Responding to the call
It’s been a busy year for the British Venture Capital Association (BVCA) in it’s efforts to meet the recommendations made by the Myners report which reviewed the whole area of UK institutional investment into private equity. Looking at the statistics for UK institutional investment into the asset class, it has certainly been something of a struggle for domestic hearts and minds.
Overseas pension fund investing has far outstripped UK pension fund investment into the asset class by around threefold in recent years, the largest proportion of which has been sourced from the US. As John Mackie, chief executive of the BVCA acknowledges, it is “a matter of concern because like any other industry when you regard money as being one of your raw materials for your industry, if you’re depending on 70% of your raw material on overseas jurisdiction then that’s not a very satisfactory position to be in”. A year on from Myners and the BVCA is in the midst of several current and ongoing projects in a bid to shift the emphasis more towards sourcing private equity funding from UK and European institutions by tackling some of the report’s key recommendations. It has called for greater education about the sector, greater transparency, greater comparability of returns and overall improvement in the quality of performance information.
Efforts to educate potential investors, the media and government about private equity in general and the subsectors within it – such as venture capital – has taken a number of forms, notably through joint ventures with the National Association of Pension Funds (NAPF). The BVCA recently published a booklet entitled ‘How to invest in private equity’ in association with the NAPF which Mackie says has been made widely available to the pensions industry. It has also run seminars jointly with the NAPF providing a forum for the BVCA’s membership to discuss with pension funds all aspects of private equity investing. Other literature produced by the association has ranged from the economic impact of private equity to annual investment returns and performance.
The whole area of research and publications is a key activity of the BVCA. It produces annual reports (when collating and publishing annual statistics on the industryin terms of both amounts of money raised and money invested) as well as ad hoc reports on matters it believes are valuable to its membership.
The past year has seen the BVCA engaging much more widely through the media, government and civil service in an attempt to disseminate information and educate people about the asset class. It is here Mackie says that the NAPF has been particularly positive.
The whole area of performance information, the quality and coverage of UK performance data with respect to both absolute fund performance and relative fund performance against funds of similar vintage and sector was another potential barrier to investment identified by Myners. For those new to the asset class, it is an area which has prescribed historic mistrust or a feeling that the figures for fund returns are not perhaps totally reliable. In response, the BVCA has undertaken a major ongoing project to produce, in consultation with the investment community, leading accounting firms, fund of funds, pension funds and the NAPF, a set of valuation reporting guidelines. Mackie hopes that this will be produced by the end of the year. It is of course, he says, of fundamental importance that these guidelines achieve a “very high degree of international acceptance” otherwise, objectives of greater comparability, consistency and transparency will not be effective. With this in mind, the BVCA continues to have a close working relationship with the European Venture Capital Association (EVCA). It is also in discussion with national venture capital associations across the world.
A second major project is the BVCA’s undertaking to produce a guide to limited partnerships (the predominant investment vehicle both in the UK and internationally). A tax transparent investment vehicle is not something with which many potential private equity investors are familiar. Similiarly, when establishing a set of valuation reporting guidelines, the BVCA has consulted widely amongst its own membership and beyond. However, Mackie believes there already to be total transparency between individual investors and the BVCA membership. As he says, “if you’re an investor with a private equity fund you can go and review the books, look at the contract terms, gather any information you want if you’re an investor”. However, although he believes there already exists a high degree of transparency between investors and the fund that they invest in, he accepts that it is harder for people who are coming into the asset class for the first time.
Broadly speaking, Mackie agrees with the section of the Myners report dealing with private equity and says that the BVCA has actively been taking steps to meet its recommendations. He does, however, take issue with Myners suggestion that the BVCA “enhance the quality and credibility of the industry benchmark data by further increasing coverage among its UK private equity member firms from the current level of 95%”. As Mackie explains, for the 150 member firms of the BVCA, the investment performance figures are aggregated for the whole industry. The BVCA gets around a 95% response rate to its annual survey for funds that qualify. Whilst not precluding the BVCA’s desire to get an even higher response, Mackie believes that 95% is not only a very high hit rate, but cites independent research which shows that the BVCA carries out the most comprehensive performance survey in the world.
With 150 members and a similar number of associate members investing in excess of £8bn (E13bn) for the last full year, three-quarters of which was invested in the UK and around a quarter overseas across all investment stages, private equity has come a long way from the cottage industry it was 20 years ago.
Private equity-backed businesses in the UK employ around 2.7m people which is approximately 15% of all those employed in the private sector work force. These businesses pay in the region of £28.2bn in taxes to public revenues. The industry is, as Mackie says, now a “significant economic force”. Within this, the BVCA acts as a trade association for the private equity industry, seeking to promote the industry as a whole.
If historically, UK institutional investment into private equity has been poor, the situation is now improving. As Mackie says, over the last couple of years not only has the asset class been “put on the radar” – of which Myners has played a significant part – but the profile of private equity has also been raised, he feels, by the fact that as an industry it has been “much better at demonstrating that with a sensible diversification strategy you can get superior returns from investing in this asset class”.
Over the long term, the private equity industry has produced average annual returns of 16.4%. Although the figures for 2001 are as yet unavailable, anecdotal evidence suggests that UK pension funds who currently invest are increasing their allocations. Those who have not invested in the asset class in the past have now begun, either to make new allocations or are thinking much harder about private equity investing.
Feedback from BVCA members states “higher levels of enquiry which were starting to translate into higher levels of commitment” from pension funds into the asset class. Although Mackie stresses that it is a gradual process, he believes that over the next few years, UK pension funds will increase their exposure to private equity in the recognition that private equity is a “sensible diversification for part of the asset allocation” of institutional investors and has its “own part to play” in constructing a well-balanced portfolio.
Moreover,says Mackie, it’s important to keep in mind that there are a number of “very large, very sophisticated investors who’ve been investing in private equity for decades” citing Railpen, the railway pension fund and Wellcome foundation, the largest charity in the UK as such examples. The bottom line is that these institutions accept that long term returns from the asset class are beneficial.
Through its work with the NAPF; the working towards the establishment of a set of valuation and reporting guidelines and the publication of a guide on limited partnerships, the BVCA has taken a number of steps to meet Myners recommendations, widely consulting at each stage, where relevant, in the attempt to achieve better understanding of private equity amongst UK institutional investors, particularly those new to the asset class who might once have passed it over. It is, as Mackie says, an industry which has, in terms of both scale and size, truly come of age.