David Bernard Munich, 23 February 2005 Thomson Venture Economics Benchmarking Private Equity T H O M S O N F I N A N C I A L EVCA Institute - Financial Officer and Fund Administration Course

T H O M S O N F I N A N C I A L 23 February Overview What are we measuring and why is it so difficult? What/how do we benchmark? What are the actual results for the industry?

T H O M S O N F I N A N C I A L 23 February Current Environment Recent calls for more transparency as to how public pension funds private equity investments are doing (FOIA) What is the return being reported? How was it derived? How can you put it in context? Valuation guidelines (

T H O M S O N F I N A N C I A L Part 1 What are we measuring and why is it so complicated?

T H O M S O N F I N A N C I A L 23 February Is a return of 200% good enough? A return of 200%? –200% total return: having invested €1, we get €2 back –200% percentage change: we get €3 back (let’s assume this) Over what time period? –Over two years -- great at 73% per year (1.73^2=3) –Over ten? --- hmmm!! At 11.6% (1.116^10=3) Is it return on the investments the fund made or is it the return to the investors in the fund? Time Weighted/IRR/Realisation/Horizon?

T H O M S O N F I N A N C I A L 23 February Why the difference with most stock indices? You can’t just look at the value at two points in time, i.e. today and some point in the past, with no transactions or cashflows in between – it would assume that you buy and hold You don’t invest the money all at once, you also take money out over a period of time So with investments either in private equity or any investment manager, if you have cashflows in and out of an investment, simple percentage change/total return calculations can no longer be done to get the true Return On Investment. So we turn to IRR, a form of ROI that takes the time value of money into account as it accounts for the timing of the transactions in the investment

T H O M S O N F I N A N C I A L Part 2 What/how do we benchmark?

T H O M S O N F I N A N C I A L 23 February How do you put this fund return in context? Return is mathematical algorithm – it is an absolute measure Performance is a relative measure – can only be determined by comparing return to something else – for example past returns, benchmarks, etc. So you need a benchmark

T H O M S O N F I N A N C I A L 23 February Why a benchmark: the Naïve Investor example Investor has choice of two investments Other things being equal, with no additional information – optimal allocation for naïve manager is So any decision you make different than this should be better performance – so benchmark is performance of allocation So you are benchmarking the decision of the allocation That’s why public indices is used so often in stock market benchmarks – it’s the naïve manager decision Any investment decision you make different than allocation to S&P500 should be better if you are worth the fees you are being paid

T H O M S O N F I N A N C I A L 23 February Whose decision are you benchmarking? Several decisions to benchmark for the LP investor –The allocation to private equity –The allocation between private equity sub asset classes –The temporal (timing) decision of when to invest –The decision of one manager over the other –(The investment decision of the fund)

T H O M S O N F I N A N C I A L 23 February 2005 Principal benchmarks Cumulative IRR Cumulative Realisation Multiples (Cash-in/Cash-out) Time Weighted Return Investment Horizon Return Public Market Comparables – Index method

T H O M S O N F I N A N C I A L 23 February Which benchmark to use – The LP Investor Benchmark the decisions under the control of the manager –If time is under control of the manager – timing of investments should be rewarded / penalised – so use IRR – either cumulative or investment horizon –If time is not under control of the manager – use Time Weighted Return that takes time out of the calculation of the benchmarks Several decisions to benchmark –The allocation to private equity – time weighted return –The allocation between private equity sub asset classes – time weighted return –The temporal (timing) decision of when to invest – investment horizon or cumulative IRR –Decision of one fund over the other – cumulative portfolio IRR* –The investment decisions of the fund – IRR/realisation by vintage year * AIMR, GIPS, standard practice

T H O M S O N F I N A N C I A L 23 February Some definitions (1/2) Limited Partners Private Equity Firm (General Partners) Fund I Fund II Company 1 Company 2 Cash take-down Cash/stock distribution Takedown : actual money paid into partnerships, a.k.a. capital calls, paid in capital Distributions : cash or stock returned to LP investors NAV (net asset value*), a.k.a. residual value: ending value of the fund for the period being measured – net of management fees and carry Vintage Year: year fund started investing Pooled Return: portfolio return by pooling cashflows Management fees Carry * as calculated and reported by the GPs

T H O M S O N F I N A N C I A L 23 February Some definitions (2/2) Best fund Worst fund IRRs in decreasing order Maximum IRR Upper Quartile Median Lower Quartile Minimum IRR Top Quarter 2 nd Quarter 3 rd Quarter 4 th Quarter …

T H O M S O N F I N A N C I A L 23 February Fund Returns Calculations Cash / stock returns to investors = ‘Distribution’ Invested capital = ‘Paid-In’ time Principal metric is IRR since inception calculated net to limited partner. Beginning point is fixed, endpoint is variable The IRR is calculated as an annualised effective compounded rate of return using daily cash flows and annual/quarterly valuations. The IRR is the return (discount rate) that will equalise the present value of all invested capital with the present value of all returns, or where the net present value of all cash flows (positive and negative) is zero: where CFi is the cash flow for period i (negative for takedowns, positive for distributions) r -i

T H O M S O N F I N A N C I A L 23 February Typical Fund Cashflow - Simple example of IRR calculation YearTakedownsDistributionsNAV 1992(5,201.8)5, (12,749.5)17, (15,299.4)32, (5,099.8)7, , (5,099.8)73, (7,649.7)30, , , , , , IRR + -12,749.5 (1 + IRR) (1 + IRR) 3 = 0 -5, , , Column A Row 1(5,201.8) Row 2(12,749.5) Row 3(15,299.4) Row 452,016.3 THE RAW DATATHE CALCULATION IN MS EXCEL THE FORMULA =irr(A1:A4,0) =28.9%

T H O M S O N F I N A N C I A L 23 February Cashflows for Cumulative Returns CF series to 1993 CF 1994CF 1995CF 1996CF 1997CF 1998CF (5,201.8) 19934,550.7(12,749.5) ,946.6(15,299.4) ,016.32, ,677.3(5,099.8) , , , , ,531.5 IRR-12.5%-4.4%28.9%32.5%29.4%20.7%17.9% Series of actual annual cash flows with NAV added as a positive cash flow in last year 17, ,749.5

T H O M S O N F I N A N C I A L 23 February Cumulative IRR Returns DPI = Distributions / Paid In Ratio, a.k.a. realised multiple RVPI = Residual Value / Paid In Ratio, a.k.a. unrealised multiple TVPI = DPI + RVPI YearTakedownsDistributionsNAV Cumul IRR DPIRVPITVPI 1992(5,201.8)5, (12,749.5)17, % (15,299.4)32, % (5,099.8)7, , % (5,099.8)73, % (7,649.7)30, , % , , % , , %

T H O M S O N F I N A N C I A L 23 February 2005 Time Weighted Returns Time weighted return calculates a return for each period – quarterly, annually Beginning point is variable, endpoint is variable Calculate using net asset value at beginning and end of period and cashflows between periods Calculate IRR for each period and then compound together Shortfalls –Creates aberrations: · % = 120 · % = 96 –Returns heavily dependent on valuations. Wrong valuations affect future returns –Assumes money can come and go freely at the beginning and end of each period

T H O M S O N F I N A N C I A L Time Weighted Returns

T H O M S O N F I N A N C I A L 23 February Cashflows for Time Weighted Returns Year 1Year 2Year 3Year 4Year 5Year 6Year (5,201.8) 19934,550.7(17,300.2) ,946.6(32,246.0) ,016.3(49,128.1) ,677.3(73,777.1) ,537.2(66,416.4) ,594.6(38,853.7) ,531.5 TWR-12.5%-2.0%61.3%39.8%21.4%-16.3%-6.0% 32, ,299.4

T H O M S O N F I N A N C I A L 23 February YearTakedownsDistributionsNAVTWR Cumul total return Cumul annual return 1992(5,201.8)5, %0 1993(12,749.5)17, %87%-13% 1994(15,299.4)32, %86%-7% 1995(5,099.8)7, , %138%11% 1996(5,099.8)73, %193%18% 1997(7,649.7)30, , %235%19% , , %196%12% , , %185%9% Time Weighted Returns

T H O M S O N F I N A N C I A L 23 February Investment Horizon Return Calculates backwards – what is the return over the last 1 year, 3 years, etc. Came about because some funds are quick out of the gate but LPs want to know – what have they done for me lately Indicates what impact overall market is having most recently Beginning point is variable and endpoint is fixed IRR is calculated for each “investment horizon” IRR is calculated net to limited partner Composites are calculated on a “pooled” basis as if from one investment

T H O M S O N F I N A N C I A L Investment Horizon Return

T H O M S O N F I N A N C I A L 23 February Cashflows for Horizon Returns 1-year2-year3-year4-year5-year6-year7-year 1992(5,201.8) 1993(17,300.2)(12,749.5) 1994(32,246.0)(15,299.4) 1995(49,128.1)2, (73,777.1)(5,099.8) 1997(66,416.4)23, (38,853.7)16, , %-12.2%1.6%11.9%22.5%19.2%17.9% Series of actual cash flows during the period, with NAV at the end added as a positive cash flow in last year, and NAV at the beginning added as a negative cash flow at beginning 11, ,046.8

T H O M S O N F I N A N C I A L 23 February 2005 So what do you have to ask to benchmark appropriately? Net IRR annualised since inception, net of fees and carried interest compounded at least quarterly, preferably daily The vintage year (be sure it agrees with Thomson Venture Economics’ vintage year – the year of the first capital call whether for investment or just management fees) Optional – total distributions, total paid in capital, ending NAV

T H O M S O N F I N A N C I A L Part 3 What are the actual results for the industry?

T H O M S O N F I N A N C I A L 23 February Thomson Venture Economics Private Equity Performance Database Maintained by Venture Economics since 1988, online since US Funds formed European Funds Other International Funds formed Available through Annual Benchmarks Reports & Online in VentureXpert, where you can define your own performance sample (by country, vintage, size, focus, etc.)

T H O M S O N F I N A N C I A L 23 February

T H O M S O N F I N A N C I A L 23 February 2005 Sources 1/2 from partnerships on behalf institutional investor clients who contract our benchmarking services 1/2 directly from Partnerships who need data for their own benchmarking and fund raising needs Since we get data from LPs in addition to GPs there is not a consistent or significant self reporting bias We calculate IRR ourselves – do not use self-reported IRRs – use the underlying cashflows to calculate the return – verify against general partner financial reports to LPs We treat confidentiality very carefully – all data reported is strictly anonymous

T H O M S O N F I N A N C I A L 23 February Example Vintage Year Performance Benchmarks All European PE Funds Formed Returns Since Inception Net to Investors as of 31-Dec-2003 VintageNumber Average IRR Pooled IRR Max IRRMed IRR Pooled DPI %9.2%13.0%10.5% %8.6%11.0%6.3%2.11 ………………… %-2.8%169.0%-1.6% %1.5%154.9%-11.3% %-11.7%66.4%-12.1% %-13.7%76.5%-19.5% %-14.6%0.2%-2.5%0.00 Source: Thomson Venture Economics (VentureXpert database)

T H O M S O N F I N A N C I A L 23 February 2005 European Private Equity IRRs by Vintage Year as of 31-Dec-03 Source: Thomson Venture Economics (VentureXpert database)

T H O M S O N F I N A N C I A L 23 February 2005 European Private Equity Realisation Multiples (DPI/RVPI) by Vintage Year Source: Thomson Venture Economics (VentureXpert database)

T H O M S O N F I N A N C I A L 23 February 2005 European Private Equity Annual Year to Year Returns (Time Weighted) Source: Thomson Venture Economics (VentureXpert database)

T H O M S O N F I N A N C I A L 23 February Five Year Performance Trends US Venture vs. Buyouts as of 31-Dec-2003 Source: Thomson Financial

T H O M S O N F I N A N C I A L 23 February Five Year Performance Trends First Quartile Funds US Venture vs. Buyouts vs. stocks Source: Thomson Financial

T H O M S O N F I N A N C I A L 23 February US Private Equity Performance Benchmarks US Limited Partnerships Formed Returns Since Inception Net to Investors as of 31-Dec-2003 StageNumberPooled IRRAverage DPIStd Deviation Manager Risk Coefficient Seed Capital6310.5% %3.5 Early Stage % %3.2 Balanced % %1.9 Later Stage % %2.2 All Venture % %3.0 Buy-outs 0-$250m % %2.5 Buy-outs $250-$500m % %2.2 Buy-outs $500-$1bn7913.5% %1.6 Buy-outs $1bn % %2.6 All Buy-Outs % %3.0 Mezzanine639.6% %1.4 All Private Equity % %3.5 Source: Thomson Financial’s VentureXpert database

T H O M S O N F I N A N C I A L 23 February Comparators* Public Market Equivalents Returns as of 31-Dec-2002 *Comparators are Internal Rates of Return (IRR). IRRs for public market indices are calculated by investing the equivalent cashflows that were invested in private equity into the public market index. Then an equivalent IRR is calculated for each index.

T H O M S O N F I N A N C I A L 23 February 2005 European vs. US Private Equity Cumulative IRR Since Inception by Calendar Year inception=31-Dec-1979 Source: Thomson Financial’s VentureXpert database

T H O M S O N F I N A N C I A L 23 February 2005 European Private Equity Five Year Rolling IRRs Funds Formed Source: Thomson Financial’s VentureXpert database

T H O M S O N F I N A N C I A L 23 February 2005 European Private Equity Funds Formed Net Returns to Investors From Inception to 31-Dec-2003 StageNumber Pooled IRR Upper Quartile DPIRVPITVPI Early Stage2301.7%5.3% Development1619.1%8.5% Balanced1259.0%11.2% All Venture5167.2%7.4% Buy-Outs %16.8% Generalist749.2%6.9% All Private Equity %11.0% Source: Thomson Financial’s VentureXpert database

T H O M S O N F I N A N C I A L 23 February 2005 European Private Equity Funds Formed Net Investment Horizon Return as of 31-Dec year3-year5-year10-year20-year Early Stage-13.6%-11.7%-2.1%1.1%1.7% Development-7.3%-4.8%4.7%10.8%9.1% Balanced-5.2%-10.2%4.3%12.4%9.0% All Venture-7.8%-9.2%2.3%8.3%7.2% Buy-Outs1.5%1.6%10.1%13.1%12.5% Generalist1.4%-10.4%8.1%14.7%9.2% All Private Equity-0.8%-3.5%7.6%12.1%10.0% Source: Thomson Financial’s VentureXpert database

T H O M S O N F I N A N C I A L 23 February Want to know more? VentureXpert, the most complete private equity database globally ( –Profiles and directories (LPs, firms & funds, portfolio companies) –Analytics (includes investments, divestments, fund raising, fund performance) For your data contributions and surveys: