Web Site: www.evca.com
Phone: (322) 715-0020
Principal Contact: Didier Guennoc, Research and Public Affairs Director
Chief Executive: Javier Echarri
Address: Minervastraat 4, B-1930 Zaventem (Brussels), Belgium
Regulatory Authority: Membership is voluntary. However, members must sign and adhere to a code of conduct that requires a member (and all of its directors, managers, employees, nominees and representatives) to abide by all rulings and regulations issued by the Professional Standards Committee of the EVCA. Guidelines are not compulsory.
EVCA Guidelines Available at:
Membership Structure and Reach: Formed in 1983 the association represents 900 members from the private equity and venture capital industry, both European and non-European, including institutional investors, investment bankers, and professional advisors. Included in the groups’ functions are: networking, training, coordination of Public Affairs, performs research, publishes industry literature, “upholds” professional standards.
The European Venture Capital Association (EVCA) issued its first set of guidelines for the valuation of portfolio companies in 1993. They were out of date by 2000, due to changes in the private equity market says Eduardo Bugnone, past-chairman of the association. So, the EVCA determined to develop three sets of guidelines for reporting, valuation, and best practices. The first guidelines on reporting were released in March of 2000.
Bugnone chaired the Task Force on Valuation, which was made up of representatives from Argos Soditic, Access Capital Partners, HarbourVest, Credit Suisse, Robecco, Sofinnova, Bell Atlantic-Verizon, Abbey National, M Vision, Dienst Wellington Partners, Arthur Andersen, Extorel, and the EVCA. The EVCA adopted the task force’s guidelines for valuation in March 2001.
Europeans may introduce their document with the soft-sell approach of their American counterparts, but the recommendations come with great detail and stringent terms about how things such as IRR must work. The EVCA notes that before a pure IRR is determined-once all investments are complete, disbursements have been made to investors and fees and charges have been deducted-venture funds can compute three “interim” IRRs:
1. Gross Return on Realized Investments. This accounts for cash outflows, inflows, interest and loans.
2. Gross Return on all Investments. This accounts for cash outflow and inflow on realized, partially realized, and wholly unrealized investments and the valuation of the unrealized portfolio.
3. Net Return to Funder. This accounts for cash flow, including the carry, management fee, other charges and a valuation of remaining unrealized portfolio value.
The guidelines define each of these terms, differentiate between different kinds of funds, taxation, and timing of cash flows. There is more. Much more, including presentation formats, the algebraic formulae used to calculate IRR and stringent disclosure recommendations.
Bugnone agrees with the characterization of EVCA’s guidelines on valuation as more “prescriptive” than the work of the BVCA and AIMR. It’s no wonder, given the relatively more complex environment faced across the European Union. He gives three reasons for the approach of the EVCA. First, there is recognition that a formulaic approach is not absolutely correct, but it is relatively more correct than “a VC putting his hand in the air” as a means of valuing a portfolio company. Second, if there is to be comparability between funds, for investments in the same time period for the same company, similar methods of valuation must be applied. And, third, it has become clear that while investors want fair market values generated for the investment of their funds by VC firms, investors also want “prudent values” not merely values based on P/E ratios or comparable prices of public equities.
On the increasingly important topic of regulation, Bugnone points out that France’s private equity market is regulated, although not as heavily as the United Kingdom, and he says that “there is pressure in German and Italian markets for regulation”. Beyond the trends in individual nations, Bugnone suggests that the European Union is also moving in the direction of eventual regulation of private equity. Bugnone points to one other important body of work, that of AIMR and its GIPS standard, because that group has a global reach, is the most likely to influence the work of firms around the world and to foster the development of a unified methodology for portfolio company valuations.