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EVCA Reporting Guidelines

IVCA - EVCA FOUNDATION COURSE FOR INVESTMENT PROFESSIONALS
August 13, 2009 New Delhi

Agenda

About EVCA Introduction to EVCA Reporting Guidelines Structure of the guidelines The guidelines

About EVCA

EVCA established in 1983; based in Brussels Represents the European private equity sector and promotes the asset class both within Europe and throughout the world Role includes
representing the interests of the industry to regulators and standard setters; developing professional standards; providing industry research; professional development and forums, facilitating interaction between its members and key industry participants including institutional investors, entrepreneurs, policymakers and academics

Why have reporting guidelines? Reporting guidelines attempt to achieve standardization Standardization benchmarks facilitates transparency and creation of

Helps in comparison between two PEs or between two reporting periods of the same PE Is useful to both LPs and GPs

Introduction to EVCA Reporting Guidelines EVCA issued its first set of reporting guidelines in March 2000 In 2006, reporting guidelines updated to align with the new valuation principles and to reflect the evolution of common reporting practices within the industry The guidelines include:
Requirements that must be adopted to enable a fund manager to claim compliance with the Guidelines Recommendations whose adoption is left to the discretion of the fund manager Templates Principles

Law takes precedence - where there is a conflict between the guidelines and any applicable laws, regulation or contractual agreements, the latter takes precedence
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Reporting Guidelines Structure

The Guidelines are structured as follows: Statutory Accounts Reporting requirements and recommendations
General Considerations Timing Fund Reporting Portfolio Reporting Capital Account Fees and Carried Interest

Templates
Fund Reporting Portfolio Reporting Capital Account Fees and Carried Interest

Performance Measurement

1. Statutory Accounts
Statutory accounts are governed by the law of the jurisdiction in which the fund or investment company is established, together with the investment agreement and/or constitutional document of the fund The content of statutory accounts is not therefore the subject of the guidelines. The reporting guidelines are designed to complement and enhance the requirements of European laws regarding the format and content of statutory accounts

2. Reporting requirements and recommendations

Reporting requirements and recommendations are broken down into

General Considerations Timing Fund Reporting Portfolio Reporting Capital Account Fees and Carried Interest

2.1. General Considerations

Requirements Relevance - Information provided should allow investors to monitor their individual investment; Transparency - Information on all relevant topics regarding the evolution of the funds performance should be communicated to investors in a transparent manner; Consistency - Information provided to investors should be consistent over time Recommendations Combined statements of all investment vehicles comprising the fund can be produced when appropriate Reporting can be made available in electronic format

2.2. Timing
Requirements Semi-annual reporting within 60 calendar days (half year) and within 90 calendar days (full year) after the end of the reporting period Extent of audit requirement arrangements with the investors Recommendations Quarterly reporting with fund level information within 45 calendar days (quarter) and within 60 calendar days (full year) Fund manager may extend quarterly reporting to portfolio company level information. to be determined by contractual

2.3. Fund Reporting This includes requirements and recommendations for Fund Overview Executive Summary Fund Summary Cash Flow Schedule and Net IRR Calculations

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2.3.1. Fund Overview

Requirements First closing date and vintage year (i.e. year of first cash flow), total commitment, term and investment period; Funds domicile, legal form and structure, and investment focus both by stage and geography

Fund Overview
First Closing Date Vintage year : 30 June 2003 : 2003

Fund Overview
Legal form : Series of limited parnership - Fund A Euro 400 Mn. - Fund B Euro 250 Mn. - Fund C Euro 350 Mn. : - Early stage - Development Capital - Buyout investments Investment focus by geography : Europe & UK

Total commitment : EURO Billion Term : 10 + 2 years 5 years i.e. end of June 2008 Jersey One GP & 10 LPs

Investment focus by stage Generalist fund :

Investment period : Funds domicile Structure : :

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2.3.2. Executive Summary

Requirements
Current investments (significant events) New investments Realizations Significant changes to the management company or to the general partner (especially to senior investment personnel) Changes in portfolio or fund strategy Material risks to the performance of the fund as a whole A notification of the annual meeting A statement of compliance with EVCA Reporting Guidelines

Recommendations
Presentation of a value progression chart, showing the change in value of the fund over its life, analyzed into total contributed capital, cumulative distributions, and residual fund value net of management fees and carried interest.

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2.3.3. Fund Summary

Requirements
Total commitment, drawdowns, remaining available for drawdown; Cumulative distributions to the investor(s) and to the fund manager; Fair value of portfolio, total other assets and liabilities, total net asset value; Gross and Net IRR; Multiples to investors (optional during the first 2 years of the fund):
o Distributions to paid-in capital (DPI); o Residual value (net of management fees and carried interest) to paid-in capital (RVPI); o Total value to paid-in capital (TVPI); o Paid-in capital to committed capital;

Total invested in portfolio companies; Total additional committed to portfolio companies and planned for follow-on investments; Note of any leverage of the fund, including debt, guarantees, charges, warranties, indemnities or other contingent liabilities.

Recommendations
Potential drawdown for next reporting period.
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2.3.4. Cash Flow Schedule and Net IRR Calculations

Requirements
Cash flows between fund and investors and their timing; IRR calculated on at least a monthly cash flow basis on fund performance (net of management fees and carried interest).

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2.4. Portfolio Reporting This includes requirements and recommendations for Realization Summary Current Portfolio Summary Portfolio Companies Funds Investment Significant Events & Issues

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2.4.1. Realization Summary

For the current reporting period and since inception until the end of the current reporting period, a clear statement of total and partial realisations, to include the following details for each transaction:

Requirements
Legal and/or trading name of the portfolio company; Disposal date; Holding period; Percentage of the funds holding sold; Cost of realised investment; Proceeds of the investment, including interest and dividends; Deferred proceeds, escrow accounts and earn-outs; Realised gains/losses; Multiple to cost; Gross IRR on realised investment; Exit method

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2.4.2. Current Portfolio Summary

Requirements
Legal and/or trading name of the portfolio company; Whether the company is quoted or unquoted; Date of initial investment; Geography; Industry; Stage of initial investment; Percentage ownership; Cost of investment; Fair value of the investment (in accordance with the International Private Equity and Venture Capital Valuation Guidelines); Interest and dividends since inception; Multiple (Fair Value/Cost) as at the end of the current reporting period; Gross IRR on unrealised investment.

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2.4.3. Portfolio companies General information

General information on the companies currently in the portfolio to include the following details for each holding:

Requirements
Legal and trading names (including any change) of portfolio company; Location of head of office or management; Total amount invested by the fund; Brief description of the business; Stage of initial investment; Statement of the funds role in the investment (lead, co-lead, etc) at the time of the first investment; Percentage ownership and board representation (if any) by the fund; Valuation of the company (enterprise value if leveraged) at the time of the initial investment; Valuation of the company (enterprise value if leveraged) at the end of the current reporting period, in accordance with the International Private Equity and Venture Capital Valuation Guidelines.

Recommendations
budget or forecast for the current year and comparison of historic profit and loss with budgeted numbers

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2.4.4. Investment specific information

Requirements
Valuation of each investment, in accordance with the Private Equity and Venture Capital Valuation Guidelines; Specific methodology used in accordance with the International Private Equity and Venture Capital Valuation Guidelines; For quoted shares, price and any discounts applied; Currency when the investment is denominated in a currency other than the funds currency; Exchange rate used for the conversion at the reporting date; Interest and dividends since inception; Gross IRR on realised and unrealised investments; Other exposures of the fund to the portfolio company, such as guarantees and contingent liabilities.

Recommendations
Explanation of any changes in valuation compared to the previous reporting period; Name of significant syndication partners and co-investors; Exit plans, where applicable.

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2.4.5. Other Investment specific information

Significant Events and Issues Requirements
Brief analysis of significant events during the reporting period and anticipated events; Disclosure of any significant extraordinary items; Any realisation restrictions over the investment (for example a lock-up period on listed shares)

Historical Financial Information Requirements

Profit and loss turnover, EBIT and other key performance indicators as appropriate for the company and industry

Expectations vs Achievement Requirements

An assessment of the companys status compared to the expectations at the time of the investment
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2.5. Capital Account

Each individual investor should receive a statement of his own capital account together with a statement for the fund as a whole to include the following information:

Cumulative Data Since Inception Requirements

Percentage ownership; Total commitment, split between different instruments if appropriate; Total contributions; Cumulative distributions; Sub-total representing the contributions outstanding; Amount of cumulative distributions recallable by the fund manager; Cumulative realised portfolio gains/losses; Cumulative unrealised portfolio gains*/losses; Allocation to the carried interest partner; Cumulative operating income and expenses (other than portfolio gains/losses); Capital account at fair value at the end of the current reporting period.

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2.5. Capital Account (contd.)

For current reporting period Requirements
Capital account at fair value at the beginning of the period; Contributions made during the period; Distributions made during the period. If distributions are non-cash instruments, value and the calculation basis for valuation should be disclosed. Where applicable stock markets and tickers of the distributed non-cash instruments and expiration date of any lock-up period should be disclosed; Realised portfolio gains/losses; Unrealised portfolio gains*/losses; Operating income and expenses (other than portfolio gains/losses); Capital account at fair value at the end of the current reporting period.

Recommendations
For each individual investor: her/his own cash flow schedule detailing amounts and dates of draw downs and distributions since inception; Information regarding the origin of the distributions may be provided to investors (e.g. distributions related to capital gains, dividends or interest).

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2.6. Fees and Carried Interest

The following information regarding fees should be reported for the current reporting period:

Requirements
Clear statement of related party transactions, benefits and fees, broken down into principal categories (e.g. underwriting fees, directors and monitoring fees, deal fees, broken deal fees, etc.). The treatment of such fees and transactions will be specific to each individual fund and the reporting should show clearly the treatments adopted; Net management fees (i.e. gross management fees net of any credit from received fees) and the basis of calculation. Statement of carried interest paid to include the following details:

Requirements
Total amount of carried interest paid since inception to the end of the current reporting period; Total amount of carried interest paid during the current reporting period; Total amount of carried interest earned during the current reporting period; Total amount of carried interest accrued during the current reporting period.

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3. Performance Measurement
IRR is the most common measure of performance within the private equity industry. Industrywide private equity performance studies in the US and Europe use the IRR. Takes into account the time value of money, has the ability to measure the returns on groups of investments and also expresses the return as a simple percentage. Multiples to paid-in capital are another commonly used measure.

Performance measures advocated by EVCA: 3 levels of IRRs:

Gross return on all investments Gross return on realized and unrealized investments Net return to the investor

3 multiples to investors:
Distributions to paid-in capital Residual value to paid-in capital Total value to paid-in capital

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3.1. Three levels of IRRs

Gross return on all investments This return takes account of all the following All the cash outflows (investments) and inflows (divestments, including realisation values, interest and dividends, repayments of principal of loans, etc.) which take place between the fund and all of its investments, independent whether realised or not; The valuation of the unrealised portfolio (consisting of wholly unrealised investments and the unrealised portions of partially realised investments). By definition, the unrealised portfolio excludes cash and other assets held by the fund.

This return does not include the impact of carried interest or charges of any kind, such as management fees paid to the private equity firm by the investor, fees paid by a portfolio company either to the fund or the private equity firms, and fees paid or due to lawyers, accountants and other advisers.

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3.1. Three levels of IRRs (contd.)

Gross return on realized and unrealized investments For realised investments, the return takes account of all the cash outflows (investments) and inflows (divestments, including realisation values, interest and dividends, repayments of the principal of loans, etc.) which take place between the fund and its realised investments. For the purposes of this return all proceeds from a holding in a portfolio company shall be taken into account for this calculation, including proceeds from partially realised companies. For partially realised investments, cash outflows should be allocated between realised and unrealised on a prorata basis at the dates of each cash outflow. Partial write-offs or write-downs should not be included at this level, only full write-offs.

For unrealised investments, the return takes account of all the cash outflows (investments) and inflows (interest and dividends) to the extent they refer to the unrealised portfolio, and the valuation of the unrealised portfolio. Partial write-offs or write-downs should be included at this level.

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3.1. Three levels of IRRs (contd.)

Net return to the investor This measures the return earned by the investors in the fund, and takes account of: The cash flows which take place between the fund and the investors, net of the following:
The fund managers carried interest; The management fees paid to the fund manager by the investors; and All other applicable professional and ancillary charges which are paid out by the fund manager in the course of investing, managing and divesting from its investment portfolio;

And, the valuation of the unrealised portfolio (consisting of the unrealised portions of partially realised investments, wholly unrealised investments and also including cash and other assets), after deducting the implied carried interest. When the portfolio is fully realised/ fully distributed, the net return is the 'cash-on-cash' return to the investors.

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3.2. Principles for performance measurement

Commitments vs actual payouts
Only actual payouts to be considered, not committed ones. If funds have been invested in tranches over a period of time, timing and quantum of investments to be taken into account in calculating returns

Equity received in lieu of cash

to be considered investment at zero cost.

Net return to investors: Unrealized portfolio

Appropriate level of carried interest must be deducted while arriving at net return to investor from unrealized portfolio after taking into account the hurdle rate

Realization
Shares in a company that has been listed should be considered realized on such date that any restrictions on trading of the shares are extinguished. Earn-outs expected on investments that have been fully sold should not be considered while calculating IRR; at best a note on the impact of such earn-outs on IRR may be provided
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Exhibits

Representative reporting templates

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Exhibit 1 : 2.3.3. Fund Summary

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Exhibit 2: 2.3.4. Cash Flow Schedule and Net IRR Calculations

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Exhibit 3: 2.4.1. Realization Summary

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Exhibit 4: 2.4.2. Current Portfolio Summary

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Exhibit 5: 2.4.3. Portfolio companies General information

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Exhibit 6: 2.4.4. Investment specific information

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Exhibit 7: 2.5. Capital Account

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Exhibit 8: 2.5. Capital Account

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Exhibit 9: 2.6. Fees and Carried Interest

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