Key Facts and Figures
Private equity and venture capital provides investment opportunities to institutional and professional investors.
The vast majority of these private equity and venture capital investors, called limited partners, are banks, pension funds and insurance companies. They do not manage the funds that they have invested in, and do not intervene at the level of the investee company. However, they regularly assess the quality of the investments made on their behalf.
Of the €79bn funds raised in 2007, €60bn (76.0%) was allocated to buyouts and €10.3bn (13.1%) to venture and growth capital.
Private equity and venture capital provides more than finance to investee companies
Not all companies are suitable for private equity and venture capital financing.
The focus is on investing in high-growth potential companies and:
- Enabling a growth strategy
- Professionalizing a company
- Offering on-going support to the management on strategic and policy matters
- Representing a broader perspective on corporate development
- Management expertise and sounding board for management ideas
- Networking opportunities/connections
Therefore, the private equity and venture capital investor will seek out investment opportunities and companies where:
- A balanced and complementary management team have industry and previous entrepreneurial experience and ability to grow the company
- The market size and growth potential of the investment can be accurately calculated
- The internal processes of the company demonstrate good or strong potential around strategic and financial planning, corporate governance and reporting.
A more detailed summary of the typical characteristics of the Private Equity industry can be found in a recent European Commission Expert Group Report on Private Equity , June 2006.
Private equity, venture capital and growth and employment
Investments by European private equity and venture capital firms amounted to €73.8bn in 2007, and approximately 5,200 European companies received private equity investments. About 85% of these companies have fewer than 500 employees.
Studies show that between 2000 and 2004 European private equity and venture capital financed companies created 1 million new jobs, which translates to a compound annual growth rate of 5.4% per year (eight times the EU25 total employment rate of 0.7%). Between 1997 and 2004, the average employment growth in buyout-financed companies was 2.4%, compared to 30.5% for venture-backed companies.
Private equity and Venture Capital: Long-Term Investors
PE/VC fund investors have a long-term commitment horizon of generally ten years, which stems from contractual agreements which bind PE/VC funds to their investors.
On this basis, PE/VC funds should not be considered as short-term investors, which implies holding periods of less than one year, as their average holding periods in investee companies is four years. More concretely, PE/VC firms also distinguish themselves from short-term investors by the way they manage their investments. Short-term investors take advantage of market trends but do not influence the way the underlying companies operate, unlike private equity and venture capital.
Industry Regulation
The private equity industry is regulated on a national basis in most EU member states.
Private equity houses deal almost exclusively with sophisticated, ‘professional’ investors. These investors are able to understand and accept the risks and rewards of investing in the asset class. This is largely reflected in the type and level of regulation across Europe.
In addition, although there is no harmonised framework for private equity at the European Union level, a number of EU legislative measures in place indirectly affect the industry, such as MiFID, UCITS, the Pension Funds Directive, and the Capital Requirements Directive.
Industry behaviours
EVCA believes that the highest professional standards are crucial to a stable, long term relationship with institutional investors and regulators. They are also vital to increasing overall transparency and trust in the asset class. For nearly three decades, EVCA has worked with the industry to create the most advanced professional standards of any alternative asset class anywhere in the world.
The European private equity industry has already enacted IFRS and US GAAP compatible valuation and reporting guidelines, management principles for private equity houses and OECD-inspired guidelines for the corporate governance of portfolio companies.
For further information about EVCA Public and Regulatory Affairs, please contact the Public and Regulatory Affairs team at publicaffairs@evca.eu or 32 (0)2 715 00 20.
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