Corporate GovernanceA view from the private equity world

John Mackie Chief Executive

Agenda

• Introduction to private equity• Prior to investment• Post investment• Key issues

Introduction toprivate equity

• Largest market after US

• UK accounts for one third of total European investment

• £80 billion plus under management

• BVCA represents vast majority of private equity/venture capital in the UK (171full members and 154 associates)

• £6.2 billion invested in 1,597 companies in 2001

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

£millions

Growth of investment by BVCA members in UK firms 1984 -

2001

Economic impact of private equity

•Private Equity backed companies create more jobs– People employed increase 23% p.a.– Almost 3 million people work in private equity backed companies

•Private Equity backed companies boost the UK economy– Sales rise by 30% p.a.– Exports grow by 20% p.a. (national growth rate 2.9%)– Investment increases by 25% (national growth rate 2.3%)

2001 Performance Measurement

The net returns of private equity funds raised between 1980 and 2001 measured to 31.12.01

One year - 7.1%Three year 13.0% paFive year 15.7% paTen year 17.4% pa

Highlights of 2001 Performance Measurement

• Over one, three, five year and ten years outperformed the FTSE 100 and the FTSE All-Share Indices

• The overall long-term (since inception) net return to investors now stands at 16.2%

Prior to investment

Prior to investment

Timescale 3-12 months

Business plan – strategic – market

– financials

Prior to investment

Due diligence - legal- accounting- market-

environmental

Prior to investment

Management - references- change/supplement- new environment- financial

commitment- equity upside

Prior to investment

Milestones - financial- operational- drawdown

Prior to investment

Shareholder agreement - remuneration- reporting- Board representation- acquisitions/disposals- borrowing- share issues

Prior to investment

Exit planning - trade sale- IPO- refinancing- value

maximisation

Prior to investment

- A mass of detailed information about the business, its markets, management, opportunities, threats

- A detailed agreement on governance, monitoring, decision taking, forward planning

Post investment

Post investment

- Shareholder Director(s)- Independent Director/Chairman- Continuous monitoring

Post investment

- Strategic input- Management change- Acquisitions

Post investment

- Development capital- Growth- Exit planning

Key issues

Key Issues

- Real shareholder involvement- Board representation- Management

change/development

Key Issues

LeverageAlignment of interestsGood governance = more value