UK Private Equity Sector Will Be Unhappy With Pre-Budget Report

08 December 2006

Private equity funds will have good reason to feel disappointed following the Chancellor’s failure to redress the unfair retrospective legislation which will attack their fund returns, claim business and financial advisers Grant Thornton.
As a result of restrictions on the deductibility of finance costs in investee companies from April 2007, funds will see a significant increase in tax costs which in many cases could not have been predicted when their investments were made.
Stephen Quest, head of tax transactions at Grant Thornton, comments: “The taxation of private equity funds has been in a state of flux for the last two years. The market needs stability to enable deals to be completed with a degree of certainty. Clarity in this area would have provided a boost to the private equity sector which has brought so much to the British
economy over the last year.”
In light of the unchanged conditions, says Grant Thornton, the major issues facing the private equity market remain the deductibility of interest, withholding tax, and the tax treatment of management teams.
For portfolio companies, the most draconian measure to impact funds is the retrospective application of the transfer pricing regulations to the financing of investee companies. From April 2007, amounts payable to private equity
funds in respect of finance deemed not to be available on an arm’s length basis may not qualify for a deduction for corporation tax relief. The effect on returns is significant and unfair; the new rules can increase the cost of finance by 3-5% for investee companies, despite the fact that at the time finance was put in place no such legislation existed.
Quest says: “We had hoped to see a Pre-Budget in which the Chancellor put this right. His failure to do so will result in private equity funds taking a hit in April. It also sets a dangerous precedent and undermines the basis upon which funds will make investment decisions in the future.”
As regards withholding tax, Grant Thornton says that significant uncertainty exists as to whether withholding tax needs to
operate on interest paid on many international fund structures. This needs to be clarified as soon as possible.
For management teams, the treatment of ratchets remains worrying. AlthoughiIn August 2006, HMRC provided welcome confirmation that the British Venture Capital Association (BVCA) safe harbour would apply to ‘ratchets’
where management teams acquire sweet equity, the Pre-Budget Report has failed to address the thorny issue of post-acquisition changes to ratchets which cause so much difficulty when private equity investments are re-financed.
Grant Thornton says that tax law remains unclear with regard to earn-outs. Quest remarks: “The tax law in this area is in a considerable mess with uncertainty as to whether future receipts are taxed on a current or deferred basis. There is urgent need for a reform in this area.”
Stephen Quest concludes, “Private equity has become a mainstream and permanent factor in capital markets and deserves a fiscal regime that is consistently applied and delivers certainty to the funds in assessing investment opportunities in the UK. It remains the case that there is significant uncertainty and this is disrupting the flow of funds into the UK market. We hope that there will be substantive changes in the next Budget and that the introduction of retrospective attack on pre-2005 investments is dropped.”
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Israeli start ups raised $2.14b in 2011

Israeli start ups raised $2.14 billion in 2011, an 11-year high, and 70% more than the $1.26 billion raised in 2010, and 91% more than the $1.12 billion raised in 2009, according to the IVC Research Center and KPMG Somekh Chaikin Quarterly Survey. 546 start ups raised capital in 2011, up from 391 companies that raised capital in 2010.
The average financing round rose to $3.92 million in 2011 from $3.23 million in 2010 and $2.51 million in 2009.
Despite the good year, IVC is pessimistic about the future, “As predicted, 2011 numbers were impressive, but our forecast for 2012 is not as optimistic,” said IVC CEO Koby Simana. “As local venture capital funds have found it increasingly difficult to raise new capital and maintain a satisfactory level of first investments in early stage companies, foreign investors have been upping their investments, which more than doubled in the past year.
“However, with Israeli VCs continuing to downsize their investments and with the world economy still very much unsettled, foreign investors can no longer be counted on to fill in the gap. We believe annual investment can fall to as low as $1.5 billion if there is no dramatic recovery in the next few months.”
124 start-ups raised $569 million from Israeli and foreign venture capital funds in the fourth quarter of 2011, 9% more than the $522 million raised by 137 start-ups in the third quarter, and 65% more than $344 million raised by 100 start-ups in the corresponding quarter of 2010.
77 start-ups raised more than $1 million each during the fourth quarter, including five start-ups that each raised more than $20 million, and thirteen start-ups that raised $10-20 million each.
Israeli venture capital funds invested $525 million in Israeli companies in 2011, 42% more than the amount invested in 2010 and 28% more than in 2009. However, Israeli venture capital funds accounted for just 25% of total investment in 2011 – the lowest level in the past decade, in which the average proportion was 40%. First investments accounted for 31% of total investment by Israeli venture capital funds in 2011, up from 29% in 2010 and 2009, and the average first investment was $2.21 million, and the average follow-on investment was $1.06 million.
In 2011, the internet sector attracted the largest share of investments for the first time in the last decade, with 115 internet start-ups raising $482 million, 23% of total investment, more than double the $222 million, 18% of total investment, raised in 2010, and $147 million, 13% of total investment, raised in 2009.
The communications sector was in 2nd place, with 88 start-ups raising $432 million, 20% of total investment in 2011, 82% more than in 2010. The software sector was in third place, with start ups raising $415 million, 19% of total investment, in 2011, nearly triple the amount raised in 2010.
Mid-stage start ups raised the most capital in 2011, raising $903 million, 42% of total investment. Early stage start-ups accounted for 26% of total investment, and seed-stage start-ups raised 5% of total capital. Mid and late-stage companies raised $1.48 billion altogether – 90% more than the $781 million raised in 2010.
KPMG Somekh Chaikin partner Technology Group, Ofer Sela said, “Mobile solutions and applications are the primary factor behind the significant increase in communication company investments in the past two years. Israeli companies have traditionally excelled in the communications sector, and the high quality of such companies is expected to attract foreign investors in the future.”
He added, “The substantial increase in late stage investments indicates the strength of Israel’s technology industry, as well as its attractiveness to foreign investors. An impressive number of mature Israeli companies have reached substantial sales. A decade ago, such companies would most likely have gone the IPO route, raising funds publicly. Today, due to changed conditions in IPO markets, these companies are relying principally on both existing and late-stage investors. As a result, we expect a large portion of these companies to be sold over the coming 24-month period.”
Published by Globes [online], Israel business news – www.globes-online.com – on January 24, 2012
© Copyright of Globes Publisher Itonut (1983) Ltd. 2012
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Prospect Capital and Other Shareholders Enter Into Definitive Agreement to Sell NRG, With Prospect Expected to Receive …

NEW YORK, NY–(Marketwire -01/23/12)- Prospect Capital Corporation (NASDAQ: PSEC – News) (“Prospect”) announced today that Prospect and other third-party shareholders have executed a stock purchase agreement to sell their ownership interests in NRG Manufacturing Inc. (“NRG”), a leading manufacturer of oilfield equipment.
The transaction is subject to regulatory approval and is expected to close within the next 30 days. Such closing would also result in full repayment of Prospect’s loan to NRG.
Prospect expects to collect approximately $100 million in cash in the March 2012 quarter related to the sale of NRG. This $100 million would consist of approximately $30 million of investment income in the form of prepayment premium and structuring fee, with the remaining approximately $70 million related to debt repayment and equity proceeds. Additional amounts are expected to be escrowed for potential collection in future periods, resulting in potential incremental post-closing proceeds to Prospect of approximately $14 million. As a result, Prospect would receive a total of up to $114 million from the sale of NRG.
Prospect initially invested approximately $12 million of debt and equity in September 2006 to help finance the acquisition of NRG. Including all cash flows over the life of the investment, but not including escrowed amounts, Prospect expects to realize at closing on its combined debt and equity investment a 59% annualized internal rate of return.
With the expected sale of NRG, Prospect estimates it will have generated cumulative net investment income in excess of cumulative distributions to shareholders for both the current August 2012 tax year as well as since Prospect’s inception.
“Coming on the heels of the sale of Gas Solutions by our Energy Solutions portfolio company, Prospect’s sale of NRG adds another valuable realization to the Prospect Capital track record,” said M. Grier Eliasek, President of Prospect. “Our team is hard at work to invest our substantial liquidity. With our more than $1 billion of new originations in calendar year 2011, we have significant capability to invest such liquidity.”
“We applaud the managers of NRG, who have built the company into a premier supplier of mission-critical oilfield equipment,” said Bart J. deBie, a Managing Director of Prospect Capital Management. “Prospect is actively seeking new control and non-control investments across all industries.”
RBC Capital Markets is acting as financial advisor to NRG for the sale.
Separately, Prospect has provided $18.3 million of secured second-lien financing to a financial services processing company purchased by a leading private equity sponsor. Prospect has also invested $34.4 million in Class D senior secured notes and Class E subordinated notes for CIFC Funding 2011-I, Ltd., with third party first loss capital underneath Prospect’s position.
ABOUT PROSPECT CAPITAL CORPORATION
Prospect Capital Corporation (www.prospectstreet.com) is a closed-end investment company that lends to and invests in private and microcap public businesses. Our investment objective is to generate both current income and long-term capital appreciation through debt and equity investments.
We have elected to be treated as a business development company under the Investment Company Act of 1940 (“1940 Act”). We are required to comply with a series of regulatory requirements under the 1940 Act as well as applicable NASDAQ, federal and state rules and regulations. We have elected to be treated as a regulated investment company under the Internal Revenue Code of 1986. Failure to comply with any of the laws and regulations that apply to us could have an adverse effect on us and our shareholders.
This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, whose safe harbor for forward-looking statements does not apply to business development companies. Any such statements, other than statements of historical fact, are highly likely to be affected by other unknowable future events and conditions, including elements of the future that are or are not under our control, and that we may or may not have considered; accordingly, such statements cannot be guarantees or assurances of any aspect of future performance. Actual developments and results are highly likely to vary materially from these estimates and projections of the future. Such statements speak only as of the time when made, and we undertake no obligation to update any such statement now or in the future.
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