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Denominator effect (hLLp//wwwcarrledlnLeresLcom/2008/12/LhedenomlnaLoreffecLhLml)

O nstItutIons that commIt capItal to prIvate equIty funds have strIct guIdelInes for asset
allocatIon. ( 5 allocatIon to prIvate equIty, 60 to lIsted equItIes, 10 to real estate)
O prIces of lIsted assets have collapsed, and the value of each Investor's total
portfolIo, the denomInator, has shrunk
O prIvate equIty Investments have often held theIr value. ThIs doesn't necessarIly
reflect the IntrInsIc value of these assets, but rather the fact that they are unlIsted
O %he resuIt! A 5 prIvate equIty allocatIon may have suddenly blown out to 20 or
O %hIs forces the IImIted partner to decrease the vaIue of the prIvate equIty In hIs
portfoIIo by seIIIng (wIth a Ioss ussuaIIy) some beIoved hoIdIngs. %hIs has caused
some major reguIated InstItutIonaI Investors to offIoad huge portIons of PE.
O $Ide effect Is Improvement of secondary market, Increase In share of non
InstItutIonaI non reguIated Investors as of totaI share of PrIvate EquIty Investors.
O %he bottom IIne Is however that totaI amount of funds raIsed for prIvate equIty Is
decreasIng and wIII not pIck up before eIther
4 the vaIue of other hoIdIng InstItutIons have wIII Increase so the PE can
regaIn Its orIgInaI aIIortment.
4 aIIocatIon ruIes wIII change to refIect the denomInator effect
4 PrIvate equIty wIII vaIue Its portfoIIo companIes on the basIs off faIr vaIue
and comparIsons to comparabIe pubIIc companIes and theIr deprecIatIon
and subsequentIy mark to market thIs vaIue on more frequent basIs
(coherent wIth InstItutIonaI ruIes for the aIIocatIon adjustments)
1ypes of rlvaLe LqulLy flrms ln Lerms of fund ra|s|ng source
venLre caplLal LhaL lnvesL ln prlvaLe busless by purchaslng lLs equlLy mosL commonly ln Lerms of shares
PeLerogenous organlzaLlons LhaL defflr ln Lhelr resources ob[ecLlves and sLraLegles
uependlng on Lhe sLraLegy venLure CaplLal can aLLempL Lo lmprove orghanlzaLlons managemenL
operaLlons efflclency can make use of lLs conLacLs aLLempL Lo creaLe synergles eLc
CfLen lnvesL ln secLor wlLh hlgh growLh opporLunlLles ussually rlsky lnvesLmenLs LhaL however are on
rlsk ad[usLed basls aLLracLlve reLurn lnvesLmenLs
Independent L f|rms work separaLe of Lhelr llmlLed parLners 1hese flrms Lake Lhe largesL markeL
share ln Lerms of LoLal caplLal ralsed for prlvaLe equlLy (CorporaLe flnanclal sLraLegy by 8uLh 8ender)
source fundlng from lnsLlLuLlonal and hlgh neL worLh lndlvlduals
kk8 Apax arLners 8aln CaplLal
1he mosL of rlvaLe LqulLy flrms are lndependenL (Lhe SML flnanclng Cap)
apt|ve pr|vate equ|ty ralse caplLal from prlamry sharehodlers or parenL company )lnsurance
companles lnvesLmeLn banks) ManagemenL sLracLure ls characLerlzed by greaL degree of effecLlve
conLrol and lnvolvmenL of Lhe prlamry shareholder (8arclays rlvaLe LqulLy Alllanz rlvaLe LqulLy
arLners Morgan sLanley caplLal parLners
Sem| capt|ve LC1 Lhe wallenberg famlly rasles caplLal form Lhls prlmary shareholder and from Lhe
exLernal lnvesLors

ey PE metrics in Europe EVCA yearbook

Funds raised
LlmlLed parLners sLrucLure
30 of domesLlc llmlLed parLners 24 of non dopmesLlc Lurpean LlmlLed arLners 12 of non
european lnvesLors (very low compared Lo hlsLorlcal levels even Lhough lL has lncrease from 300 mllllon
Lo 128n european lnvesLmenLs lncreased more) 94 of non domesLlc lnvesLmenLs was done by
canadlan *48 and uS *46 prlvaLe equlLy flrms
MosL slgnlflcanL european lnvesLor lnLo non domesLlc non european equlLles ls uk (28n 32 companles)
lrance 102m 13 companles Cermany 62m 46 companles
O 111 mllllons ln dry powder (end of 2009)
O mproved debL avalllblLllLy lmproved buy ouL markeL (decreaslng avg equlLy raLlo 313 Lo 306
O Accordlng Lo LvCA Lhe number of companles LhaL geL Lhe fundlng from L funds ls decreaslng
sLeadlly Lhls ls wlLh very low correlaLlon Lo Lhe overall amounL of funds realsed Whlle ln 2000
almosL 10000 companles were flnanced Loday lLs less Lhan half even Lhough Lhe amounL of Lhe
funds ralsed ls hlgher Loday
Fund stage focus 9 v {funds raised, favourite industries]
O uyout lnvesLmenL 110 yoy lncrease Lo 318n lollowlnd wlLh slgnlflcanL lncrease ln mega large
and mld markeL deals number
O rowth cap|ta| yoy lncrease 42 Lo 68n nearly 1000 companles 28lncrease
O Ienture cap|ta| lLLL Lo 338n as boLh sLarL up and laLer sLage lnvesLmenL decreased by 7
O 1hroughouL perlod 2007 Lo 2010 leasL affecLed seemed Lo be expanslon or growLh parL of Lhe
rlvaLe LqulLy 1hroughouL 2010lnvesLmenLs ln all secLors come closer LogeLher ln Lerms of
amounLs lnvesLed before crlsls (p4)
O venLure 196 Lo 166 buyouL aL round 38 CrowLh caplLl lncrease from 38 Lo 128 and
CenerallsL decreased from 138 Lo 83
O 1he proporLlon of lnlLlal vs follow on lnvesLmenLs has changed wlLh Lhe flnaclal markeL crlsls
lnvesLors seemed Lo sllgLly prefer lnvesLlng ln already lnvesLed companles (Lhls could also be an
effecL of decreased deslre of enLrepreneurs Lo ralse money aL Llmes where Lhelr companles
value ls bellow whaL Lhelr expecLaLlons are
O Looklng aL lnvesLmeLn Lrends leadlng four secLors of venLure caplLal
4 Llfe Sclences CompuLere and Consumer elecLronlcs CommunlcaLlons Lnergy and
O Looklng aL lnvesLmeLn Lrends leadlng four secLors of buyouL and growLh caplLal
4 1hls segmenL ls more equal ln Lerms of share of lndlvldual secLors Lhe only ouLsLandlng
lndusLry ls Consumer Codds and reLall oLher secLors worLh Lo menLlon are Llfe sclences
lndusLrlal producLs and servlces and communlcaLlon
O 80 of LargeL companles are SMLs and 70 of Lhose were LargeLed by venLure caplLal
companles venLure CaplLal are Lhus very slgnlflcanL ln Lerms of soclal and economlc lmpacL on
O Whlle ln venLure CaplLal lL seems LhaL over 90 of caplLal ls lnveLed ln companles wlLh less Lhan
100 employees 8oyouL and growLh lnvesLmenLs are mosL concenLraLed Lo 200 employees / 37
O AmounL of funds ralsed across europe has lncreased by 127 allLogeLher form 2009 Lo 2010
O rlvaLe equlLy ln Lurope has ralsed 3108n beLween 20062010 (compare Lo uS Asla) look aL lL as
percenLage of Lu aggregaLe Cu 1hls ls around 023 of Lu Cu LhaL for Lhls perlod averages

1he exlL markeL
O Cs lncreased four fold ln Lurope Lo 200 per 2010 19 bllllon was reallsed aL cosL of 2086
O Lu based flrms exlLed 81 non Lu companles wlLh LoLal amounL dlvesLed aL 118n
O 1rade sales ralsed 438n and remalned second mosL lucraLlve exlL meLhod
O 1he Lhlrd opLlon ls a sale Lo anoLher prlvaLe equlLy lnvesLor
O n Lerms of lndusLrles 8uyouL and CrowLh consumre goods and reLall were mosLly dlvesLed and
ln vC where ln llfe sclences and compuLer and consumer elecLronlcs
O Clean1ech companles seem no Lo flnd Lhemselve currenLly ln good poslLlon ln Lerms of markeL
demand for such lnvesLmenLs (vlew as Loo rlksy Loo uncerLaln Loo many compeLlLlon subsldles
LhaL make unclear whaL ls Lhe besL Lechnologles golng Lo be whlch have Lhe poLenLlal Lo galn
market acceptance NC1 IN the stage where sat|sfactory cap|uta| cou|d be ra|sed through
pub||c offer|ng Its st||| v|ewed as sector for spec|a||sts
O WrlLe off dlvesLmenL
Private equity country of origin v country of management {table]
Final closing in by independent funds
O Cne of Lhe lndlcaLors LhaL can help us predlcL where are we headlng ln Lerms of secLro focus ls
by looklng aL Lhe f|na| c|os|ngs at 2010 84 new funds were closed where 84 where generallsL 6
llfe sclences 3 C1s and 4 energy and env|ronemnt focused

1he beauLy of Lhe CleanLech secLor ls lLs slgnlflcance LhaL reaches across almosL every parL of our llfes
and has some relaLlonshlp wlLh Lhe ma[or lndusLrles LhaL elLher can make use of Clean1ech or are one of
Lhe subsecLors wlLhln Clean1ech 8esearch Lnergy 1ransporLaLlon compuLer consumer goods llfe
sclences lndusLrlal servlces and producLs (pracLlcally all L favourlLe lndusLrles)
ingle countries exposure to Private Equities
Whlle we know whaL counLrles are Lhe mosL common for fund locaLlon and whaL counLrles mosLly
manage Lhe funds closer look aL Lhe lnvesLmenLs ln 2010 can Lell us whaL counLrles are mosL acLlve ln
cerLaln lndusLrles (whlch could lead us Lo assumpLlon LhaL Lhe lndusLry aL LhaL counLry ls more
developed or aL leasL Lhe knowledge of Lhe secLor exlsLs wlLhln Lhose counLrles (also assumlng Lh fund
allocaLlon ls prlmarlly domesLlc)
Looklng ln Lerms of amounnumber of deals wlLhln energy and envlronmenL leadlng counLrles are
norway Sweden Spaln and AusLrla each closlng one fund ln energy and envlronmenL secLor
Investments Energy and environment v. overall
Lnergy and envlronmenL has aLLracLed 18138n(7) ln 2009 and 13038n(33) ln 2010
Comparlng Lhe amounL of resources lnvesLed over pasL flve years 264338n wlLh Lhe amounL ralsed
3108n we can see LhaL rlvaLe equlLles qulLe slgnlflcanL parL of Lhelr porLfollo ln dry powder
nLeresLlngly whlle funds ralsed ln 2010 reached roughly 208n lnvesLmenLs reached 42338n whlch
seem as a slgn of recovery for Lhe prlvaLe equlLy markeL as new opporLunlLes emerge or more llkely Lhe
economlc condlLlons enable L funds Lo lnvesL Lhelr resources effecLlvely
Lven Lhough lL seems LhaL Lhe energy and envlronmenL ls raLher lnslgnlflcanL secLor ln Lerms of L secLor
allocaLlon lL ls lmporLanL Lo noLe LhaL Lhe decrease beLween 2009 and 2010 lnLo energy and
envlronmenL has dropped largely due Lo decrease lnmore slgnlflcanL buyouL deasl (61 29) amounL
slze LhaL halved venLure CaplLal lnvesLmenLs are sLlll arounf 11(119 107) whlch puLs Lhls secLor
Lo be Lhe 4
mosL aLLracLlve by vCs afLer llfe sclences CompuLer and Consumer LlecLronlcs and
CommunlcaLlon 1hls ls even Lhough Lhe dlfflculL Llmes CleanLech ls golng Lhrough aL Lhe momenL
(sublsldles halLed unceraLlnLy abouL fuLure fundlng eLc) Cnce Lhe L condlLlons lmprove and cleanL
ech envlronmenL sLablllzes reasonably lLs share should grow slgnlflcanLly as lLs growLh poLenLll and rlsk
ad[usLed reLurn prospecL wlll lncrease Also unllke CommunlcaLlons and CompuLer secLors CleanLech ls
new and ls far from maLurlng sLage
O funds ralsed for venLure caplLal ln 2009 and 2010 are abouL 23 of overall funds ralsed whlle
lnvesLmenLs ln venLure caplLal seem Lo be ln range beLween 10 Lo 20 of Lhe overall
O especlally ln 2010 lnvesLmenLs ln buyouL sLage are slgnlflcanLly larger Lhen Lhe funds ralsed for
Lhe same perlod whlle ln venLure CaplLal Lhese Loo are more coherenL 1hls ls probably due Lo
buyouL funds ralslng money before Lhe crlsls and lnvesLlng agaln ln only recenLly as debL markeLs
became more avallable
O venLure caplLal flrms were less hlL by Lhe crlsls Lhan Lhe buyouL funds slnce Lhe caplLal Lo ralse
was easler Lo obLaln and lnvesLmenLs were noL halLed by debL lnavalllblllLy Powever succesful
buyouL funds have used less debL ln Lhelr flnanclng for Lhls perlod whlch however has negaLlve
effecL on Lhelr reLurns as more equlLy ls used and Lhan lower reLurn on equlLy ls achleved