86<strong>The</strong> <strong>Global</strong> <strong>Economic</strong> <strong>Impact</strong> <strong>of</strong> <strong>Private</strong> <strong>Equity</strong> <strong>Report</strong> <strong>2008</strong>
European private equity cases: introductionann-kristin achleitnerTechnische Universität Müncheneva nathusiusTechnische Universität MünchenKerry hermanHarvard Business Schooljosh lernerHarvard Business School<strong>Private</strong> equity in Europe traces its roots back to the mid1930s, with the formation <strong>of</strong> investment groups such asCharterhouse Development Capital (1934) and 3i (1945) inthe UK. Differences in post‐Second <strong>World</strong> War economiesand focus informed these groups’ activities compared totheir US counterparts. Early private equity in Europe wascharacterized by shortages <strong>of</strong> long‐term capital availableto smaller companies; this originally prompted the Bank<strong>of</strong> England and UK clearing banks to focus on companiesfacing funding gaps. In contrast, early US players, such asAmerican Research Development Corporation (ARD), raisedinstitutional capital via publicly traded, closed‐end investmentcompanies to pursue the commercialization <strong>of</strong> newtechnologies developed in the war, characterizing futuredirections in the industry in that country. 1Europe’s private equity industry remained highly fragmenteduntil 1970, with a limited number <strong>of</strong> private equity investors.Overall, it was a less popular asset class than more traditionalvehicles such as stocks, bonds or real estate. In the early1970s, however, private equity investments began to take<strong>of</strong>f in Europe. However, conditions were tough; leverage wasunheard <strong>of</strong>, small deals were typical, and investors practisedextreme discipline in their deal selections; on the other handcompetition was virtually nil. 2<strong>The</strong> environment for private equity improved with changes toinvestment rules and tax regulations. Institutional investors,such as banks and pension funds, were allowed to undertakemore diverse investments with the Bank <strong>of</strong> England’s‘Competition and Credit Control’ policy shift in 1971. This gaveUK banks more flexibility to invest in a range <strong>of</strong> vehicles, andopened their c<strong>of</strong>fers to private equity. Similar legal reformsrelaxing investment rules for institutional investors followed inother European countries and were a key catalyst for thedevelopment <strong>of</strong> the European private equity market. Inaddition, tax regulation changes across Europe madeinvestments in asset classes that provided capital gains moreattractive, further fueling private equity investment growth. 3Support from US institutional investors, particularly to some<strong>of</strong> the more established partnerships such as Schroders andApax Partners, continued to fuel growth.By the mid 1990s, accelerated by a low inflation environment,European private equity entered a period <strong>of</strong> rapid growth,and favoured investors who created conditions for growthin portfolio companies. 4 Liberalization across Europe’seconomies continued. In Germany, for example, the legacy<strong>of</strong> cross‐shareholding in a company, with stakes held acrossbanks, insurers and leading industrial companies – originallyinstalled to protect companies from takeover – was dismantled.Chancellor Schroeder’s government designed a system <strong>of</strong> taxincentives which enabled these stakeholders to divest theirholdings in order to focus instead on core activities. 5Despite the turmoil <strong>of</strong> capital markets, specifically technologymarkets in 2000, and a slower growth in private equity in2001, the private equity market continued to grow, drivenprimarily by later‐stage buyout deals and the entry <strong>of</strong> manymajor US‐based funds, with a resulting surge in mega‐deals.Analysts reported increased interest in private equitythroughout Europe, with institutional investors increasing theirallocations and foreign pension consultants recommendingtargets for the first time. 6 Pension funds were quicklybecoming the largest investors, with banks and insurancecompanies not far behind. 7 This positive trend continued,driven primarily by increasing volumes and returns inlater‐stage mid‐sized and large buyouts. Between 1994and 2006, portfolio volumes saw compound annual growth<strong>of</strong> 20.4% (see Exhibit 1 for development <strong>of</strong> European privateequity portfolio volumes). 81Alex Bance, “Why and How to Invest in <strong>Private</strong> <strong>Equity</strong>”, An EVCA Investor Relations Committee Paper, Zaventem, March 2004.2Phil Davis, “‘Greed rampant at the moment’,” Financial Times, 3 December 2007, p. 9.3Alex Bance, “Why and How to Invest in <strong>Private</strong> <strong>Equity</strong>”, An EVCA Investor Relations Committee Paper, Zaventem, March 2004.4As Bance notes, a low inflation environment “created a particular need for growth stocks and highlighted a core skill <strong>of</strong> private equity managers,namely creating conditions for growth in portfolio companies.” Alex Bance, “Why and How to Invest in <strong>Private</strong> <strong>Equity</strong>”, An EVCA Investor RelationsCommittee Paper, Zaventem, March 2004.5Paul Betts, “Will Deutschland AG battle with the giant locusts?” Financial Times, 8 November 2007, p. 14.6According to Paris Europlace Financial Forum, “New Trends and opportunities in the <strong>Private</strong> <strong>Equity</strong> market in France and in Europe”, 5 July 2001,http://www.axaprivateequity.com/gb/Press/documents/newtrends.pdf, accessed 10 November 2007.7According to Paris Europlace Financial Forum, “New Trends and opportunities in the <strong>Private</strong> <strong>Equity</strong> market in France and in Europe”, 5 July 2001,http://www.axaprivateequity.com/gb/Press/documents/newtrends.pdf, accessed 10 November 2007.8“EVCA Yearbook 2006”, European <strong>Private</strong> <strong>Equity</strong> & Venture Capital Association, Zaventem, 2006; “EVCA Yearbook 2007”, European <strong>Private</strong> <strong>Equity</strong>& Venture Capital Association, Zaventem, 2007.<strong>The</strong> <strong>Global</strong> <strong>Economic</strong> <strong>Impact</strong> <strong>of</strong> <strong>Private</strong> <strong>Equity</strong> <strong>Report</strong> <strong>2008</strong> Case studies: European private equity cases: introduction 87
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The Globalization of Alternative In
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ContributorsCo-editorsAnuradha Guru
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PrefaceKevin SteinbergChief Operati
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Letter on behalf of the Advisory Bo
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Executive summaryJosh lernerHarvard
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• Private equity-backed companies
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C. Indian casesThe two India cases,
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Part 1Large-sample studiesThe Globa
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The new demography of private equit
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among US publicly traded firms, it
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should be fairly complete. While th
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according to Moody’s (Hamilton et
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draining public markets of firms. I
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FIguresFigure 1A: LBO transactions
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TablesTable 1: Capital IQ 1980s cov
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Table 2: Magnitude and growth of LB
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Table 4: Exits of individual LBO tr
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Table 6: Determinants of exit succe
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Table 7: Ultimate staying power of
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Appendix 1: Imputed enterprise valu
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Private equity and long-run investm
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alternative names associated with t
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4. Finally, we explore whether firm
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When we estimate these regressions,
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Exhibit 1: Summary information on 3
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Exhibit 6: An excerpt from the 180-
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Indian private equity cases: introd
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ICICI Venture and Subhiksha *Lily F
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investment,” recalled Deshpande.
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2005 - 2007: Moderator, protector a
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Exhibit 3: Subhiksha’s board comp
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Warburg Pincus and Bharti Tele‐Ve
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founded two companies at this time
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By 2003 this restructuring task was
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Exhibit 1C: Private equity investme
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Exhibit 4B: Bharti cellular footpri
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Exhibit 6: Summary of Bharti’s fi
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Exhibit 7: Bharti’s board structu
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In the 1993‐94 academic year, he
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consumer products. She was also a R
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AcknowledgementsJosh LernerHarvard
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The World Economic Forum is an inde