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| Strategic importance of Private Equity and Venture Capital |
 Dr. Herman Daems is Chairman of the Board of GIMV, a Belgian investment company since 1999. He has had a distinguished career in academia, policy making, and consulting. He was a Visiting Professor at the Harvard Business School from 1987 to 1990 where he taught Competition and Strategy in the MBA program. He was a partner in the Dutch consulting firm, Horringa & de Koning, a Member firm of the Boston Consulting Group from 1990 to 1993. From 1995 to 1998 he was Director of the Cabinet of the Flemish Minister of Economics and Media. He was, till recently, chairman of EVCA, the European Association of Private Equity and Venture Capital.
GIMV was established in 1980, and has been quoted on Euronext Brussels since 1997. It has Euro 1.4 billion under management including 1.1 billion of its own equity and its long-term returns are about 14%. Its purpose is to invest in the equity of unlisted companies. GIMV operates in three areas. GIMV’s venture capital is invested primarily in ICT and Life Sciences. In more traditional industries it also undertakes management buy-outs (MBOs) and it provides growth capital (Corporate Investment). The portfolio maintains a balance among start-up companies, fast growth companies and major enterprises. GIMV contributes knowledge and experience (through the board of directors) in addition to its capital investment.
Dr Daems talked to the ISB community about the strategic importance of the Private Equity and VC industry to an economy drawing lessons from the European experience.
Dr Daems began by describing the key characteristics of the Private Equity and Venture Capital (PE & VC) industry in Europe. A key aspect distinguishing the industry is the presence of a variety of models in which VC firms are organised. Apart from the well-known Partnership Model wherein the VC firm is managed by General Partners who invest funds provided by Limited Partners, other models such as the Captive Model wherein institutional investors appoint investment managers to invest funds, the Private Investment Company Model wherein a holding company invests funds, and the Publicly Listed Company Model wherein a public company invests funds raised from the market, are also prevalent.
These PE & VC players adopt a number of different ways to create value including:
- Financial structuring
- Growing sales / earnings
- Improving margins
- Buying different companies and building a consolidated operation
- Building a technology and product platform
- Building a market position
The value chain in the PE & VC industry begins with deal generation and proceeds through the deal selection, deal acquisition, due diligence, investment decision, value creation and reporting stages, finally ending at the exit stage. The firm requires specific capabilities to manage each stage of the value chain.
The industry provides (about Euro 30 billion in 2004) seed, expansion, and replacement capital, and capital for buyouts. However, buyouts account for a significant portion of the funds invested by the industry as this investment avenue offers higher returns than seed investment opportunities. In contrast, returns on seed capital are higher in the US arguably because well developed capital markets push up valuations for technology industries resulting in higher yields. The capital allocation pattern observed in Europe could prove to be a major challenge for its high technology industries when compared to their counterparts in the US.
The returns in the industry are cyclical with good vintage years making a significant difference to its performance. An interesting aspect of the industry from the perspective of mode of exits is that IPOs are less important than trade sales. Secondary buyouts too are now assuming importance.
The large difference between average net portfolio returns and variability of gross returns on a deal basis is undermining the professional reputation of the industry. There is also a perception that the industry is shrouded in secrecy. Therefore, the industry in Europe has taken the lead in bringing in both professionalism and transparency. The industry body, EVCA, has focused on creating standards including international valuation guidelines to be adopted by members.
In conclusion, Dr Daems said that the PE & VC industry is crucial to every economy as it channels funds for building wealth-creating enterprises. The industry must be encouraged to adopt the variety of models in existence to channel funds and to accept the best professional standards. The government can play a role in creating economic conditions that are good for the PE & VC industry. The industry thrives when an active market for exits is created and well-developed capital markets go a long way in ensuring that this exit market is created. |
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