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Financial and Real Estate Funds

Austria*Bright Prospects for Your Investment

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Editorial

Owner&Publisher Austrian Business Agency Editor-in-Chief: Renè Siegl Associate Editors: Maria Hirzinger, Karin Schwind-Derdak, Clifford Stevens Print: Digital Druck Donau Status: January 2007 Austrian Business Agency Opernring 3, A-1010 Vienna Tel.: +43-1-588 58-0 Fax: +43-1-586 86 59 office@aba.gv.at www.investinaustria.at

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Content

Content ......................................................................................3

Hot Spot for Risk Capital............................................................4

Companies and Deals ................................................................5

Impetus for the Venture Capital Market ...................................6

High Demand – Growing Supply...............................................8

Companies ...............................................................................10

Systematic Approach to Service ..............................................11

4

70,3

10,2

6,8

4,8

4,6

2,3

1

B anks

Pub lic sect or

Insurance companies

N ot specif ied

Pr ivat e invest ors

U mb rella f unds

C orp orat e

In Austria, in %, 2005Sources of private equity financing

Soruce: EV C A Y earboo k 2 0 0 6

24,8

14,6

12,9

10,3

8,6

7,8

5,6

5,3

3,9

3,8

1,1

0,7

0,6

Inf o rmat io n t echno lo g y

Indust rial p ro duct s

C o mmunicat ions

C hemicals

Elect ro nics

Pro duct io n

B io t echno lo g y

M edicine / Healt h

C o nsumer g oo d s

C onst ruct io n

T ransp ort

Energ y

Ot her

2005, in %Investments in Austria by sector

So urce: EV C A Y earb oo k 2 0 0 6

Hot Spot for Risk Capital Booming Austrian venture capital and private equity market

The venture capital market is booming. In 2005, the growth rate in the European VC market amounted to 27 per cent. According to UNCTAD, private equity firms are playing an increasingly important role in foreign direct investment activity. In a recent market study, Strategic Capital Management (SCM) based in Switzerland confirmed that the upward trend is expected to continue in 2007. Around 30 venture capital companies are operating in Austria. The average volume of the funds is about 30 – 35 million euros. In 2005, these firms committed a total of 143 million euros to 217 investment projects, 39 more than in 2004. A total of 216 million euros in venture capital was raised in Austria in 2005. Growth-oriented small and mid-sized companies (SMEs) dominated the market, grabbing a market share of approximately 74 per cent. The percentage of initial and follow-up investments was relatively equal, accounting for 46 per cent and 54 per cent of investments respectively. More than half of the capital invested was designed for the financing of half-tech projects. The information and communications technology sector performed particularly well, absorbing 38 per cent of the funding, followed by the chemical products and materials segment (10.3 per cent), as well as industrial products and services, with a 14.6 per cent share of venture capital investments. To a large extent, the origin of the capital inflows corresponds to the typical structure of venture capital in Europe. Banks represent the largest group of financial investors by far, followed by the public sector and insurance companies. About half the projects involved expanding an existing business, whereas start-ups accounted for slightly more than one-third of the project, and about 15 per cent were buyouts.

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Companies and Deals Successful large projects

The revenues of companies with venture capital shareholdings grow twice as fast, on average, as those of the top 500 European firms. The increase in employees is seven times higher, whereas firms in which VC funds have an interest invested six times more in research and development. The biggest deal in 2006: Global Equity Partners (GEP) and gamma capital partners (gcp) successfully disposed of their interest in INODE Telekommunikationsdienstleistungs GmbH, selling it to UPC Telekabel for a reported purchase price of 93.9 million euros.

Human medicine: profitable hotbed for venture capital

Austria is playing in the major leagues of biotech financing. The country made a name for itself in 2005 by means of a series of large financing projects: • A new spin-off was established in 2005/2006, namely Nabriva Therapeutics Forschungs

GmbH. Nabriva generated 42 million euros in venture financing. • Green Hills Biotechnology succeeded in ensuring the implementation of its research

plans, raising 2.5 million euros from private Austrian investors. • Fibrex Medical Research & Development announced a round of financing amounting to

8.3 million euros, in which Atlas Venture, Global Life Science Ventures (GLSV), EMBL Ventures and Mulligan BioCapital participated.

• Emcools, a medical technology company promoted with the help of funds provided by the Seedfinancing Program and ZIT Calls, concluded an additional round of financing with BusyAngel Managementberatung und Beteiligung AG.

• The company Biovertis reported that it had completed a second financing round totaling 10 million euros. In the process, Biovertis acquired more than 95 per cent of Morphochem, whose headquarters are located in Munich and Basel.

The Largest Venture Capital Companies in Austria

BA-CA Private Equity Invest Equity

CAPEXIT Invest Mezzanin Capital

Danube Equity Invest AG

ECO IPO Beteiligungs-Management

ECOS Venture Capital Lead Equities

Gasser+Partner NÖBEG

gcp gamma capital partners PONTIS

Global Equity Partners SIGNA RECAP

Go Equity stage1

Hannover Finanz Austria Tecnet

Horizonte Venture Management Unternehmens Invest

Hypo Equity V4B – Venture for Business

IB Industrie-Beteiligungen Zukunft Land Salzburg

icubator

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Impetus for the Venture Capital Market Regulations and tax incentives promote the use of risk capital

In the upcoming years, highly attractive market opportunities will be open to risk capital investors in Austria, according to a forecast made by Jürgen Marchart, Managing Director of AVCO, Austrian Venture Capital and Private Equity Organisation based in Vienna. The explanation provided was based on the growing potential of the high-tech industry and innovative sectors of the economy, a new start-up mentality, and an optimal infrastructure, combined with a rising openness towards alternative financing instruments. High-tech firms are increasingly insisting on carrying out their own equity capital financing instead of taking out loans. This demand-oriented impetus is serving as an additional impetus fueling the development of the venture capital market.

Spirit of optimism – This best describes the upbeat venture capital and private equity business in Austria at present. On average, 60 per cent of the funding for Austrian companies can be attributed to credit financing, whereas 45 per cent of the firms have an equity ratio of zero or less. Another primary reason underlying the expected strong growth in the Austrian market for risk capital is the fact that legal regulations as well as the overall framework are currently being revised. As of January 1, 2007, the amendment to the Austrian Banking Act pertaining to the implementation of Basel II took effect. The international financial regulatory system aims to ensure that banks have sufficient equity capital at their disposal. The agreement makes it more difficult to grant loans to companies with a low degree of creditworthiness, due to the fact that the banks will have to back the credit lent to such firms by holding a higher level of capital. As a result, financing with venture capital will become more attractive for start-ups and for expansive young companies.

“The Austrian venture capital market will experience an explosive period of development featuring a steep growth curve. Market growth in the years to come will be well above the European average“.

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Medium-Sized Business Financing Company (Mittelstandsfinanzierungsgesellschaft)

The dominant legal form for private equity funds in Austria is the so-called “Mittelstandsfinanzierungsgesellschaft“ (MFAG) or medium-sized business financing company, which pools the resources of financially strong investors. This approach takes advantage of a series of tax incentives: • According to the Austrian Corporate Tax Law (KStG), companies in the first five years

after establishment are entitled to an exemption from the limited tax liability on investment income realized from cash contributions and other claims against banks, as well as debt securities, pursuant to § 6b (1) Sent. 7, Corporate Tax Law. After the sixth year of operation, the exemption only applies to gains from participation transactions.

• The distribution of profits up to a nominal value of 14,000 euros to the partners or shareholders, if granted to natural persons, is exempt from Austrian income tax.

• An exemption from paying corporate tax applies to the issuance of shares and profit participation rights.

• The purchase of equity interests in companies is exempt from stamp and legal fees and the capital transfer tax.

To be recognized as an MFAG, a company must fulfill several pre-requisites. On the one hand, at least 70 per cent of equity must be invested to acquire holdings in commercial operations, and two-thirds of the total investments must be designed to purchase interests in Austrian firms whose business operations are predominantly focused on Austria. On the other hand, the MFAG may only acquire minority interests encompassing a maximum of 49 per cent of the operating assets or nominal capital of the associated company. Finally, the MFAG is required to have at least eight holdings. AWS – One-Stop Shop for All Services

The private-law business development company “Austria Wirtschaftsservice GmbH“ (AWS) serves as a one-stop shop for foreign companies. AWS supports venture capital funds and the setting up of associated companies by providing capital guarantees. By safeguarding the stakes held by investors in your venture or private equity fund, these capital guarantees facilitate the raising of funding and enable you to address a broader target group. Furthermore, double equity financing is available as the basis for doubling the level of venture capital participation. It has increasingly emerged as a growth driver for innovation financing. → www.awsg.at Pension funds Pension fund regulations have stimulated the venture capital and private equity markets in Austria. Since 2002, pension funds have been legally permitted to invest up to five per cent of their assets in venture capital and private equity, as long as the value of the investment can be precisely determined at any given time. In practice, these guidelines only allow for investments in publicly listed companies. However, the legal limit for insurance companies is ten per cent.

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55,000

42,000

40,000

40,000

34,000

28,400

27,400

27,000

22,500

22,000

20,000

20,000

19,400

18,650

Euro P laza IV

space 2 mo ve

T o wn T o wn

H andelskai P V

Simply 11

Gaso meter

B C 20

A UA headquarters

C ity P o int

H o ch Z wei

M illennium

P o stbus

P lus Z wei

simm o ff ice

Rental space in m² Office projects 2006-2008

Source: C B R ichard Ell is

High Demand – Growing Supply Real estate: high rates of return in European comparison

Real estate funds have been experiencing strong upward growth in Austria. In 2006, total investments surpassed two billion euros, due to the boom in the construction of skyscrapers, hotels and shopping centers. Many prominent foreign players have discovered the Austrian market. In addition to German real estate funds, Anglo-Saxon and Italian companies are increasingly investing in Austria, primarily as the result of the attractive rates of return on the capital invested in comparison to other European countries. Among the largest investments in 2006 were the sale of the Allianz portfolio with a total space of 230,000 m², the office building of Allianz and Basler Versicherung, SCN shopping center, Hotel Intercontinental as well as the headquarters of the Austrian Trade Union Federation. The Austrian Real Estate Investment Fund Act has helped to promote the development of secure products which attract the interest of investors. Geographical proximity to Eastern Europe as a special asset: international pension funds are searching for attractive cross-border investment opportunities. Due to its geographical proximity to Central and Eastern Europe, Austria has become a particularly coveted market. In the first two quarters of 2006, Austria was the largest single source of funding for commercial real estate projects in Central and Eastern Europe, accounting for 31 per cent of commercial real estate investments in the region. Total commercial property investments in Central and Eastern Europe and South East Europe are expected to reach eight billion euros for all of 2006 (CB Richard Ellis).

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287

288

299

312

327

366

404

451

483

490

536

823

843

1,134

1,157

Prag ue

B erl in

V ienna

B ud ap est

W arsaw

A mst erd am

R o me

B russels

F rankf urt

N ew Y o rk

Z urich

Paris

M o sco w

Lo nd o n C it y

T o kyo

T o tal rental co sts per m² annually in EUROffice rents in international comparison

So urce: C B R ichard Ell is, 2 0 0 6

470

247

226

159

108

98

92

70

68

40

35

30

A llianz

IZ D T o wer

C o nwert

C itec

SC N

T o wnT o wn

B B A G

P alais C o rso

P & C

A llianz

B asler B üro

Lenaupark

Purchase price in EUR mLarge Investment Deals in 2006

Source: C B R ichard Ell is

According to a study carried out by the international real estate broker CB Richard Ellis, which evaluates office rents in 173 cities worldwide, Vienna ranks among the most favorably priced locations in international comparison. On the basis of total rental costs, Vienna is less expensive than Budapest, Warsaw, Rome, Brussels, Zurich or Paris. Only Prague and Berlin have lower rental costs than Vienna. An office in Vienna in a top location costs 299 euros annually per m2. For this reason, Vienna has emerged as one of the most stable office locations in Europe in recent years. Technology centers serve as an investment magnet. Depending on the region and purpose, the technology centers are so successfully and commercially exploited that large sections are already rented in advance, during the construction phase. Generally, the useable space available to tenants lies between 3,000 m2 and 30,000 m2. For the most part, tenants are high-tech companies in growth sectors such as information technology, telecommunications and biotechnology. A Chinese technology park will commence operations as of the year 2008. It is the second such project in Europe, but the first one with official government support of the People’s Republic of China. Total investments will amount to approximately 80 million euros. Another technology park is under construction in Dorbirn in the province of Vorarlberg, at a total cost of 35 million euros. Millions are also being invested to expand existing technology parks, for example in Villach or Oberwart. Six technology centers are currently for sale in Burgenland. Commercial and industrial properties also represent an additional focal point of investment activity. Wellness tourism as a growth market. Last but not least, hotels and leisure parks rank among the most popular investment projects. Among the many ongoing projects which offer investment opportunities are the Wellness Island Attersee, Health Center Großgmain, Grand Congress & Spa Hotel Bad Gastein, Panvital Hotel Moosburg/Pörtschach and Wagrain, Sport & Spa-Hotel "AnnaQuell" Abtenau, TCM (Traditional Chinese Medicine) Clinic St. Georgen on Lake Läng, Vacation Village Hotel Forstau, St. Urban/Simonhöhe and Obertraun, Sport Hotel Jochberg/Kitzbühel, Economy Hotel Linz, Vienna and Salzburg.

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Companies Hannover Finanz Austria

Hannover Finanz Austria is a subsidiary of the German firm Hannover Finanz, and basically serves as a management company which is in charge of managing a local private equity fund. At the end of 2006, the Hannover Finanz Group had acquired a participating interest in around 60 companies. More than 200 million euros are available for new investments. Prominent German institutional investors comprise the key investors backing Hannover Finanz Group’s investment funds, complemented by Hannover Finanz itself and private investors in some individual cases. In the year 2006, Hannover Finanz Austria particularly made a name for itself with the management buyout of Schrack Energietechnik. The funds of the financial group are structured as “evergreens“. As a result, long-term partnerships lasting for up to 20 years are not uncommon. → www.hannoverfinanz.at

3TS Capital Partners

3TS Capital Partners is among the youngest companies on the Austrian market. It is one of the leading private equity and venture capital investors in Central and Eastern Europe, with local teams in Budapest, Bucharest, Prague and Warsaw. 3TS currently administers funds with a total volume of 170 million euros. The strategy of 3TS can be defined as “active investing“, i.e. the pro-active, practical support of its portfolio companies at a supervisory board level and in its business development efforts. The 3TS office located in Vienna serves as a partner to Austrian companies and investors for projects throughout the entire Central and Eastern European region. Bulgaria and Romania, the newest members of the European Union, offer Austrian companies outstanding investment opportunities. → www.3tscapital.com

“Austria is still seen by local and international buyout houses as a source of interesting investment opportunities, particularly for those operating at the smaller end of the mid-market, a deal bracket which, according to the EVCA, still generates the best returns on average in Europe”. 3/2006

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Systematic Approach to Service ABA-Invest in Austria offers consulting services free of charge to international investors in Austria

ABA-Invest in Austria, a government-owned and operated consulting firm, is the first point of contact for international investors aiming to set up a company in Austria. It offers you services ranging from issues such as subsidies and market opportunities to taxation law. 26 qualified professionals offer you comprehensive and unbureaucratic know-how, completely free of charge. • Experienced business location consultants personally attend to your needs, providing all

the necessary contacts you require in Austria. • ABA-Invest in Austria supplies you with both general information and specific details

about Austria as a business location, sectors, technologies and market developments as well as the political and economic framework.

• In selecting a suitable business location, ABA-Invest in Austria advises you on labor and

tax issues, component suppliers, market opportunities, incentives, real estate prices and many other issues.

• ABA-Invest in Austria also provides assistance in dealing with formalities such as

incentive applications or site approvals. The employees of ABA-Invest in Austria support you, cooperating with the respective regional investment promotion agencies.

• Even after completion of the project, ABA-Invest in Austria remains at your disposal as a

service center for expansion investments. • Take advantage of the international network set up by ABA-Invest in Austria, with offices

in New York, Tokyo, Taipei and Stuttgart. Moreover, close cooperation exists with the Austrian Trade Commission offices managed by the Austrian Federal Economic Chamber.