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Technische Universität München

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Current German Legislation on Improving the Financing Environment for German Enterprises

3rd Norface Seminar on „Entrepreneurial Finance“Berlin, May 21st, 2007

Univ.-Prof. Dr. Christoph Kaserer

Lehrstuhl für Finanzmanagement und Kapitalmärkte &Center for Entrepreneurial and Financial Studies (CEFS)Technische Universität München

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Nr. Name HauptsitzVerwaltetes Kapital in Mio. US-$

1 Carlyle Group, The Washington, DC 45.8002 Goldman, Sachs & Co. New York, NY 42.5773 Blackstone Group, L.P. New York, NY 41.3634 Kohlberg, Kravis, Roberts & Co. (AKA: KKR) New York, NY 36.5675 Texas Pacific Group Fort Worth, TX 26.1786 Warburg Pincus, LLC New York, NY 23.0107 Permira Advisers Limited (FKA: Schroder Ventures Europe) London, UK 22.3528 HarbourVest Partners LLC Boston, MA 22.1969 Bain Capital Boston, MA 22.069

10 Providence Equity Partners, Inc. (FKA: Providence Ventures) Providence, RI 20.63911 Apax Partners Worldwide London, UK 20.20612 Oaktree Capital Management, LLC Los Angeles, CA 17.80813 Apollo Management (FKA: Apollo Advisors L.P.) Purchase, NY 17.50014 3i Group PLC London, UK 17.37415 Cinven, Ltd. London, UK 17.30816 CVC Capital Partners London, UK 15.95417 DLJ Merchant Banking Partners New York, NY 15.40018 Welsh, Carson, Anderson & Stowe New York, NY 12.84419 EQT Partners AB Stockholm, Sweden 12.71920 PAI Partners (FKA: PAI Management) Paris, France 12.474

Largest PE Firms worldwide by capital under management (2006)

No. Name LocationCapital under management in US$ mm

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Largest European PE Firms by capital under management (2006)

Nr. Name HauptsitzVerwaltetes Kapital in Mio. US-$

1 Permira Advisers Limited (FKA: Schroder Ventures Europe) London, UK 22.3522 Cinven, Ltd. London, UK 17.3083 3i Group PLC London, UK 16.8924 Apax Partners Worldwide London, UK 16.1145 CVC Capital Partners London, UK 15.9546 EQT Partners AB Stockholm, Sweden 12.7197 PAI Partners (FKA: PAI Management) Paris, France 12.4748 BC Partners London, UK 11.9459 Bridgepoint Capital, Ltd. (FKA: NWEP & NatWest Ventures Ltd) London, UK 9.830

10 Candover Investments PLC London, UK 7.98211 Terra Firma Capital Partners, Ltd. London, UK 6.26912 Carlyle Group, The Washington, DC 6.24913 Doughty Hanson & Co, Ltd. London, UK 6.20314 Partners Group Baar-Zug, Switzerland 5.81115 ATP Private Equity Partners Copenhagen, Denmark 5.47816 Nordic Capital (AKA: NC Advisory) Stockholm, Sweden 5.11817 Charterhouse Capital Partners LLP London, UK 5.05218 AXA Private Equity Paris, France 4.98419 Montagu Private Equity, Ltd. (FKA: HSBC Private Equity Ltd.) London, UK 4.92120 Coller Capital London, UK 4.866

No. Name LocationCapital under management in US$ mm

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Largest VC Firms worldwide by capital under management (2006)

Nr. Name HauptsitzVerwaltetes Kapital in Mrd. Euro

1 The Carlyle Group Washington, USA 36,852 CSFB Private Equity London, UK 24,133 Warburg Pincus New York, USA 22,464 Panorama Capital Menlo Park, USA 19,975 Bain Capital Boston, USA 18,806 Apax Partners London, UK 16,647 J. & W. Seligman New York, USA 14,978 3i Group London, UK 11,759 Permira London, UK 11,00

10 Adams Street Partners Chicago, USA 10,5711 General Atlantic Greenwich, USA 8,3212 Investcorp New York, USA 8,3213 TA Associates Boston, USA 8,3214 New Enterprise Associates Baltimore, USA 7,0715 AXA Private Equity Paris, Frankreich 7,0016 Oak Investment Partners Westport, USA 6,9917 AIG Capital Partners New York, USA 6,6918 J.H. Whitney & Co. Stamford, USA 6,1119 OrbiMed Advisors New York, USA 5,2420 Advent International Boston, USA 4,99

No. Name LocationCapital under management in US$ bn

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Largest European VC Firms by capital under management (2006)

Nr. Name HauptsitzVerwaltetes Kapital in Mrd. Euro

1 CSFB Private Equity London, UK 24,132 AlpInvest Partners Amsterdam, Niederlande 20,003 Apax Partners London, UK 16,644 3i Group London, UK 11,755 Permira London, UK 11,006 AXA Investment Managers Private Equity Paris, Frankreich 7,007 UBS Capital London, UK 4,588 Montagu Private Equity London, UK 3,209 HgCapital London, UK 3,11

10 CapMan Group Helsinki, Finland 2,2011 WestLB Equity Investments Düsseldorf, Deutschland 1,7012 Baring Private Equity Partners London, UK 1,6613 Credit Agricole Private Equity Paris, Frankreich 1,5314 Gilde Investment Management Utrecht, Niederlande 1,5015 Royal Bank of Scotland, Equity Finance Group Edinburgh, UK 1,4716 AGF Private Equity Paris, Frankreich 1,3017 Société Générale Asset Management Paris, Frankreich 1,2018 TVM Capital München, Deutschland 1,1619 GIMV Antwerpen, Belgien 1,1520 Palamon Capital Partners London, UK 1,11

No. Name LocationCapital under management in US$ bn

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Zielland des Kapitals

25,2%

16,3%

5,2%11,8%

9,1%

6,4%

6,1%

5,4%

14,4%

Sitzland des Managements

50,7%

15,5%

6,4%

5,7%

5,7%

4,1%2,2%4,7%

5,0%

Großbritannien

Frankreich

Schweden

Deutschland

Spanien

Niederlande

Italien

Dänemark

Übrige

Private-Equity-Investitionen 2005Volumen: EUR 47 Mrd.

Zielland des Kapitals

25,2%

16,3%

5,2%11,8%

9,1%

6,4%

6,1%

5,4%

14,4%


50,7%

15,5%

6,4%

5,7%

5,7%

4,1%2,2%4,7%

5,0%

Großbritannien

Frankreich

Schweden

Deutschland

Spanien

Niederlande

Italien

Dänemark

Übrige

Private-Equity-Investitionen 2005Volumen: EUR 47 Mrd.

Private Equity Investment in Europe

Source: EVCA (2006)

Country of management Country of destinationPrivate Equity investment 2005Volume: EUR 47bn

United Kingdom

France

Sweden

Germany

Spain

Netherlands

Italy

Denmark

other

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Private Equity Fundraising in Europe

Source: EVCA (2006)

Herkunftsland des Kapitals

28,9%

23,7%16,4%

9,1%

6,2%

5,4% 4,6%

5,6% Großbritannien

USA

Sonstiges Europa

Frankreich

Deutschland

Asien

Niederlande

Übrige


63,6%13,0%

16,0%

4,0% 3,4%Großbritannien

USA

Sonstiges Europa

Frankreich

Deutschland

Asien

Niederlande

Übrige

PE-Fundraising 2005Volumen: EUR 71,8 Mrd.

Herkunftsland des Kapitals

28,9%

23,7%16,4%

9,1%

6,2%

5,4% 4,6%

5,6% Großbritannien

USA

Sonstiges Europa

Frankreich

Deutschland

Asien

Niederlande

Übrige


63,6%13,0%

16,0%

4,0% 3,4%Großbritannien

USA

Sonstiges Europa

Frankreich

Deutschland

Asien

Niederlande

Übrige

PE-Fundraising 2005Volumen: EUR 71,8 Mrd.

Country of management Country of originPrivate Equity fundraising 2005Volume: EUR 71,8bn

United Kingdom

USA

other Europe

France

Germany

Asia

Netherlands

other

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Private Equity Investment in Europe

Source: EVCA (2006), Eurostat

Volkswirtschaftliche Bedeutung von Private Equity

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

Großbr

itann

ien

Schwed

en

Dänem

ark

Niede

rlande

EU (15 Lä

nder

)

Frank

reich

Spanie

n

Eurozo

ne

Norwege

n

Portu

gal

Italie

n

Finnlan

d

Schweiz

Deutsc

hland

Irlan

d

Belgien

Polen

Österre

ich

Griech

enland

-4

-2

0

2

4

6

8Investitionen(Sitzland)/BIP Investitionen(Zielland)/BIPPortfolio/Marktkap. PE-Umfeld (rechte Skala)

Economic Significance of Private Equity

Investment(Mgmt)/GDPPortfolio/Market Cap.

Investment(Dest.)/GDPPE Environ.(right scale)

United

King

dom

Sweden

Denm

ark

Nethe

rland

s

EU 15

Franc

e

Spain

Euro

zone

Norway

Portu

gal

Italy

Finlan

d

Switzer

land

Germ

any

Irelan

d

Belgium

Poland

Austri

a

Greec

e

9


Equity Ratios in Europe

Source: BACH-Datenbank, Eurostat

0

10

20

30

40

50

Sweden

Denm

ark

Nethe

rland

s

Franc

eSpa

in

Portu

gal

Italy

Finlan

d

Germ

any

Belgium

0

10

20

30

40

50

KleineUnternehmen

MittelgroßeUnternehmen

Small companies

Mid-size companies

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Equity Ratios in Germany

1996 1997 1998 1999 2000 2001 2002 2003

Deutsche BundesbankKleine Unternehmen 4,1 3,0 8,4 8,1 4,3 4,2 5,8Mittlere Unternehmen 15,9 16,4 19,3 19,7 20,1 20,8 22,7Große Unternehmen 26,1 26,4 27,2 27,0 26,7 27,4 28,5Alle Unternehmen 16,2 17,5 18,4 18,6 19,5 21,0 21,9

KfW-BilanzdatenbankKleine Unternehmen 14,1 13,9 15,4Mittlere Unternehmen 14,9 16,0 18,1Größere Unternehmen 25,5 25,4 26,3Alle Unternehmen 15,0 15,3 17,1

SmallMid-sizeLargeAll companies

SmallMid-sizeLargeAll companies

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Importance of Geographical Distance (Martin et al. 2005)

1 2 3 4 5 6

Beteiligungs-unternehmen

GrößererBallungsraum

Kapitalgeber des Venture-Capital-Gebers

Andere Venture-Capital-Geber

Andere Finanzgeber des Beteiligungsunternehmens

Forschungsinstitute

Sehr wichtig unwichtig

Wichtigkeit der geografischen Nähe für Venture-Capital-Geber (Duchschnittswert)

Deutschland (n=107)

Großbritannien (n=60)

1 2 3 4 5 6

Beteiligungs-unternehmen

GrößererBallungsraum

Kapitalgeber des Venture-Capital-Gebers

Andere Venture-Capital-Geber

Andere Finanzgeber des Beteiligungsunternehmens

Forschungsinstitute

Sehr wichtig unwichtig

Wichtigkeit der geografischen Nähe für Venture-Capital-Geber (Duchschnittswert)

Deutschland (n=107)

Großbritannien (n=60)

Importance of close distance for Venture Capital firms (mean)

Portfolio company

Investors

Other VC firms

Other external sources of capital for portfolio company

Research institutes

Large urban area

Highly important UnimportantGermany (N=107)

United Kingdom (N=60)

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Employment Effects after Buyout Transactions

Source: CEFS (2005)

3,4%

2,8%

1,6%

-3,8%

7,1%Buyout in Familienunternehmen

Secondary Buyout

Going-Private-Buyout

Spin-off-Buyout

Turnaround Buyout

2,4%

Durchschnitt der Buyout-finanzierten Unternehmen

3,4%

2,8%

1,6%

-3,8%

7,1%Buyout in Familienunternehmen

Secondary Buyout

Going-Private-Buyout

Spin-off-Buyout

Turnaround Buyout

2,4%2,4%

Durchschnitt der Buyout-finanzierten Unternehmen

All buyout target companies

Buyout in family firms

Secondary Buyout

Going private buyout

Spin off buyout

Turnaround buyout

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Median Return (IRR) and Risk of Private Equity Investments

Source: CEFS (2005)

0

5

10

15

20

25

0 10 20 30 40 50 60

Standard deviation in %

Ret

urn

in

% All funds

VC

Buyout

Benchmark

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Median Return (PME) of Private Equity Investments

Source : CEFS (2005)

PME mean

-0,5

0

0,5

1

1,5

2

All funds VC Buyout

Kaplan/Schoar 2005

Kaplan/Schoar 2005 value-weighted

Kaserer/Diller 2004 Sample Liq.

Kaserer/Diller 2004 Sample I

Kaserer/Diller 2004 Sample II

Kaserer/Diller 2004 Sample Liq. Value-w.

Kaserer/Diller 2004 Sample I value-w.

Kaserer/Diller 2004 Sample II value-w.

Phalippou/Zollo 2005

Phalippou/Zollo 2005 value-w.

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Valuation and Financial Structure in European LBOs

Source: Standard&Poors (2006), Thomson Financial, Eurostat, CEFS

-2

0

2

4

6

8

10

1Q

98

3Q

98

1Q

99

3Q

99

1Q

00

3Q

00

1Q

01

3Q

01

1Q

02

3Q

02

1Q

03

3Q

03

1Q

04

3Q

04

1Q

05

3Q

05

1Q

06

3Q

06

Purchase Price Multiple Debt Multiple EU 25 GDP Growth in %Euro 10yr rate in % Leverage

16


Valuation and Financial Structure in German LBOs


0

1

2

3

4

5

6

7

8

9

10

2001(5)

2002(6)

2003(9)

2004(18)

2005(13)

2006(12)

Purchase Price Multiple Europe

Purchase Price Mult. Germany

Debt Multiple Europe

Debt Multiple Germany

Leverage GermanyLeverage Europe

17


Valuation and Financial Structure in European LBOs


0

5

10

15

20

25

30

35

40

45

50

1Q

98

3Q

98

1Q

99

3Q

99

1Q

00

3Q

00

1Q

01

3Q

01

1Q

02

3Q

02

1Q

03

3Q

03

1Q

04

3Q

04

1Q

05

3Q

05

1Q

06

3Q

06

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

5P/E Frankfurt (left scale)

P/E London (left scale)

Equity Multiple (right scale)

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Taxation of Carried Interest

Land Taxation of Carried Interest Relevant tax rate

France Capital gains tax 27 %

Italy (Fondo Chiuso)

Capital gains tax under certain conditions 12,5 %

Luxembourg Structure of Carried Interest rules tending towards capital gains and/or dividends. No taxation of capital gains, if shares are held longer than 6 months and do not represent a substantial amount (10%). Otherwise taxation as ordinary income

max. 39,33%

Netherlands Taxation as ordinary income max. 52 %

Spain Capital gains tax 18 %

Switzerland Taxation as ordinary income Tax rate dependent on region (Kanton) (Maximum tax rate between about 24 % and 42 %)

United Kingdom

Taxation as ordinary income 25% of capitals gains subject to income tax with holding period of at least 2 years (Maximum tax 40%), therefore Carried Interest is taxed at max. 10% with at least 2 years holding period

(Source: EVCA (2006a))

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VAT on Management Fees

Country VAT on management fees

Germany (GmbH & Co. KG)

Yes. Exception § 4 Nr. 8 h UStG not applicable to Private Equity Funds. Preliminary distribution of profits to managing shareholders is qualified as special compensation, if this payment results in a lower net income

United Kingdom(Limited Partnership)

No VAT on additional share of profit of the general partner (EVCA 2006c).

Luxembourg(SICAR)

No VAT, Art. 38 of SICAR-Law in conjunction with Art. 44, § 1 d) of the Luxembourg VAT Law.

France(FCPR)

No VAT, Art. 261 C 1°f) Code Général des Impots.

Italy(SGR)

No VAT (EVCA 2006c).

Netherlands No VAT (EVCA 2006c).

Switzerland(KAG)

No VAT, Appendix to Art. 153 KAG i.c.w. Art. 18 Ziff. 19 f) of the Swiss VAT Law of 2 Sep 1999.

Spain No VAT, SGECR (Art. 20.1.18 (n)) of Spanish VAT Law.

(Source: Local company and tax law, EVCA (2006c))

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Recommendations for Taxation

Guaranteed tax transparency for Private Equity Funds. These funds may be structured in different legal forms as corporations or partnership.

Exemption from taxation for all services rendered between the fund as separate assets and its management companies, which will be comparable to EU-regulated OGAW / UCITS

Continuation of tax rules regarding Carried Interest with an internationally competitive tax rate

Amendment to § 8 Abs. 4 KStG (resp. § 8c KStG-E) to allow loss carry forward.

Tax exemption for capital gains resulting from Seed- or Start-up-financing for a closely defined group of young technology companies and for specified holding periods

21


Recommendations for Company Law

Amendment and revision of UBGG

Minimum capital requirement of EUR 1 million.

Object of the company: Direct or indirect equity investments (including fund-of-funds) and mezzanine capital

Restriction of each single investment to 30% of the fund’s assets (but not applying to the first three years from the funds’s vintage year)

Permit investments in listed companies, if at least 5% (2%) of nominal capital is acquired

Holding period restriction for investments (e.g. 12 years)

After 5 years no single shareholder should own more than 40% of the fund

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Recommendations for Sector Supervision

Registration (certification) of Private Equity Funds combined with

Registration of fund managers

Implementation of (voluntary) commitment of funds and fund managers to industry-wide common rules of conduct and continuing education

Supervision by central supervisory authority

Fund shares may be marketed to qualified investors only (e.g. minimum investment EUR 125k; EUR 10k in the case of fund-of-funds)

Revision of rules regarding a Pension Fund’s ability to invest in alternative assets

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Technische Universität München

Center for Entrepreneurial and Financial StudiesTU München | Arcisstrasse 21 | 80333 München Tel: +49 89 289 25483Web: www.cefs.de

www.ifm.wi.tum.deEmail: [email protected]

Univ.-Prof. Dr. Christoph KasererTel: +49 89 289 25489Email: [email protected]

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