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16 June 2004 INVESTMENTS IN PRIVATE EQUITY: THE ROLE OF PENSION FUNDS Presentation by : GIANNIS PAPADOPOULOS Managing Director, Attica Ventures 1 The aim of VC investments High returns Risk spread 2 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 3 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 4 Common features of both PE and Pension funds Pension Funds PE Control over investments YES YES Return on capital YES YES Investment spread Risk spread YES YES YES YES Long-term focus YES YES 5 Comparison of Pension fund investment options EU GREECE Stock Exchange Bonds YES YES YES YES Real Estate YES YES YES YES YES NO Mutual Funds PE/VC 6 Pension Funds and Private Equity. Why? (1) 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 Stage European Private Equity Return Morgan HSBC Small JP Morgan Stanley Euro Company EuroBonds Index index Early stage Development Balanced All Venture Buyouts Generalist 4,9 10,3 10,7 9,2 12,9 10,0 -0,1 7,7 -0,2 3,0 -7,1 7,1 -4,2 3,9 -4,1 -1,3 -8,7 0,3 7,4 8,0 6,5 7,3 4,0 7,7 All Private Equity 10,8 -2,3 -5,7 7,2 *Comparisons based on the internal rate of return (IRR). 31-Dec-2002 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 2004 UK Luxembourg Ireland Greece Netherlands Portugal Belgium Hungary Italy France Switzerland Spain 2003 average 2002 average 1.26 1.49 1.53 1.75 1.76 1.81 1.82 1.86 1.86 1.89 1.95 1.96 1.97 2.03 (1=most favourable, 3=least favourable) 8 Pension Funds and Private Equity. Why? (3) 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. Conclusion: Investment in PE reduces instability and improves the risk profile in an investment portfolio. 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 growth Increase in competitiveness Increase in profits Wealth distribution Robust pension funds 12 Capital raised in Europe per investor category (1999-2003) Corporate investments Ν#A 6.70% Capital Markets 0.70% Private Investors 6.20% 8.00% Academic institutes 1.20% Government Agencies 6.70% Fund of funds 11.50% Banks 24.40% Insurance companies 12.50% Insurance Pension Funds Funds 22.1% 22.10% 13 Capital raised in Greece per investor category (1999-2003) Corporate investmentsCapital Markets 0% 8% Academic institutes 0% Fund of funds 24% Private investors 11% Government agencies 4% Insurance companies 4% Insurance Funds Pension Funds 0% 0% Banks 50% 14 A tentative overview ..... 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. 15 Investments in VC as % of GDP (2003) 16 Tentative conclusions.... Europe: Greece: 1. PE: a well-developed institution 2. The role of pension funds is primary 3. Developed markets / competition 1. PE not developed as an institution 2. Pension funds still seeking their role 3. Under-developed markets / competition 17 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 positively) Structure and incentives for creating PE funds Legal regime governing mergers & acquisitions Entrepreneurial environment Corporate taxation(35% compared to 28% in the EU) Lack of entrepreneurial incentives Role of the State Competition Policy priorities Greek economy development model Idiosyncrasy and culture (developing 18 The 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. 20 Learning a lesson from history..... 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. 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. 22 The actions needed 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. 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). 24 ATTICA VENTURES – Investment Team Wide ranging professional experience (VC, consulting, finance, retail, corporate management). Network of business contacts and excellent knowledge of the Greek market Complementary academic backgrounds 25 Managed fund: 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 26 Investment criteria People Capable and collaborative managers with levels of commitment to the firm 1 Successful background in the sector Clear development strategy Strategy Alternative development plans - scenarios 2 Products or services that meet real market / consumer needs Developing market, or market “in the making” Synergies with other companies or strategic partners Returns Full financing framework Return proportionate to risk and investment stage 3 Clear link between investment and overall portfolio Visible exit routes www.attica-ventures.gr Akadimias 34, GR-10672, ATHENS Tel.: +30 210 3637663 Fax: +30 210 3637859