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Finding the Key: Canadian Institutional Investors and Private Equity

Appendix V: Canadian Private Equity Performance, Mathodological Notes

In the past, Canadian institutional managers have argued that the absence of returns performance data was a serious impediment to investing in Canadian private equity funds. Such data have been available in the U.S. for almost fifteen years, and in Europe for at least five years. It was not until 2000 that Canadian private equity fund managers were first asked to pool their data for the purposes of calculating aggregate performance statistics in this country.

For the past three years, the CVCA and Réseau Capital have worked with Macdonald & Associates and Thomson Venture Economics to develop reliable performance benchmarking data for Canadian private equity. As such data are based on the confidential cash flow information of individual funds, there was significant preparatory work required to convince Canadian GPs to participate in a survey and thereby develop an adequate sample.

The first Canadian performance database was released in March 2003, covering the period 2000 to December 31st, 2001. Further data up to the end of December 2002 were also released in October 2003. The results are summarized in the table below.

Some key points should be noted with respect to performance methodology:

• The sample includes the full market spectrum of private equity: buyout, mezzanine and venture capital.
• The sample size limits market segmentation.
  
  The most recent results were taken from a sample of 118 funds, 94 of which were venture-oriented. The sample was large enough to segment returns for early stage and balanced venture funds, but not sufficient to calculate vintage year returns (which would group the funds according to the years in which they were formed). With only eight mezzanine funds in the sample, the mezzanine and buyout fund returns were blended.
  
  It is important to note that not all private equity GPs in Canada choose to participate in the survey.
• Results are not directly comparable with those produced for the U.S. and Europe.
  
  The majority of private equity funds in the U.S. and Europe are structured as limited partnerships with a fixed life and terms regarding management fees and the carried interest payable to the GPs. As a result, performance benchmarks can be calculated on a "net-returns" basis (i.e., realized and unrealized returns to investors net of management fees and carried interest).
  
  In Canada, only about 25% of the estimated $50 billion of capital under management is in these traditional partnership vehicles, with the rest managed by corporations, governments, institutions (i.e., internal programs for direct investment) and labour-sponsored venture capital corporations.
  
  Because management expenses and fees, costs of capital and profit sharing vary widely across these different fund types, it is difficult to calculate meaningful returns on a net basis across the industry.
  The returns for Canadian funds have therefore been calculated on a gross basis, meaning that they are based on the cash flows from the funds to portfolio companies and from the portfolio companies to the funds when there is a liquidity event. As such, they are not directly comparable to the American or European numbers at the present time.
• There is a lack of standard valuation guidelines.
  
  The issue of valuation guidelines has been hotly debated in the U.S., Europe and Canada in recent years and has been the subject of the attention of the International Limited Partners Association. The European industry has now adopted standard valuation guidelines through the European Venture Capital Association (EVCA).
  
  The CVCA and Réseau Capital have developed draft guidelines closely modelled on the EVCA guidelines and these have been distributed to members of the industry for their comments. These industry associations expect to be in a position to adopt a set of valuation guidelines by 2004. The American industry has not yet developed or adopted comparable guidelines.
  
  In Canada, all funds submitting data for the returns survey will be asked to confirm (with the signature of a senior manager) that they have complied with these guidelines in preparing their year-end valuations.

Comparable investment data for U.S. private equity funds can be found at the Web site of Thomson Venture Economics: www.ventureeconomics.com.

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