, 3)</p><p>Belgian law gazette (3)</p><p>Company websites (3)</p><p>German stock exchange (3, 5)</p><p>PATSTAT database (4)</p><p>IPO prospectuses (5)</p><p>1: Portfolio company identification 2: Accounting data </p><p>3: Company data 4: Patent data </p><p>5: Investment data</p></li><li><p>20/10/2011</p><p>18</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Database VICO</p><p>Financial statement data</p><p>Followed for (max) 10 years after initial VC investment</p><p>Key items including sales, tangible assets, intangible assets, total assets, </p><p>cash, equity and financial debt,</p><p>Patent data</p><p>Including patent owner, citations, publications, patents application and </p><p>grant years, industry patent classes, and priority countries,</p><p>Venture capital investment data</p><p>Including investment year, investment amount, venture capital firm type </p><p>and venture capital firm age, exit type and exit timing,</p><p>Venture capital investor data</p><p>General experience, sector experience, country experience, VC firm </p><p>focus,</p><p>35 |</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>VICO SURVEY TO COMPANIES</p><p>Control of sample criteria: independent, VC backed,</p><p>Experience of founders: serial entrepreneur, PhD, MBA,</p><p>Equity finance:</p><p>Search of equity finance</p><p>Negotiations with investors: @ founding, after 2 years,</p><p>If negotiations were unsuccessful: main reason?</p><p>Exit way of VC</p><p>Several questions on the contribution of the VCs:</p><p>Strategy</p><p>Technology position</p><p>Marketing position</p><p>Management professionalization</p><p>Financial function</p><p>36 |</p><p>Signalling PC quality</p><p>Internationalization</p><p>Exit orientation</p><p>Adverse effects of VC?</p></li><li><p>20/10/2011</p><p>19</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>VICO COUNTRY DISTRIBUTION</p><p>37 |</p><p>INVESTMENTS</p><p>VC-backed companies 759</p><p>Investors 1,125</p><p>Investors per company (mean) 2.77</p><p>Investments per company (mean) 4.58</p><p>TOTAL investments 3,475</p><p>Belgium</p><p>12%</p><p>Finland</p><p>9%</p><p>France</p><p>15%</p><p>Germany</p><p>17%</p><p>Italy</p><p>13%</p><p>Spain</p><p>11%</p><p>UK</p><p>23%</p><p>% Of PC per Country</p><p>0% 20% 40% 60% 80% 100%</p><p>UK</p><p>ITALY</p><p>GERMANY</p><p>BELGIUM</p><p>FRANCE</p><p>FINLAND</p><p>SPAIN</p><p>Per country % of VC investments by VC origin</p><p>CBVCB CBVC DOM VC</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>VICO INDUSTRY DISTRIBUTION</p><p>38 |</p><p>Biotech &amp; </p><p>Pharmaceutical</p><p>21%</p><p>ICT </p><p>manufacturing</p><p>16%</p><p>Internet</p><p>18%</p><p>Software</p><p>34%</p><p>TLC services</p><p>6%</p><p>Other*</p><p>3%</p><p>R&amp;D Services</p><p>2%</p><p>% PC per industry</p><p>* Includes: aerospace, robotics, nanotech and cleantech</p><p>0% 20% 40% 60% 80% 100%</p><p>Internet</p><p>TLC</p><p> Web PUB</p><p>PHARMA</p><p>Biotech</p><p>Software</p><p>ICT MAN</p><p>Other R&amp;D*</p><p>Per industry % of VC investments by VC origin</p><p>CBVCB CBVC DOM VC</p></li><li><p>20/10/2011</p><p>20</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>VICO EXIT DISTRIBUTION</p><p>39 |</p><p>IPO</p><p>12%Buy out</p><p>4%</p><p>Acquisition</p><p>43%</p><p>Liquidation</p><p>33%</p><p>Inactive</p><p>1%</p><p>Buy Back</p><p>7%</p><p>% of PC per Exit</p><p>0% 20% 40% 60% 80% 100%</p><p>DOMVC</p><p>CBVC</p><p>CBVCB</p><p>Exit percentage per VC origin</p><p>Trade sale Liquidation IPO Sale to other VC Buyback</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Integrated buyout database (IBD)</p><p>Sample criterion: worldwide LBO transactions</p><p>International dataset:</p><p>57 countries: 35% USA, 15% UK, 12% FR, 8% GE, 30% Other (3% Australia, 4% </p><p>Asia, 22% EU)</p><p>Main data sources:</p><p>Reuters LPC Dealscan</p><p>Financial &amp; deal variables on debt syndicate level</p><p>Thomson One</p><p>Financial &amp; deal variables on equity syndicate level</p><p>Zephyr/Amadeus/Orbis (Bureau van Dijck)</p><p>Company accounts</p><p>40</p></li><li><p>20/10/2011</p><p>21</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Integrated buyout database (IBD)</p><p>Additional data sources:</p><p>Bloomberg macro-economic variables</p><p>GlobalEDGE institutional, country-specific variables</p><p>Berry et al. (2010) institutional distance</p><p>Factiva news articles</p><p>Compustat listed company accounts</p><p>41</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>IBD descriptives (I)</p><p>977</p><p>335</p><p>194</p><p>136</p><p>69</p><p>61</p><p>152</p><p>132</p><p>Deals per country</p><p>USA</p><p>United Kingdom</p><p>France</p><p>Germany</p><p>Italy</p><p>Netherlands</p><p>Other EU</p><p>Other non-EU</p><p>42</p></li><li><p>20/10/2011</p><p>22</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>IBD descriptives (II)</p><p>0</p><p>100</p><p>200</p><p>300</p><p>400</p><p>500</p><p>600</p><p>700</p><p>800</p><p>bil</p><p>lio</p><p>n $</p><p>DealScan Total LBO Loan Volume (in billion $)</p><p>Total US Levered Loan Market</p><p>Source: IBD, Bloomberg43</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>IBD descriptives (III)</p><p>44</p></li><li><p>20/10/2011</p><p>23</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>IBD descriptives (IV)</p><p>0</p><p>1</p><p>2</p><p>3</p><p>4</p><p>5</p><p>Average No Financial Covenants</p><p>45</p><p>Current projects</p></li><li><p>20/10/2011</p><p>24</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Impact of VC origin on growth</p><p>Theoretical framework used: Resource based view</p><p>Results show not all VC is the same, PC backed by:</p><p>Domestic VC =&gt; high growth early on</p><p>CBVC =&gt; more sustainable growth rates in long run</p><p>Domestic &amp; CBVC =&gt; strongest growth</p><p>47 |</p><p>Cross-border VS Domestic VC ?</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Impact of VC origin on growth </p><p>48 |</p></li><li><p>20/10/2011</p><p>25</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Impact of VC origin on write-off exit</p><p>49 |</p><p>To achieve good performance VCs need to:</p><p>Nurture the promising PC</p><p>Avoid throwing good money after bad </p><p>VCs face liquidation dilemma </p><p>Further finance company =&gt; option of improvement</p><p>Terminating =&gt; sure losses</p><p>Theoretical framework used: escalation of commitment</p><p>CBVCs can both have advantages or disadvantages for PC:Provide access to specific international resources, networks and experience</p><p>Have a lower emotion commitment and face higher transaction costs and as they face larger geographic and cultural distances </p><p>=&gt; RQ: How does CBVC as opposed to domestic VC impact the speed and probability of a write-off exit</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Belspo</p><p>Cost and terms of funding are key in (leveraged) buyout </p><p>transactions</p><p>Leverage, maturity, loan spreads</p><p>Covenants</p><p>Research question: How do PE firm characteristics and </p><p>institutional environment impact the cost and terms of funding</p><p>PE firm heterogeneity: reputation, experience, firm type, bank </p><p>relationships</p><p>Institutional environment: legal/fiscal framework</p><p>50</p></li><li><p>20/10/2011</p><p>26</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management School</p><p>Belspo</p><p>Many LBO transactions end up in financial distress</p><p>Type and timing of exit are crucial to PE investors</p><p>History shows high levels of buyout company bankruptcies after peak </p><p>deal activity</p><p>Research question: How do PE firm characteristics and </p><p>institutional environment impact outcomes of financial distress </p><p>in buyouts</p><p>Impact of reputation, experience, firm type, syndicate structure, </p><p>institutional environment</p><p>Exit type (liquidation, bankruptcy, trade sale, ) / timing</p><p>51</p><p> Vlerick Leuven Gent Management School Vlerick Leuven Gent Management Schoo...</p></li></ul>

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