Hello I'm Kimberly Remain EditorinChief of Unquote Europe's longestrunning private equity publication. I have with me here today John Holloway Director at the European Investment Fund Europe's largest venture investor. Tom thank you very much for being with us here today. Unquote celebrating its 20th year this year and you are actually celebrating your 12th year at the EIF so congratulations for that. I wanted to know how you've seen the industry change in the last 12 years the time that you've been in it.
Well first of all congratulations to Unquote as well. 20 years is no mean feat. What have I seen in the last 12 years. If someone had said to me in September 2000 this is what the world will look like in September 2012 I think I would have had a lot of difficulty understanding or seeing what has actually gone on in these 12 years. Been so much change it's been utterly amazing either on a macro level or a micro level events which have affected European Union venture capital and I think unfortunately majority of the events have not been positive for VC. They being much the opposite and just to think of a few examples we had the burst of the bubble in 2001 and the effects of that of I'll not say they're incalculable there now becoming 12 years later extremely visible. We've had an Iraq war. We've had stock market crashes. We've had the euro debacle. We have enormous regulation being attached to the industry. I don't think any of these things could have been reasonably foreseen back in the year 2000. So the European Union venture capital industry this might sound contradictory counterintuitive but actually I do believe that in 2012 the European venture capital industry is much stronger than it was in 2000 and in 2000 2001 it was still raising substantial amounts of money far too much money the majority of which was lost. As I say that has lasting effects on the way the industry has worked in the meantime.
Well we've had a bit of a Darwinian shake up haven't we since then. Absolutely far fewer players which I think is fair. If I look at the portfolio the EIF had at the end of say what's at the middle of 2001 and the portfolio EIF had 11 years later of the venture capital fund managers who were in that portfolio 11-12 years ago more than half of them aren't there today because they simply were not able to raise a success of fund and there were very good reasons why they could not. On the other hand my positive side to this is that particularly since the real crash in 2007 when some very bright people were released particularly by corporates they kept some of them came together form teams first time teams with a lot of individual technical and financial expertise mixed together and they are for me the today's generation of for the future developments of venture capital in Europe.
What I see in our portfolio what we've invested in the strength of those companies admittedly today very much on unrealized investments but looking at where they've put their money how they've researched it you diligence tit where they've chosen to invest leaves me feeling much more optimistic that when those companies are ripe to be sold which isn't yet is too soon maybe in 2 3 years it will be right. Hopefully in two or three years the world won't be the waiters least of all in Europe and those venture capital managers today will be able to sell companies which they bought at relatively low valuations have been able to develop and will be able to sell them at a reasonable price when the time is right. And that way European venture capital may be on the pipe dreamer here. This is what I genuinely hope that within three or four years time European venture capital will back in the press for the right reasons not the wrong reasons. We'll be talking about performance because everybody talks about performance of European VC and I think we'll have a situation where we'll have a performance starting to grow that we can be proud of rather than constantly having to defend a set of composite statistics for the past ten years from whichever house provides the statistics which gives the good reason a number the return return numbers which is simply not going to inspire anybody really in the private sector or institutional investors to say European VC is a place I want to make my investment.
We are starting to see signs of some exit momentum building up. There was a number of phenomenal venture exits in the last two years and a lot of it is from the industry heavyweights you would expect but they've also been a sprinkling from some brands which aren't as well known which is refreshing. I mean we've got some firms have had between 4 to 7 exits in the last 18 months putting the venture community which is phenomenal. We've seen half a dozen fund closes in the venture community ensure more final as well as one fund actually reopened because the investor demand was such that that was what they decided to do.
So maybe this is the start of what you're saying we're going to see really come to fruition two or three years. I think it is true. And I think what you touched on there and what you've alluded to is the most important thing which wasn't happening in the past and that's selectivity. At the turn of the millennium there were no written there was no real attempt to be selective because the investors to a large degree who disappeared the ones who are willing to stay and have a look of being so selective and this follows a Darwinian principle were talking about a couple of minutes ago that those teams who were able to raise money today really are pretty damn good.
EIF has been investing beyond venture. You've been investing in lower minute and growth opportunities since I believe 2005. It's good therefore you've got a nice wellrounded view of the fundraising market. You see how your GPs interact with other LPs their immense and there goes into fundraising or lack thereof. What would you say has changed in the last five years from a fundraising point of view. Just going back five years so since the world got more difficult have your expectations as an LP change. Do you expect to be rewarded for going in at first close. Do you expect reduced management fees.
EIF is a slightly different animal from your normal investor. We are happy to back a team we will not necessarily seek preferential terms. We will not normally seek some kind of sweetener reduction in management fee whatever. What about the attitude that you're seeing from some of the other LPs in the function investing. Are you noticing them being slightly more aggressive. Yes they are because at the moment if we talk about the pendulum and the ups and downs of the relationships and the strange marriage which is called LP and GPs there are moments when one party is deemed to have a stronger position than the other. At the moment with the flight to quality the very best GPs are still in a very strong position perhaps not as strong as they were a few years ago because there are less help please in their worth for some GPs life is so difficult to raise money that the LP is in a position to say well actually I'd like this and this otherwise I won't come in.
But really deserves attention is the question of the contribution from the GP himself because we all use this phrase alignment of interest and I find it difficult really to understand that if the LPs are putting in ninety-nine percent and the GP putting one percent the nut to me is not really an alignment of interest at its most basic level. One of the things we do like to see we think it's genuinely justified is the GP contribution is higher than the classic one percent.
Give me a number on question recording summit for 50 cent. Again look at what our starting point is. The team is the human beings who are they where they come from what have they got in the past. If someone has a substantial net worth which has been whatever it's got it from they lack the hunger and they may lack the hunger but if we know that someone else had carried from previous funds unless they would they're raising the third generation a number one is in carry number two maybe not far away enough was just a hypothesis and we know that we're probably invested in them. We know what they've done and they come along and say yeah we're putting one percent as usual but we're not going to be too happy with that. That's one area where we are looking at trying to do better than in the past.
We've been talking about the past and where the market currently stands. Where do you see the market going in the next ten years. I am actually more optimistic than developing. To most people who may see this video they might think this man is slightly off his rocker but on the basis of I can only talk for our portfolio because that's that's all I have as concrete evidence. We're talking about venture and I am talking about specifically the venture part of the European Investment Fund portfolio which is probably over two and a half billion of gross commitment. So I'm looking at them and I see where that money has been invested.
I said earlier on the teams which have come along since 2006 since the crisis really started to bite are doing good things. They're not investing the way that venture capital funds invested in 99 and 2000. They're being much more careful infinitely more careful. The due diligences are taking longer. They're checking things out much better. If I look at our portfolio and the valuations on unrealized these evaluations are done realized that our VC managers who we've been with for the last five to six years evaluations are looking pretty good. They're not inflated. We're quite happy with the way it's looking and certainly a whole lot better than the first five years of this millennium.
So assuming they'll be able to grow those companies and sell them I think the return should be there but it won't be for the next three to four years. That will start to see significant changes in European VC but I'm convinced it can come because I see the companies that are being invested in and they're very good.
Thank you very much for taking the time to speak with us. Thank you very much for watching.
