The institutional investor presence was very much in evidence at the recent seminar held in Zurich by the European Venture Capital Association. Of the 250 participants, some 25% came from pension funds, insurance companies and other institutions. The pension fund perspective on market developments was delivered in no uncertain terms by Ad van den Ouweland of PGGM, the Dutch healthworkers’ pension scheme.
Are management fees in the private equity field too high, he asked his audience, still overwhelmingly composed of association members. “Are management fees on committed capital unfair, by having these on both invested and committed capital?”
He suggested that instead of having a sliding scale on committed capital, that these fees should be on “a hybrid of committed and invested capital”.
Referring to carried interest, he said: “This is at a fixed 20%, which is not discussed. There is no distinction made between good and bad groups, it is still 20%.” In the US, there was a more discretionary approach to carried interest, and he thought this should apply to Europe as well.
Commenting on current trends, he felt that venture capital provision needed a stimulus given the predominance of merger and acquisitions and buy-out activities. “Too many institutions are saying that venture capital is not the proper category for them to invest in. But in the US, it is seen as a category for the future.” Despite, the larger funds being more aligned to the needs of pension funds, van den Ouweland reckoned there was room for the smaller and mid-sized funds in the market. “Pan European, multi country funds will be the predominant item,” he predicted. “It is becoming harder and harder to gain entry to the better, established funds in Europe, which is a new phenomenon.”
Looking to the challenges the millennium would bring, he pointed to the need for greater transparency. “You could in future have one global performance presentation standards for the whole PE industry.” He looked forward to these and global valuation standards (see page 51 ).
The questions pension funds should ask themselves before reviewing private equity managers were discussed by Marcus Simpson of the US-based Virginia Retirement Scheme, with $33bn of assets, of which $3.4bn was invested in over 120 private equity funds. “Are you going to be an active investor, or are you going to be passive? Do you have any strategic interests that will affect your business decision?” he asked.
When doing due diligence, he advised: “We do not go in with an itemised check list. What we do is have meetings with the partner, where we would go over most of the aspects of the business and then try to concentrate our our due diligence on the areas that come out of that.”
He added: “Our scheme receives 125 annual reports, 500 quarterly reports, we attend advisory board meetings, annual meetings, every day we go and visit our managers and do annual due diligence. All that requires a lot of work!”
The growth in public to private transactions was expected to jump in 1999 to two to three times the levels experienced in the UK in 1998, Jon Moulton of London-based Alchemy Partners said. In 1998, these totalled £2.7bn from 29 transactions, compared with £1.1bn for 39 such moves in the period 1990 to 1997. “We see an explosion in this work, where we have done seven transactions.” He reckoned some 180 of UK smaller quoted companies would go private if they could. “But the transactions are difficult to do and costly. They can cost up to 8% of equity and costs could come to 5%, even if the deal fails.”
The frustrating but human world of family business buy-outs in Germany was analysed by Max Roemer, of Quadriga Capital Management , who clearly showed that psychological as well as financial factors came into play. “There were plenty of opportunities to waste time, as clients would decide not to sell their company after the deal had been negotiated.” One typical situation, he called the ‘Prince Charles syndrome’, where a 61-year-old son was waiting to take over from the 85-year-old father, still boss of a E1bn company. “There was no one recipe for these situations, each one required an individual solution.”