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The annual survey (Performance Measurement Survey 2008) once again demonstrates the outperformance that PE as an asset class delivers to investors 8 BVCA Quarterly Brief Summer 2009 BVCA Research Team Update Performance Measurement Survey (PMS) 2008 The annual survey once again demonstrates the outperformance that PE as an asset class delivers to investors. The total return to investors from all private equity funds is 15.4% pa over a tenyear period. Although this is a 4.7% decline from last year’s survey, returns from PE are still far in excess of the FTSE All-Share, which returned just 1.2% pa to investors over the same period. Since inception returns from PE funds see the figure rise to 16.4% pa. The PMS this year also examined VC returns of purely commercial venture funds raised from third party return-orientated investors to dispel some false myths around the performance of this asset class. Pre-bubble (1980-1997) funds have seen a strong pooled average IRR of 11.9% pa. Funds raised during the bubble period (1998 – 2001) suffered from inflated valuations and recorded a collective loss of 2.4% on average. Post-bubble funds (2002 – 2004) have produced a pooled average of 7.7% with top decile funds returning more than 17% to their investors per annum. As these funds continue to mature, even stronger returns will be generated in years to come. The full report can be found at the following link: http://www.bvca.co.uk/Research/features/PerformanceMeasurementSurvey2008 Responsible Investing in Private Equity/Venture Capital A survey conducted by IPSOS MORI on behalf of the BVCA has found that a clear majority of BVCA members consider social and governance issues to be an important factor when making investments or managing their portfolio. The research, which examines members’ attitudes and opinions on responsible investing in the private equity and venture capital industry, found that around half of private equity firms have guidelines or policies in place covering responsible investment. With more than half of respondents also stating that they plan to do more to incorporate sustainability risks into their portfolio companies, the BVCA will be working to ensure we provide our members with the advice they need to become standard bearers for best practice in this area. For more details on the results of the survey, please contact the BVCA Research Team (Research@bvca.co.uk). BVCA Update The EU Alternative Investment Fund Managers Directive (AIFM) The BVCA is continuing to push hard for substantial changes to the AIFM Directive. These include provisions on capital requirements, third country funds, disclosure, structural and marketing issues. We are working closely with HM Treasury, the FSA, EVCA, other member states and policy makers (including MEPs) to make our case. Over the summer, the Swedish presidency has taken into account views of all member states on the directive and has produced an options paper on potential ways forward. Working group discussions continue from September, and the Directive will also start its process through the EU Parliament next month. Progress had been made in some areas, though it is clear there is still considerable work to be done on amending the directive to a point where it is workable for our members. UK Innovation Investment Fund (UKIIF) Following the announcement of the UKIIF by the Prime Minster, Lord Mandelson and Lord Drayson at the end of June, the BVCA has worked with the Department for Business to host a seminar on implementing the fund. The plan is to appoint a private sector fund of funds manager and then to leverage the government’s cornerstone investment of £150m significantly with private sector contributions. The fund will be deployed in to top performing VC funds in order to invest in to high growth technology businesses. The process of appointing the fund manager will be completed by the end of the year; the intention being to hold a first close shortly after that and to start making investments in the first part of next year. We are continuing to press upon the Government the importance of speed in getting the money out to struggling businesses.
Publication of the Quarter - From Funding Gaps to Thin Markets: UK Government Support for Early Stage Venture Capital September 2009: Nightingale, P., Murray, G., Cowling, M., Baden- Fuller, C., Mason, C., Siepel, J., Hopkins, M., and Dannreuther, C. ‘Hybrid’ venture capital schemes backed by private and public sector funding play an increasingly important role in the risk capital funding of early stage firms with the potential for significant growth. That is why BVCA and NESTA commissioned a consortium of key UK academics to analyse the impact of investment from six UK government-backed venture capital schemes on 782 funded firms over the period 1995-2008. The main findings of the report led to the following recommendations to the government: • Hybrid venture capital funds should be larger so that fund managers can invest in every stage of a firms growth and not become diluted in the later stages. • Venture capital funds with a commercial focus need to be able to select their investments from a large pool of high quality firms. Constraining funds to invest in geographically mandated areas is likely to have a negative impact on the size of the pool of firms they can invest in. This will limit their ability to specialise and generate commercial returns. There is therefore a potential tension between regional policy and innovation policy. To constrain investment in new technologies to a sub-national focus, and outside international centres of excellence, is particularly problematic. • The operational constraints that keep publicly funded VC funds operating within the ‘funding gap’ also generate significant costs. Many schemes constrain investment size and focus to ensure that government funds provide the small sums of risk capital that are not available from private VC funds. These constraints imposed by the public funders of hybrid programmes might need to be less rigorously applied if business angel network investment activity was increased, thereby providing more supply at the earliest stages of external finance. • Policy that focuses on filling narrow funding gaps can be counter-productive. Policies that fill ‘vertical’ gaps in finance by the specific provision of funds that address different levels of investment (e.g. maximum investment levels per portfolio firm of £50,000; £250,000 and £2million) can create artificial barriers between successive funding schemes that force growing firms to undertake disruptive and costly changes in their search for new or additional investors. Policy should focus on improving the flow of funding to high potential, growth oriented firms (through a ‘funding escalator) as they move from formation to a successful market exit. • The systemic approach to policymaking adopted by the UK government that encourages Business Angel networks and links entrepreneurship and innovation policy is a positive development. Therefore, they have the potential to support regional development ambitions without compromising their own economic viability. The full publication is available via the link: http://www.bvca.co.uk/home/Home-for-launch/features/BVCANESTAFromFundingGapstoThinMarkets Hybrid venture capital funds should be larger so that fund managers can invest in every stage of a firms growth and not become diluted in the later stages Summer 2009 BVCA Quarterly Brief 9
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