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U. S. Competitiveness and Private Equity
Karen G. Mills kmills@mmpgroupinc.com
Council of Foreign RelationsDecember 13, 2005
The rise of private equity in Asia: opportunity or threat?
2
Asia will become an increasingly viable venue for private equity deals
Opportunity InfrastructureEnvironment/
Market Support
Available companies or technologies
Strong end markets
Brokers to deliver deal opportunities
Experienced investors
Consortiums to share risk
Support Industries
Legal
Accounting
Investment Banking
Industry Associations
Regulation
IPO Market
M & A Market
3
1%
65%
34%
Asia:Capital
Invested
5.1
(6)
(77)
(15)
No. of Deals
Investments are growing but little is venture
Asian Private Equity2005 January-June ($Billions)
58%
28%
14%Venture
Expansion/Growth
Buyouts 55% growth vs. YAG
Asia: Funds Raised
5.6
Source: Asian Private Equity Review
Other 1.6
India .5
Korea .7
China .8
Japan 1.5
Investment: By Country
5.1No. of Deals
(11)
(22)
(2)
(42)
(11)
4
Firms raising funds or investing funds in Asia in the first half of 2005:
Specific Asia Funds
$650 – 2 BillionAllocating Existing
Funds to Asia
• Affinity Capital• CVC Capital Partners
(Citicorp Venture)• Castle Harlan• CRCI• HSBC Private Equity• CCMP (Formerly JP Morgan)• Mitsubishi• SAIF (Formerly Soft Bank
Asia)• Unison
• Blackstone• Carlyle• General Atlantic• KKR• T. H. Lee• Warburg Pincus• Ripplewood Holdings
Source: Venture Capital Journal
5
Latest news for foreign investors is mixed
Country Recent Actions
Θ Korea Current civil and criminal investigations of seven U.S. and European private equity firms
Θ China New regulation in November 2005 creates more restrictions on establishing foreign venture backed companies
+ India Lifted ownership restrictions by foreign investors in telecom
+ Japan Relooking at more positive treatments of foreign direct investment
6
Why do we care?
The dynamism and transparency of American Capital markets have historically served as a powerful contributor to U.S. innovative capacity”
- Scott Stern CFR 2005
We worry
• Will there be enough capital for U.S. opportunities?
• Will Non-U.S. innovative capacity grow to rival ours?
7
Last year $57 billion was invested in private equity
Source: 2004 NVCA Year Book
Capital Commitments to Private Equity Funds 1979-2003
8
Institutions not individuals provide most of the funds
Source: 2004 NVCA Year Book
Private Equity Commitments By Limited Partner Type
9
Private equity is beginning to operate as a global business
Sources of Private Equity Capital
Operating / Tax Home of Funds & Principals
Geography of Investments
Non-U.S. Government
Non-U.S Private
U.S.•State Pension
Funds•Endowments•Other Private
Non-U.S. Government
Non-U.S. Private
U.S. based
Other Markets
Latin America
Middle East
Asia
Europe
U.S.
Return of CapitalIllustrative
10
Non-U.S. investments in private equity are accelerating
Source: Greenwich Associates
U.S. Continental Europe
U.K. Canada Japan
41
3
27
9
20
8
14
14
4
4
44
28
28 28
8
Percent of institutions investing in private equity
Now Invest
Plan to Invest
U.S. Continental Europe
U.K. Canada Japan
41
27
20
14
4
9
8 14
4
3
44
28
28 28
8
Percent of Institutions that invest in Private Equity
Now Invest
Plan to Invest
Now Invest
Plan to Invest
11
DISCOVERY
How does innovation translate into American jobs?
Basic Research
Invention
Innovation
Commercialization Growth
BUSINESS FORMATION JOB CREATION
• Large Company Expansion
• Entrepreneurship
12
Venture Backed Growth2000-2003 Percentage Change
12%
7%
-2%
7%
5 pp
9 pp
Sales Growth Job Growth
Venture capital backed companies grow faster and create more jobs
Source: National Venture Capital Association; Global Insights study
Venture Backed
Total U.S. Venture Backed
Total U.S.
13
Venture capital funding spurs innovation more powerfully than R&D
* Innovation is measured by patent production
Source: Samuel Kortum and Josh Lerner, RAND Journal of Economics, Winter 2000
VC Spending as a percent of R&D(1983-1992)
Percent of Industrial Innovation*accounted for by VC Backed Firms
(1983-1992)
Percent accounted for in 1999
3%
8%
14%
14
Venture and buyout investing are quite different
Venture Buyout
Small deal size
Early stage
High risk
More likely technology
driven
More consortium
investing
Control stake
Return comes from:
• Leverage
• Multiple expansion
• Growth
15
Capital Commitments to Private Equity Funds
Buyouts and Mezzanine capital is also being used to grow businesses
Source: 2004 NVCA Year Book
Other Private Equity Capital
Buyouts and Mezzanine Capital
Venture Capital
16
The trend is clear; the effect on the U.S. is unknown but not worrisome
1. Non-U.S. capital will be increasing investments in private equity of all kinds.
2. Non-U.S. deal opportunities will be increasingly attractive to U.S. based capital.
3. Private equity skills and market support will increase rapidly in non-U.S. markets particularly Asia.
4. There is no evidence that U.S. interests will be harmed.
17
Karen Gordon Mills
Karen Gordon Mills was a Founder and Managing Director of Solera Capital, a private equity fund based in New York City. She has been in the industry since 1983 and is an expert in investing and growing companies in traditional U.S. based industries such as food, textiles, media and industrial components. Some of these companies and brands include Telex Communications, Mrs. Fields Cookies, Bruce Hardwood Floors and Annie’s Macaroni and Cheese. Her background also includes consulting for McKinsey & Co. and product management at General Foods.
Ms. Mills received her A.B. from Harvard University in Economics in 1975 and her MBA from Harvard Business School in 1977, where she was a Baker Scholar. She currently serves on the Boards of the Scotts Company and Arrow Electronics.
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