Private equity is long-term equity finance to unquoted (i.e. private) companies. As an asset class, private equity has existed since 1980s and is now an important feature of most established market economies. It also playing an increasingly important role in many rapidly developing economies.
Are there any useful statistics on private equity?
According to statistics published by the European Venture Capital Assocation (EVCA), across Europe, the private equity and venture capital industry as a whole invested some €71bn in 7,536 companies in 2006. Some 90% of these investments were made in companies with 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%).
EVCA statistics for 2006 show that private equity investment activity in the CEE region (not including Ukraine) increased dramatically in 2006, reaching €1.67 billion, a more than three-fold increase compared to 2005, and an all-time record.
Investment levels showed significant growth in almost all countries in the region, in particular Hungary, the Czech Republic and Poland. The amounts registered in Hungary and the Czech Republic were driven to a large extent by single large transactions in each country. Some 90% of the region’s investment activity in 2006 is concentrated in Hungary, the Czech Republic, Poland and Romania.
When comparing investment activity to GDP, the CEE region still lags behind Europe as a whole, although the gap is shrinking. In 2006, investment as a percentage of GDP in CEE reached 0.218%, or 39% of the Europe-wide average of 0.552%. In 2005, the CEE region represented 19% of the European average.
For more information visit www.evca.eu and/or (local association???).
How does private equity differ from venture capital?
Industry terminology varies, but it is a widely accepted norm that the term ‘private equity’ refers to later-stage investments in already established businesses. These later-stage investments are sometimes generalised as ‘buyouts’. ‘Venture capital’ is typically refers to earlier-stage investments in companies that require expansion capital.
Advent International focuses on mid-size investments between EUR 30 and EUR 100 million with the occasional larger transaction and does not make venture capital investments.
Looking at the type of investments an EVCA study revealed that buyouts represented 91% of the total transaction value reported in the CEE region (not including the Ukraine) in 2006, the highest proportion ever seen. This surpasses significantly the proportion of buyouts in Europe as a whole, recorded at 69%.
Buyout levels in CEE grew more than six times compared to 2005, indicating a clear focus and preference for this type of transaction among fund managers active in the region. Expansion capital transactions showed a decrease compared to 2005 and represented 5.7% of the total CEE investment value in 2006. It should not be interpreted that CEE investment targets are lacking growth perspectives, as most of the buyout targets were indeed growth companies. Start-up investments in 2006 recorded significant growth of over five times compared to 2005, primarily due to activity in Romania. However, start-ups remained low overall as a proportion of total investments at only 2.7% compared to 10.0% in Europe as a whole.
How does private equity differ from other forms of financing, such as bank debt, hedge funds or becoming publicly listed?
In simple terms, private equity takes a long-term shareholding in a business with the explicit objective of significantly enhancing its value within a 3-5 year time frame. It also plays an active role in the management and development of the company during that time.
It differs in two main ways from other forms of financing:
- Private equity firms purchase equity in a business.
- Debt financing, typically from a bank, is a loan which has to be repaid.
- A publicly-listed company raises capital from a public investor base which has a much shorter-term view on financial returns. Public markets like predictability of earnings and are less sympathetic to large-scale operational expenditure which, although in the longer-term interest of the business, might depress short-term earnings. Because a private equity firm typically invests in a business for 3-5 years, they take a longer-term view on value creation. Large scale operational expenditure is precisely the type of cost which private equity investors routinely commit to when backing a company, enabling the business to achieve clearly defined growth targets.
- Hedge funds. A hedge fund is similar to private equity in that it typically raises funds from sophisticated, professional investors. But this is where the similarity ends. Private equity seeks to create value over the longer term, whereas hedge funds are primarily interested in liquidity and therefore have a shorter-term timeframe on seeking returns from an investment. For this reason, hedge funds generally only invest in publicly-traded companies, typically taking a minority stake. Again unlike private equity, they do not play an active role in the management or development of companies.
Active ownership: Unlike banks, hedge funds or public shareholders, private equity investors play an active role in the management and development of the companies they own. Typical activities include: enabling a growth strategy; professionalising a company; offering on-going support to the management on strategic and policy matters; representing a broader perspective on corporate development; providing management expertise and acting as a sounding board for management ideas; facilitating networking opportunities/industry connections; financing, targeting and assistance with mergers and acquisitions.
Where do private equity houses get their money from to buy companies?
Private equity houses deal almost exclusively with sophisticated, professional investors such as private and public pension funds, insurers, charities, universities, private, high-net-worth family offices and other informed investors.
They regard private equity as an asset class from which they can generate a return on their capital. Other asset classes in which investors might typically invest are quoted markets, government bonds etc.
As a business owner, why should I consider selling to Advent?
For owners or founder shareholders who have an interest in seeing the continued growth of their business as an independent entity private equity presents a good solution. Many owners are also attracted by the fact that a private equity investor is an experienced, like-minded shareholder who is committed to taking a business to the next level, rather than simply acquiring its customer base, market share or assets. Many owners also like to consider the future interests of their management team, whose members will have made a significant contribution to the successful development of the business. Private equity firms typically incentivise existing management teams when they acquire a business, enabling them to participate in its continued success.
Does Advent typically take a minority or majority ownership position in companies?
Advent most commonly takes a majority shareholding in a company but will also consider minority shareholdings where we are working with like-minded shareholders.
Does the seller typically retain any ownership in the company after Advent invests?
In most cases, private sellers retain a shareholding in the business. Corporate sellers typically don’t.
What happens to the management teams of companies in which Advent invests?
Our philosophy is one of backing management teams. In most cases, the original management team, or core members of the team, will stay with the business. However, given that our portfolio companies are often striving to meet ambitious growth targets, we do sometimes have the requirement for additional, complementary management expertise. This can be introduced in a variety of ways, including executive and non-executive appointments and through the involvement of specialist industry advisers from our Operating Partner programme.
Can the management team invest in the company alongside Advent or, if they already own an equity interest, retain partial ownership?
Yes. It is Advent’s philosophy to align management team interests with ours, hence we like to be able to offer equity participation to management teams.
Does Advent use external debt as well as equity to finance its investments?
Yes, we do use third party debt financing as well as equity to finance our investments. This is typical industry practice. However, we take a very prudent approach to its use.
How does the investment decision making process work?
All stages of the investment decision-making process are conducted in the strictest confidence and with appropriate sensitivity and discretion.
The process begins with the initial screening of an opportunity. In the business plan, we like to see a description of the market opportunity, what differentiates the product or service you are offering, the historical and projected financial statements for the business (including capital structure), management qualifications, marketing and sales strategy, and the expected use of financing proceeds.
After the initial review, the next step involves meetings with your company's management, enabling us to get to know each other and discuss the business in greater depth.
The decision to invest is made by a regional investment committee. Having made over 500 investments, we are very experienced at executing transactions quickly and efficiently, and this is always our aim.
What’s it like to work with Advent? How much involvement will you have with the business?
We are an involved investor who likes to establish a collaborative partnership with management teams. We will sit on the board of the business and have a close involvement with overseeing strategy. We also pay close attention to financial reporting. We do not, however, get involved in the day-to-day operations of the business, which is the core expertise of the management team.
How does Advent help to develop companies?
Advent helps develop companies in multiple ways. Firstly, we commit capital. Secondly, we bring to bear our in-depth sector knowledge and often first-hand experience of working with companies in similar situations. Through our extensive international industry networks we are also able to offer our companies access to market intelligence, industry experts and general contacts that might otherwise be difficult to access. We also offer direct support and advice on activities such as mergers and acquisitions.
What advantages does Advent have over other private equity firms?
- Depth of sector expertise: Many private equity firms adopt a specialist sector focus, but few have been involved in their sectors for as long as we have (nearly two decades in most cases), nor have such an international perspective on their chosen sectors. Our investments within any particular sector often span four continents.
- Local market knowledge: Local market knowledge is imperative to helping companies achieve their full growth potential, whether at a domestic, regional or international level. Having an established local presence is at the heart of Advent’s philosophy and our office network (each of which has an established team of local nationals) is unrivalled both regionally and globally.
- International networks: Today, all business are impacted to one degree or another by globalisation. The result is enhanced opportunity, but also increased threats. International best practice is now a necessity for all companies. With our unrivalled combination of international reach and local on-the-ground resources, Advent’s international networks provide an invaluable source of support to portfolio companies.
- Track record: Spanning multiple sectors and geographies, and established over two decades, Advent’s track record is the most powerful evidence of how successful we are in helping our portfolio companies to develop. More broadly, we are widely recognised as one of the industry’s most influential global private equity investors. This is reinforced by over 20 industry firsts and multiple awards across all the regions in which we invest.
How long does Advent remain an investor in a company?
This is dependent on the development of the company concerned, but our typical investment period is between 3-5 years.
How does Advent realise (exit) its investment?
The exit decision is taken in conjunction with the company’s management team, board and other shareholders. Which route is chosen is determined by the individual and market circumstance of the company involved. The most common exit routes are through trade sale or IPO. In some circumstances, the business might be acquired by another private equity firm.
EVCA statistics highlighted that exit activity (measured by cost of investment) in the CEE region increased slightly in 2006 compared to 2005, by some 5%. Trade sales remained the most important exit route, comprising 47% of the divestment activity. Public market exits increased significantly to comprise 18% of total divestments, still slightly ahead of the 16% recorded in Europe as a whole.
Of notable increase was the proportion of sales to other private equity firms, popularly known as “secondaries”. In 2006, this route comprised nearly 13% of the exits, far above the 6% recorded in 2005 and increasingly close to European levels. Polish transactions remained the largest source of exit activity in CEE in 2006 at 31% of total reported activity.