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Chairman’s StatementI am pleased to present the results for Private Equity Investor PLC for the year ended 31 March 2004.The past 12 months have been marked by a growing level of positive sentiment about technology businesses in the United States, and this is reflected in the progress of many of the underlying companies in which PEI is invested. We believe that as a result of this improving investment background and sentiment, we received an indicative offer for the Company which, if made, would have represented a modest premium to the then share price, but a substantial discount to our net asset value. Your board had no hesitation in rejecting this opportunistic approach. We believe that such an offer, if made, would not even have realised the reported value of our underlying portfolio let alone its potential for substantial growth. Your board believes shareholders should be allowed the opportunity to achieve full value in the future for their investment, rather than being forced to accept a substantially discounted value for their assets today. The Company received cash and stock distributions during the period of $8.68 million compared with $1.46 million last year and $1.22m the year before. The 4% increase in the US dollar NAV for PEI is consistent with our expectations for the Company at this stage of its investment cycle, and is, we believe, the harbinger of an accelerated positive trend. In these circumstances the 11% decline in sterling NAV over the period paints a misleading picture of the Company’s performance since it is entirely attributable to exchange rate movements. We believe that now is a good time to be investing in growth companies. A strengthening economy, a robust deal flow and a healthier corporate spending environment, all combine to make it so. Market OverviewThe US economy grew at a 4.2% seasonally adjusted annual rate in first quarter 2004 – the third consecutive quarter of growth. While public market indices have had mixed results in first quarter, the NASDAQ was still up over 48% over the 12 month period ended March 2004, indicating a return of confidence particularly in the technology sector. Venture capital firms predict that attractive areas for investments over the next few years include security, data centre management, digital media, wireless technologies and web services.The strength in valuations among public companies relative to the market trough of 2002 is beginning, finally, to be reflected in venture capital valuations. After three years of negative returns, venture capital performance is showing marked signs of improvement, with a strengthening in the IPO and merger and acquisition markets. Optimism is growing as opportunities for liquidity events improve, and capital is flowing at a healthy rate. According to the most recent National Venture Capital Association Money Tree Survey (sponsored by PricewaterhouseCoopers and Thomson Venture Economics) venture capital investment in the first quarter of 2004 totalled $4.6 billion in 618 companies, broadly maintaining the investment level recorded over the past seven quarters. For the first time in three years, the year to fourth quarter 2003 saw a positive return for venture capital of 8%. Indeed fourth quarter 2003 was the third consecutive quarter of positive performance after two and a half years of decline. Of the 40 US IPOs that took place in fourth quarter 2003, 13 were of venture-backed companies – more than the total for the entire previous twelve months. A further 78 IPOs occurred in the first quarter of 2004. The average period between funding rounds for investee companies has lengthened and this is evidence, according to Jesse Reyes, vice president at Thomson Venture Economics, of the improving health of venture investments. Entrepreneurial companies are doing more with less, and for longer periods. Tim Draper, Managing Director at Draper Fisher Jurvetson says: ‘This is a terrific time to be investing in new companies, with a robust deal flow and a healthier corporate spending environment.’ Venture Capital Investment PortfolioDuring the year the Company made commitments to two new investment funds, New Enterprise Associates 11 and TCV V, increasing to twenty the number of venture capital Limited Partnerships in which it is invested. As at 31 March 2004, these partnerships held investments in 429 private and 25 public companies, representing 60.7% of the Company’s Net Asset Value (2003: 47.9%). Of these twenty partnerships seven reported a gain in value over the period. The rate of new investment remained steady, with 124 new investments compared with 111 in the previous year and there were also 225 follow-on investments (2003: 219), resulting in draw downs by investee funds totalling $24.2 million compared with $18.3 million last year. Fewer investments were written-off or written down, 47 and 115 compared to 55 and 155 last year. Write-ups increased from 33 to 110, based on information provided to us at the date of this report. Numerous investee companies where no corporate event has yet taken place gained industry accolades and enjoyed noteworthy commercial successes, among them AirPrism, Ember Corporation, DivX Networks and Baidu. At the period end, commitments to venture funds which had not yet been drawn down totalled $69.3 million. IPOs and trade salesPrivate Equity Investor saw four IPOs of our investee companies – Myogen, Pharmion, Atheros and SMI Corporation (2003: 2). At the year end these investments had increased in value to $1.68 million on a mark-to-market basis, a gross return on investment cost of 98%. In all, direct cash distributions from 7 events totalled $2.90m compared with less than $119,000 for 2003 and $158,000 for 2002. Similarly, in the year to 31 March 2004, stock distributions totalled $5.78m compared with $1.34m and $1.06m in the two previous years. In addition, during the period there were 9 trade sales (2003:5) of which our share equates to $1.16 million, representing a return on investment cost of 22%. There have been further encouraging signs from the increasing number of quoted stocks in our portfolio funds, whose shares have in general performed well over the period. Bond Portfolio and Hedge Fund InvestmentFunds awaiting draw down are invested in dollar denominated investment grade bonds managed by Cazenove, notes issued by BNP Paribas and linked to a hedge fund of funds managed by FRM and cash. At the beginning of the year a total of $40.3m was held in the bond portfolio and $15.1m in a note as described above. During the year a further $15.1m was transferred from the bond portfolio into a note issued by Deutsche Bank and linked to the same hedge fund of funds. The bond portfolio outperformed its benchmark and the hedge funds of funds achieved its return objectives during the period. However, the Dollar/Sterling exchange rate fell from $1.58 at the beginning of the period to $1.84 by the end of March 2004 as the dollar weakened. This 14% depreciation in the dollar over the twelve months adversely affected the Sterling returns on these investments. ProspectsIt is worth repeating that private equity investments in venture capital funds typically have three phases: investment, holding and realisation. It is in this last phase when substantial returns are normally achieved. Private Equity Investor is now only part of the way through its planned life and we are entering a period in which we anticipate seeing valuation uplifts and liquidity events on a more regular basis. Technology companies are being financed at a steady pace and mark-ups in valuations from previous rounds of financing are now starting to come through again. The most mature and promising companies are filing registration statements in anticipation of listing, and mergers and acquisitions are increasing. We are confident that, notwithstanding the recent cooling in general market sentiment, the prospects for the company remain excellent and that given time for the portfolio to mature, its investment objectives will be handsomely achieved. Barbara Thomas Managing Director’s ReportMarket BackgroundAs the Chairman has stated, the increasing number of positive indicators reported by our investee funds presages a more favourable environment for venture capital investing in US technology companies. Venture capital investment has kept up a steady pace, with investments in first quarter 2004 totalling $4.6bn going into 618 companies, according to the PriceWaterhouseCoopers/Thomson Venture/National Venture Capital Moneytree Survey. While this figure is below the $5.2bn invested in fourth quarter 2003, it is well above the same period last year. Additionally, valuations have returned to their mid-1990s level. The median investment amount for financing rounds remains steady at about $6.5m. While software companies received $956m in the latest quarter, making it the largest industry recipient of funds, life sciences (biotechnology and medical devices) continue to dominate other industries with investment totalling $1.3bn, representing 27% of the total invested in venture capital. Biotech alone accounted for $943m – or 20% of all investments made. Following the 48% rise in the NASDAQ over the period, the IPO window for technology companies has started to open and public markets are beginning to recognise the value of technology companies with significant potential to outperform their peers. The improvement in valuations among public companies relative to the market trough of 2002 is finally beginning to be reflected in private equity valuations. We believe we are embarking upon a period in which we will see mark-ups and liquidity events on a more regular basis. The business environment has improved noticeably and many of our investee companies are on a steady growth path. The outlook for information technology spending is improving and observers believe that the next few years will see increased investment in this sector as large corporations seek to improve efficiencies in their infrastructures. Equally, technology companies are now more receptive to strategic acquisitions. Portfolio UpdateAs at 31 March 2004, $71.4 million of the Company’s net asset value was invested in 429 private and 28 public companies. There was an increase in the rate of investment compared with the previous year from $18.3m to $24.2m, as the technology venture partnerships through which the Company is invested showed increasing optimism and reflected this in increased commitments to portfolio companies and new investments. As the Chairman has reported, there were 225 follow-on investments and 124 new investments. The number of write-ups accelerated from 33 to 110, continuing the trend evident in last year’s figures. During the year 47 investments were written off compared with 55 in the previous year, while the number of write-downs decreased to 115 compared with 155. The Company made commitments of $5 million each to two new limited partnerships, NEA 11 and TCV V, both managed by existing investee fund managers – taking to twenty the number of funds in which the Company is now invested. As at 31 March 2004, outstanding commitments to the partnerships not yet drawn down totalled $69.3 million. Through its investment in twenty venture capital funds, the Company’s exposure to the US technology markets is well diversified and the write-offs and write-downs during the year were more than compensated for by write-ups. As a result, the Company’s US dollar year end NAV showed a twelve month increase. The weakness of the dollar contributing to the 14% decline in the dollar exchange rate against sterling, means that the Company’s end-year sterling NAV does not fairly reflect its progress or prospects. As the Chairman has stated, there have been further encouraging signs from the increasing number of quoted stocks in our portfolio funds, whose shares have in general performed well over the period. Among the highlights of the year for investee companies where no corporate event has yet taken place, US handheld technology magazine Planet PDA Magazine named AirPrism’s Mobility Management Suite, which provides a next-generation solution for companies that need to manage their mobile and wireless computing resources, as Product of the Year. PEI holds a 0.26% stake in AirPrism through its investment in DFJ Fund VII. Ember Corporation won ‘top innovator’ honours at the Under the Radar conference in January 2004 for its embedded wireless frequency (RF) technology, which was also named one of the most significant technical innovations of 2003 by Control Engineering magazine. PEI holds a 0.02% stake in Ember through its investment in DFJ Fund VI. Through its investment in Zone Ventures II, PEI holds a 2% interest in DivX Networks, the video technology company whose growing success I referred to at the time of our last interim announcement. The company recently closed a Series C round of funding in March which valued the business at $100 million pre-money, a considerable increase over its last round valuation. DFJ ePlanet Ventures, in which the Company has a $30 million commitment, owns 23% of Baidu, the most widely used search engine in China, the world’s fastest growing internet market. It is interesting to note that, post period, Google, the largest search engine in the world which has filed for an IPO, has recently invested in Baidu. IPOs, trade sales and disposalsFour IPOs, all out of New Enterprise Associates Funds 9 and 10, took place during the year. At the period end, the gross value of these investments was $1.68 million on a mark-to-market basis, exceeding investment costs of $850,000 by 98%. Pharmion Corporation, based in Boulder, Colorado and founded in 1999, acquires and commercialises speciality pharmaceutical products globally, focusing on licensing and developing products in the areas of hematology and oncology. Pharmion floated in November 2003, raising $84m on the sale of 6 million shares at $14 per share. Myogen, based in Westminster, Colorado, was founded in 1996, and is a biopharmaceutical company focused on the discovery, development and commercialisation of small molecule therapeutics for the treatment of cardiovascular disorders. Myogen completed its IPO in November 2003 raising approximately $73m on the sale of 5 million shares at $14 per share. In February 2004 Atheros Communications Inc, a leading developer of semiconductor solutions for wireless communications products, went public on NASDAQ at $14 per share, valuing the business at $520 million. Based in Sunnyvale, California, Atheros was founded in 1998 and combines its wireless systems expertise with high performance radio frequency, mixed signal and digital semi-conductor design skills to provide highly integrated chipsets that are manufacturable on low-cost, standard, CMOS processes. In March 2004 Semiconductor Manufacturing International Corporation, a computer technology company located in Shanghai and focused on the fabrication of semiconductor wafers, raised $1.7 billion on its initial public offering at $17.50 per share, valuing the company at $5.4 billion. SMIC has one of the most advanced foundries in China for integrated circuit manufacturing. As the Chairman has reported, during the period there were 9 trade sales (2003:5) of which our share equates to $1.16 million, representing a return on investment cost of 22%. In all, direct cash distributions from 7 events totalled $2.90m compared with less than $119,000 for 2003 and $158,000 for 2002. Similarly, in the year to 31 March 2004, stock distributions totalled $5.78m compared with $1.34m and $1.06m in the previous two years. Bond and Hedge Fund PortfolioAs at 31 March 2004, the Company held $10.2m in cash and investment rate dollar denominated bonds, together with $33.2m in two European Medium Term Notes issued by Bank BNP Paribas and Deutsche Bank, managed by hedge fund of funds manager FRM. The US bond market was particularly volatile during the reporting period. Ten year yields rose from 3.5% in March 2003 to a peak of 4.6% in August only to finish the period close to where they started at 3.8%. During 2003, the Iraq war proved to be a turning point for equity markets and investor confidence. The UK equity market produced returns ahead of overseas markets in aggregate for the sterling investor. The FTSE All Share’s total return was 26.9% for the period against the World ex UK of 23.1%. In dollar terms, the US market was up by 35.1% but once translated into sterling this reduced to 16.25%. The stock market rallies were driven in the main by the performance of small and medium capitalisation cyclical stocks, particularly in the period between May and June 2003, rather than the larger companies within the FTSE 100. Corporate bond spreads continued to tighten over the final quarter of 2003 but the portfolio was defensively positioned towards the end of the reporting period as credit spreads widened. AAA bonds had moved to their tightest spread against gilts in the last 5 years by December 2003. The Dollar/Sterling exchange rate was $1.58 at the beginning of the period but had fallen sharply to $1.84 by the end of March 2004. This represents a 14% depreciation over the twelve months, which has clearly had a material impact on the value of dollar assets when converted into sterling. For the twelve month period the sterling return of the bond portfolio was down 9.43% against a fall in the composite index(*) of 11.71%. At the beginning of the year a total of $40.3m was held in the bond portfolio and $15.1m in a note as described above. During the year a further $15.1m was transferred from the bond portfolio into a note issued by Deutsche Bank and linked to the same hedge fund of funds. Absolute Alpha, the underlying hedge fund of funds in which the company is invested, returned 8.46% during the period, thereby meeting its return objective of LIBOR + 6-8%. Post Period EventsNEA 10 announced two IPOs in June 2004, Inhibitex Inc and SalesForce.com Inc. The Company’s share in the valuation of these two companies increased from $237,000 at the year end, to $485,000 at the time of writing and represents an overall gain of 133% on the cost of investment. Post period events continued to reflect an increasing optimism in US market sentiment. Two trade sales, those of Nanogram Devices Corporation by Bay III, and 3Ware by Vantagepoint realised $297,000, a 261% increase over investment cost. In addition there have been two further cash distributions totalling $377,000. The Company’s investment in the BNP Paribas note and linked to a hedge fund of funds managed by FRM, matured after the year end. These funds have been reinvested in our venture capital funds, short-dated bonds and a Royal Bank of Scotland global treasury fund. The Company’s underlying strategy remains unchanged. Although market sentiment has cooled somewhat since the year end, we remain confident that the funds in which we are invested will achieve excellent returns. (*) Index Statement of Total Return(incorporating the Revenue Account)*
*The revenue column of this statement is the revenue account of the Company. All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. Balance Sheet
Summarised Statement of Cash Flows
The above financial information does not constitute statutory financial statements as defined in Section 240 of the Companies Act 1985. The comparative financial information is based on the statutory financial statements for the year ended 31 March 2003. Those financial statements, upon which the auditors issued an unqualified opinion, have been delivered to the Registrar of Companies. Statutory financial statements for the year ended 31 March 2004 will be delivered to the Registrar of Companies in due course. These results have been prepared on the same basis as set out in the previous year’s annual accounts. Copies of the Annual Report will be sent to Members in August and will be available to members of the public from the Registered Office at 23 Cathedral Yard, Exeter, EX1 1HB. Barbara S Thomas Notes to editors The Company seeks to achieve substantial capital appreciation by investing in emerging growth companies through specialised US venture capital funds focused on the information technology, biotechnology and healthcare sectors. Return to Press Release Index
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