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Alexander Groh & Heinrich Liechtenstein 2009/2010 annual The Global Venture Capital and Private Equity Country Attractiveness Index Sponsored by

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  • 1.The Global Venture Capital and Private Equity Country Attractiveness Index 2009/2010 annual Alexander Groh & Heinrich LiechtensteinSponsored by

2. The Global Venture Capital and Private EquityCountry Attractiveness Index2009/2010 annualAlexander Groh & Heinrich LiechtensteinSponsored by 3. Contents Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Sponsors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 About the editors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Research team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9I. The Global VC/PE Country Attractiveness Index . . . . . . . . . . . . . . . . . . . . . 11 How to measure a countrys attractiveness for limited partners . . . . . . . . . . . . . . . . . . . . . . .12 The 2009/2010 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Comparisons of regions and countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 Tracking power of our index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Summary and outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30II. Legal systems, taxes and VC and PE activity. . . . . . . . . . . . . . . . . . . . . . . . . . . .33 After the storm: a global view on post-recession opportunities and challenges for the PE and VC industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Global Venture Capital and Private Equity Country Attractiveness Index - Legal Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36III. An insight into different VC and PE markets . . . . . . . . . . . . . . . . . . . . . . . . . .39 Africa: Governance, development and budding VC and PE activity . . . . . . . . . . . . . . . . . . . . 40 Asia: Does vibrant entrepreneurial activity and expected growth compensate some weaknesses? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Latin America: VC and PE in Latin America after the crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46IV. Regional and country proles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 How to read the country and regional proles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Regional proles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Country proles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70V. Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 Computation of the index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204 Statistical validation of the index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .206 Limitations of our index and FAQs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .207 Table with sources and explanations of the data series . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .216 4. Forewordfrom the research teamIn this annual, we want to present the results of acomprehensive research project on how to measure theattractiveness of a country for investors in Venture Capital(VC) and Private Equity (PE) limited partnerships. The projectwas initiated at IESE Business School in Barcelona in 2006with a European pilot study. From the European study wegained experience and the condence to extend the studyglobally. Since 2006 two professors, one doctoral student, andmany research assistants have worked on the project.We selected and collected more than 300 different data seriesfrom all kind of providers some ranging back to 2000. Weattempted to include as many countries as possible inthe study, and handled approximately 200,000 individualdata records.We would not have been able to realize this without thegenerous nancial and non nancial contributions fromour sponsors, and we greatly appreciate the support of IESEBusiness School, their International Center for FinancialResearch (CIIF), Ernst &Young, and DLA Piper Weiss Tessbach.This is the rst edition of the Venture Capital and PrivateEquity (VCPE) Country Attractiveness Index. This index willbe subject to critique and we invite constructive feedback tohelp us improve future editions of the index. Selected dataseries may be subject to change in future editions and newand more appropriate data series may be used as a substituteto existing data. The quality of data and the number ofcountries covered will increase. As a result, our index will bea dynamic product that always considers the most adequateand recent data. We believe this index is unique in providingthe VC and PE market segment with such a broad scope. Wehope investors will appreciate the information included in thisindex; politicians may utilize the index to make improvementsin their countries to attract international risk capital.We hope that you nd our 2009/2010 Venture Capital andPrivate Equity Country Attractiveness Index of value. Website Please visit our website http://vcpeindex.iese.us/ where you will nd more information, links to literature and several analytical tools for benchmarking purposes. 5. Professor Josh Lerner Jacob H. Schiff Professor of Investment BankingForeword Harvard Business SchoolVirtually every high growth business needs Another important trend has been thecapital. Investors allocate assets to earn professionalization of the venture capitalsubstantial returns. One would imagine thatindustry itself. Venture capital and privatethe two facts above would bring ventureequity organizations have matured. Theircapitalists and entrepreneurs together.investment policies, procedures, and systems have been rened over decades of experience,But, in fact, a signicant gap separates the two and are becoming formalized and structured.groups. Entrepreneurs live in great uncertaintyAs a result of these two trends, it is no surpriseand assume signicant risk in pursuing their that many nations are making greater efforts tobusiness, whether a young start up or aencouraging venture capital activity with an eyerestructuring division. Venture capitalists andto boosting innovation and entrepreneurship,private equity investors are a special breed, whoand to counteracting the recessionary impactseek to help entrepreneurs triumph, but have of the global economic crisis on growth.duciary responsibilities to their own investors(whether pensions, sovereign wealth funds, With the emergence of venture capital andendowments, or families), which limit theirprivate equity investment as a professionalability to absorb all the risk in new ventures.practice, understanding the way in whichWhile venture capital and private equity this industry works is critically important forhas become a well developed industry in thepolicymakers, practitioners, and would beUnited States and Western Europe, in manypractitioners, whether they are (or aspire to be)other parts of the world, a gap in experienceworking for entrepreneurial ventures, ventureand expectations has slowed the adoption ofcapital and private equity rms, or largeventure capital and private equity funds, andinstitutional capital pools. I applaud Alexanderlimited the success of the pioneering funds. Groh and Heinrich Liechtenstein, who have taken the heroic step of trying to draw together all theBut in the past few years, the venture information needed to assess whether a marketcapital and private equity industry has been is ready for venture capital and private equity.globalizing at a dramatic pace. Funds areincreasingly being raised internationally andThe country attractiveness indexwhich buildsinvested globally. More and more rms have on academic research into the determinantsestablished multinational operations. There is of these funds world wideprovides valuablean increasing appreciation by entrepreneursinformation to investors and political leadersworld wide of the benets that venture and about which markets are most suited forgrowth equity investors can bring. Company private investments. The index results bothmanagers are increasingly setting ambitiousprovide answers and raise questionse.g., togoals and looking to these investors to providewhat extent will the nancial crisis upendthe capital, advice, and strategic partnershipsthe established order of the most attractivethey need to bring their plans to fruition.markets?but represent an important step in systemizing our understanding of these issues. Enjoy the reading! The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 7 6. SponsorsWe are very grateful to our sponsors IESE Business School/CIIF, Ernst & Young,and DLA Piper Weiss-Tessbach for the nancial support, their feedbackthroughout the project and their direct contributions to the index.IESE Business School University of Navarra Business School and has established itself as a nu-is one of the worlds top 10 business schools andcleus of study within the Schools activities.has pioneered executive education in Europe sinceSixteen years on, our chief objectives remainits foundation in 1958 in Barcelona. In 1964 IESEthe same:introduced Europes rst full-time MBA program. Find answers to the questions that confront theIESE distinguishes itself in its general-management owners and managers of nance companies,approach, extensive use of case method, interna-and the nance director of all kind of compa-tional outreach, and emphasis on placing people atnies in the performance of their duties.the heart of managerial decision-making. With a Develop new tools for nancial management.truly global outlook, IESE currently runs executive- Study in depth the changes that occur in theeducation programs on four continents.market and their effects on the nancial dimen-The CIIF, International Center for Financial Re-sion of business activity.search, is an interdisciplinary center with an inter-All of these activities are programmed and carriednational outlook and a focus on teaching and re- out with the support of our sponsoring companies.search in nance. It was created at the beginningApart from providing vital nancial assistance, ourof 1992 to channel the nancial research interestsponsors also help to dene the Centers researchof a multidisciplinary group of professors at IESE projects, ensuring their practical relevance.Ernst & Young is a global leader in assurance, tax, Our private equity and venture capital practicestransaction and advisory services. Worldwide, ourtherefore offer a holistic, tailored approach that en-144,000 people are united by our shared values and compasses the needs of funds, their M&A processan unwavering commitment to quality. We make a and portfolio companies while addressing market,difference by helping our people, our clients andindustry and regulatory concerns and opportunities.our wider communities achieve their potential.We hope that the Global VC/PE Country Attrac- Potential is a key word for equity capital ma-tiveness Index proves to be a valuable tool in hel-nagement. Deal success doesnt end when the deal ping funds navigate through this uncertain time.closes. Acquirers know success and stakeholder For more information please visit www.ey.comvalue lie in portfolio companies continued growthunder their watch and after their exits. including corporate, M&A, venture capital andDLA Piper Weiss Tessbach is part of DLA Piper, capital markets, banking and nance, litigationone of the largest global legal services prac- and regulatory, general commercial law, real es-tices, with over 3,500 lawyers in 67 ofces in 29 tate, employment law, IT, telecoms and IP and ad-countries. From its ofces in Asia, Europe, the vises its clients as a full-service rm in all relevantMiddle East and the US, legal and business ad- areas of business law.visers provide a broad range of services to local,For further information, please visit:regional and international clients. The rm is hi- www.dlapiper.com.ghly acknowledged in its core areas of expertise8 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 7. About the editorsProf. Alexander Groh Prof. Heinrich LiechtensteinResearch team Alexander GrohDr. Alexander Groh is Visiting Professor atDr. Heinrich Liechtenstein is Professor of Visiting Professor,IESE Business School, Barcelona Univer-Financial Management at IESE Business IESE Business School Barcelonasity of Navarra, Spain. His research activi- School, Barcelona University of Navarra,ties focus on VC and PE, and include va- Spain. His areas of interest are entrepre- Heinrich Liechtensteinluation issues, performance measurementneurial nance, VC and PE, wealth ma- Assistant Professor,and socio-economic determinants for thenagement, and owners strategies. He is IESE Business School Barcelonadevelopment of national markets. He is active in several supervisory and advisoryAssociate Professor of Finance at GSCM boards of family holdings and founda- Karsten LieserMontpellier Business School, France. Prior tions, as well as a private equity rm. Visiting PhD Student,to that, he was visiting INSEAD, Fontaine-Dr. Liechtenstein has experience in IESE Business School Barcelonableau, France, and was Assistant Professor wealth management and owners strate-of Corporate Finance and Entrepreneurial gies at Liechtenstein Global Trust, a family Miriam HesseFinance at Darmstadt University of Tech- holding, and as a consultant at The Boston Research Assistant,nology, Germany. He is involved in trainingConsulting Group. He has previously foun- IESE Business School Barcelonacourses for the European Venture Capital ded and sold two companies.and Private Equity Association (EVCA), andDr. Liechtenstein was born in Leoben, Renata Semmelthe Indian Venture Capital and Private Austria, and received an MA in Business Research Assistant,Equity Association (IVCA), and has workedAdministration from the University of IESE Business School Barcelonafor Quadriga Capital, a Frankfurt basedGraz, an MBA from IESE Business School,Private Equity fund, since 1996. and a Doctoral Degree of Business and Sarp VardariziDr. Alexander Groh was born in Frank-Economic Sciences from the University of Research Assistant,furt, Germany. He received a joint MastersVienna. IESE Business School BarcelonaDegree of Mechanical Engineering andBusiness Administration from Darmstadt Matthias WichUniversity of Technology, where he also Research Assistant,gained his Doctoral Degree in Finance. IESE Business School Barcelona Tobias Gtz Research Assistant, IESE Business School Barcelona Markus Grabellus Research Assistant, IESE Business School Barcelona Markus Biesinger Research Assistant, IESE Business School BarcelonaThe Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 9 8. I.10 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 9. The Global VC/PE CountryAttractiveness IndexArticle written by Alexander Groh, [email protected], and Heinrich Liechtenstein, [email protected],both, IESE Business School Barcelona.The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 11 10. The Global VC/PE Country Attractiveness Index How to measure a countrys attractiveness for limited partnersThe purpose of our index is toin particular nations and will benchmarkbenchmark countries with respect to them. A politician has the opportunitytheir attractiveness for institutionalto inuence the conditions that attractinvestors who decide upon international (or deter) international risk capital: anallocations in VC and PE limitedinvestor will respond to policy actions.partnerships. We therefore take anTherefore, attempts to increase riskinstitutional investors point of view forcapital market activity in a particularthe aggregation and analyses of socio-country should focus on the relationshipeconomic data. We want to contributebetween the parties that deserve capitalto solving the investors problem: whereand those who provide it. Risk capital isto allocate the capital. However, a a high liquid asset class with respect topolitician may conclude that a vibrantinternational allocations. Funds will owrisk capital market supports innovation,quickly into regions and countries whereentrepreneurship, economic growth,investors expect opportunities. Nationsemployment, and wealth. Both the(and regions) are in strong competitionpolitician, who would like to increase risk for receiving allocations from limitedcapital market activity, and the investor,partners.who seeks adequate compensation for theinvestment risk, will observe strengthsand weaknesses, risks and opportunities12The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 11. What are institutional investorsImportance of Economic Activitythe ndings are equally valid for the laterselection criteria?Intuitively, the state of a countrys eco- stage. Jeng and Wells (2000) stress thatOur index addresses the concerns of insti- nomy should affect the VC/PE activity. IPO activity is the main force behind cy-tutional investors and looks at the criteria An economys size is an indicator of the clical swings because it reects the poten-they base their international VC and PEquantity of corporations and deal ow op-tial return to the VC/PE funds. Kaplan andallocation decisions upon. Their allocationportunities in general. Economic growthSchoar (2005) conrm this. Analogous tocriteria will include, in the rst instance, should lead to demand for nance. Gom- Black and Gilson (1998), Gompers and Ler-the expected economic opportunities of pers and Lerner (1998) focus on the VC ner (2000) point out that risk capital ou-a country or region from a macro pers- segment and point out that more attrac-rishes in countries with deep and liquidpective. However, they will also include a tive opportunities exist for entrepreneurs stock markets. Likewise, Schertler (2003)particular investment strategy of a fund if the economy is growing quickly. Wilkenuses either the capitalization of stock mar-management team, the teams compe- (1979) argues that a situation of econo- kets or the number of listed companies astence, their track record and other para-mic prosperity and development facilitates a measure for the liquidity of stock mar-meters. The latter criteria will be addressedentrepreneurship, as it provides a greater kets. She nds that the liquidity of stockas part of their fund due diligence before accumulation of capital for investments. markets has a signicant positive impactlimited partners consider committing to aThe ease of start-ups is expected to be re-on VC investments in its early stages.particular general partner. These criteria lated to societal wealth, not solely due toAlongside the disadvantages of bank-are beyond of the scope of our index be- the availability of start-up nancing, but centered capital markets, Greene (1998)cause they depend on individual cases. Our also to higher income among potentialemphasizes that low availability of debtindex points to the general opportunitiescustomers in the domestic market. Ro-nancing is an obstacle for start-ups inthat arise from the socio-economic state main and van Pottelsberghe de la Potteriemany countries. Entrepreneurs need toof a country or region and as a result, we (2004) nd that VC/PE activity is cyclical nd backers - whether banks or VC/PEcontribute to the macro perspective of the and signicantly related to gross domestic funds - who are willing to bear risk. Ce-fund due diligence. Our index provides va- product (GDP) growth.torelli and Gambera (2001) provide evi-luable information to investors as it is thedence that bank concentration promotesrst time that the different factors that de-Importance of the Depth of a Capital the growth of those industrial sectors thattermine the attractiveness of a country forMarket have a higher need for external nance bylimited partners have been summarized in Black and Gilson (1998) focus on the diffe-facilitating credit access to younger com-a composite measure. The decisive factorsrences between bank-centered and stock panies in said industry sectors.that render a country attractive have been market-centered capital markets. Theyextensively discussed in literature about theargue that a well-developed stock mar- Importance of Taxationdeterminants of vibrant VC and PE markets. ket that permits venture capitalists to exit We assume that two types of taxes affectWe give a brief overview over this literaturethrough an initial public offering (IPO) isVC and PE activity; those directly related toand group the articles into six sub-chap-crucial for the existence of a vibrant VCthe asset class, such as taxes on dividendsters that already reveal the structure of ourmarket. In general, bank-centered capitaland capital gains, and those with an im-index. Each heading represents one of sixmarkets show less ability to produce an ef-pact on corporations and entrepreneurship,key drivers that we regard as important, cient VC infrastructure. They afrm thatsuch as corporate tax rates. Gompers andappropriate and quantiable to determine it is not merely the strong stock market Lerner (1998) stress that the capital gainsthe attractiveness of a country for limitedthat is missing in bank-centered capital tax rate inuences VC/PE activity. In fact,partners. The key drivers name and dene markets; it is also the secondary institu- they conrm Poterbas nding (1989), whoa set of criteria we need to assess for ourtions, including the bankers conservative builds a decision-model to become entre-sample countries.1 approach to lending and investing, and preneur. Bruce (2000 and 2002), and Cullen the social and nancial incentives thatand Gordon (2002) prove that taxes mat- reward entrepreneurs less richly (and pe-ter for business entry and exit. Djankov et1. Groh, Alexander, Liechtenstein, Heinrich and Lieser,Karsten (2009a) : The European Venture Capital and Private nalize failure more severely), that compro-al. (2008) show that corporate tax ratesEquity Country Attractiveness Indices, forthcoming in themise entrepreneurial activity. While their strongly affect entrepreneurship. Bruce andJournal of Corporate Finance (Re-print). Available athttp://ssrn.com/author=330804. paper focuses on the early stage segment,Gurley (2005) explain that increases in theThe Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 13 12. The Global VC/PE Country Attractiveness Index personal income tax raise the probability ofting standards have a signicant impactRigid labor market policies negatively becoming an entrepreneur. Hence, the dif- on the governance of investments in the affect the evolution of a VC/PE market. ference between personal income tax rates VC/PE industry. Desai et al. (2006) show, Lazear (1990) and Blanchard (1997) dis- and corporate tax rates tends to be an in-that fairness and property rights protec- cuss how protection of workers can reduce centive to create self-employment.tion largely determine the growth and employment and growth. Black and Gilson emergence of new enterprises. Cumming (1998) argue that labor market restric- Importance of Investor Protection and Johan (2007), meanwhile, highlighttions inuence VC/PE activity, though not and Corporate Governancethe perceived importance of regulatoryto the same extent as the stock market. Legal structures and the protection ofharmonization with respect to increasing Djankov et al. (2002) investigate the property rights also inuence the at- institutional investor commitments to role of several societal burdens for start- tractiveness of a VC/PE market. La Portathe asset class. La Porta et al. (2002) nd ups in different countries. They conclude et al. (1997 and 1998) conrm that thea lower cost of capital for companies inthat the highest barriers and costs are legal environment strongly determines countries with better investor protection,associated with corruption, crime, a lar- the size and extent of a countrys capitaland Lerner and Schoar (2005) conrm ger unofcial economy, and bureaucratic market and local companies ability to re-these ndings. Johnson et al. (1999) show delay. ceive outside nancing. They emphasizethat weak property rights limit the rein- the difference between statutory law andvestment of prots in start-up compa- Importance of Entrepreneurial the quality of law enforcement in somenies. Finally and more broadly, Knack and Culture and Opportunities countries. Roe (2006) comprehensively Keefer (1995), Mauro (1995), and Svens- Access to viable investments is one of the discusses and compares the political deter- son (1998) demonstrate that propertymost important factors for the attracti- minants of corporate governance rules for rights signicantly affect investments andveness of a regional VC market, especially the major economies and focuses on theeconomic growth.for early stage or start-up deals. The num- importance of strong minority sharehol- ber of potential investments relates to the der protection to develop a vibrant capital Importance of the Human and Socialresearch output in an economy. Gompers market. Glaeser et al. (2001) and Djankov Environment and Lerner (1998) show that both indus- et al. (2003 and 2005) suggest that parties Black and Gilson (1998), Lee and Peterson trial and academic research and deve- in common-law countries have greater(2000), and Baughn and Neupert (2003) lopment (R&D) expenditure signicantly ease in enforcing their rights from com-argue that national culture shapes both correlates with VC activity. Kortum and mercial contracts. Cumming et al. (2006)individual orientation and environmentalLerner (2000) highlight that the growth in nd that the quality of a countrys legal conditions, which lead to different levelsVC fundraising in the mid-1990s may be system is more closely connected to faci- of entrepreneurial activity in particular due to a surge of patents in the late 1980s litating VC/PE backed exits than the size countries. Megginson (2004) argues that,and 1990s. Schertler (2003) emphasizes of a countrys stock market. Cumming et in order to foster a growing risk capital that the number of both R&D employees al. (2009) extend this nding and showindustry, research culture plays an impor-and patents, as an approximation of the that cross-country differences in lega- tant role, especially in universities or na-human capital endowment, has a positive lity, including legal origin and accoun-tional laboratories.and highly signicant inuence on VC ac-14 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 13. tivity. Furthermore, Romain and von Pot-For the index calculation, it would betelsberghe de la Potterie (2004) nd thatideal to include all parameters. However,start-up activity interacts with the R&D some of the cited papers focus on parti-capital stock, with technological opportu- cular economies or regions, dependingnities, and the number of patents. Simi- on the data available, and their datasetslar to Djankov et al. (2002), Baughn and are difcult to compare. Therefore, we tryNeupert (2003) argue that bureaucracy in to nd the best possible proxies for thethe form of excessive rules and procedural aforementioned drivers of VC/PE activity,requirements, multiple institutions from which are available for a large number ofwhich approvals are needed, and cumber-countries. From the foregoing review ofsome documentation requirements mayprior research, we identied six main cri-severely constrain entrepreneurial activity. teria that ultimately determine the attrac-Lee and Peterson (2000) stress that thetiveness of an individual country for VC/time and money required to meet such PE investments: Economic Activity, Depthadministrative burdens may discourageof a Capital Market, Taxation, Investornew venture creations. Protection and Corporate Governance, Human and Social Environment, and En-Summary on the determinants of trepreneurial Culture and Opportunities.vibrant VC and PE marketsWe regard these criteria as key drivers,The research ndings discussed emphasize conrm their choice via a survey amongthe difculty of identifying the appro-institutional investors, reported in Grohpriate parameters for our index. There isand Liechtenstein (2009b) and (2009c),neither consensus about the most impor-and base the index structure upon them.tant parameters for VC/PE investment,Since none of the key drivers are di-nor any ranking. While some parameters rectly measurable, we regard them asare more comprehensively discussed,constructs and seek for data series thatand certainly of very high relevance, it adequately express their character.remains unclear how these interact. Forexample, it is debatable whether the VC/PE activity in a country with a high cor-porate governance level is more affectedby the liquidity of the national stockmarket or by labor regulations. While anIPO exit is, in principle, possible at manystock exchanges in the world, labor mar-ket frictions can hardly be evaded.The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 15 14. The Global VC/PE Country Attractiveness Index The 2009/2010 Index Assessing six latent key drivers How we disaggregate the six keyOverall, we use 22 level 2 constructs for The basic and important principle of our in- driversour index, and hence, 1 Economic Acti- dex is to make use of latent drivers. TheseAccording to the principle to assess latentvity receives a weight of 3/22, which is are criteria that are not directly observable, drivers of VC and PE attractiveness with 0.136, while the weight of 3 Taxation is but driven by others which can be measu- observable data we disaggregate the six2/22 - 0.091. The advantage of this wei- red. For example, while we do not get data key drivers in sub-categories. These catego- ghting scheme is that the key drivers that on the number of investment banks, law ries are either actual data series or furtherconsist of more level 2 constructs gain rms, accountants, or consultants to assesssub-constructs, and we call them level 2more weight. That way, we also smooth the infrastructure of the deal supportingconstructs. For example, in Table 1, we nd,outliers in individual data series.3 institutions for the majority of our samplethe key driver 2 Depth of a Capital Mar- countries, we can gather more general in-ket split into ve sub-categories: 2.1 SizeSeparate VC and PE indices formation on the level of debt provided by and Liquidity of the Stock Market, 2.2 IPO To account for differences with respect the banking sector, or estimates about the Market Activity, 2.3 M&A Market Activi-to the two market segments, VC vs. PE, we soundness of banks, the sophistication ofty, 2.4 Debt and Credit Market, and 2.5propose three alternative indices. The rst the nancial system and the ease of access Financial Market Sophistication. The last combines both segments. The second fo- to loans. We assume that the better thesesub-category is a data series provided by thecuses on early stage VC and the third on criteria are developed, the more deal sup- World Economic Forum (WEF), all the others later stage PE only. For the VC and PE in- porting institutions will likewise exist toare constructs by themselves. For example, dices we simply discard data series that are facilitate VC and PE activity. This principlewe assess 2.1 Size and Liquidity of the Stock less important for either market segment: is maintained at all individual stages for the Market with three different data series (andfor the VC index, we regard the level 2 index construction. An unobservable crite- call them level 3 data): the 2.1.1 Market construct 2.4 Debt and Credit Market as rion is assessed with several proxy parame-Capitalization of Listed Companies", the relatively unimportant, and hence discard it. ters. In principle, we measure the attrac- 2.1.2 Total Trading Volume, and 2.1.3 Lis-When calculating the PE index, we discard tiveness of a country by six main criteria.ted Domestic Companies. This approach has 3.1.2 Entrepreneurship Incentive, 3.1.3 The choice of these criteria is based on our two major advantages: rst, individual dataLabor and Tax Contributions, and 3.2 Ad- own experience, the above review of aca- series do not gain too much weight whenministrative Tax Burdens, and further, 5.1 demic literature and a survey we undertook they are grouped; second, the overall resultsEducation and Human Capital, 6.1 Inno- among limited partners.2 can be traced to more granulated levels andvation and R&D, 6.2 Ease of Starting and We call them the six key drivers : hence, facilitate interpretations. Running a Business and 6.4 ICT Infrastruc-1. Economic Activity ture from the criteria. The weights for the2. Depth of a Capital MarketThe weighting scheme individual index items in the separate VC3. Taxation We spent a great amount of time with and PE indices are calculated analogue to4. Investor Protection and Corporatestatistical analyses and optimization ap-the above explained procedure.Governanceproaches to determine the weights for theTable 1 presents the structures and the5. Human and Social Environment data aggregation. Finally, we came to theweights of the individual data series and6. Entrepreneurial Culture andconclusion not to apply a statistically so-constructs for the combined VCPE, the VCOpportunities.phisticated approach that deserves docu- and the PE index. In the appendices, we As discussed before, these six key dri-mentation and discussion, but to chooseprovide detailed information on the data vers are not directly observable. For this a simple, plausible, and robust weightingseries used to aggregate the index, and all reason, we disaggregate them, and use se-scheme. We apply equal weights for all data sources. There, we also explain the veral proxies for their assessment.data series, when we aggregate them to exact data aggregation technique.the level 2 constructs. Then again, we use 3. Details about the possible statistical approaches to 2. The results of this survey are described in two academicequal weights for the level 2 constructs determine weights for the data series are provided in the working papers : Groh, Alexander and Liechtenstein,to aggregate the six key drivers. Finally, academic paper Groh, Alexander, Liechtenstein, Heinrich Heinrich (2009b) : International Allocation Determinantsand Lieser, Karsten (2009a) : The European Venture of Institutional Investments in Venture Capital and Privatethe weight of the key drivers dependsCapital and Private Equity Country Attractiveness Indices, Equity Limited Partnerships, IESE Business School Workingon the number of level 2 constructs in-forthcoming in the Journal of Corporate Finance. Available Paper No. 726, and in Groh, Alexander and Liechtenstein,at http://ssrn.com/author=330804. Heinrich (2009c) : How Attractive is Central Eastern Europecluded. For example, 1 Economic Acti- for Risk Capital Investors ? Journal of International Moneyvity consists of three level 2 constructs, and Finance (28), 4, p. 625 647. Available at http://ssrn. com/author=330804. while 3 Taxation consists of only two.16The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 15. Table 1: Structure of the VCPE Index, the separate VC, and PE Indices, and the weighting schemes VCPEVCPEVCPEVCPE Index Index Index Index Index Index1 Economic Activity0.140.140.18 4.2.3 Intellectual Property Protection 0.330.330.331.1 Gross Domestic Product 0.330.330.33 4.3 Quality of Legal Enforcement 0.250.250.251.1.1 Total Economic Size0.330.330.33 4.3.1 Judicial Independence0.250.250.251.1.2 GDP per Capita 0.330.330.33 4.3.2 Impartial Courts 0.250.250.251.1.3 Real GDP year-on-year Growth 0.330.330.33 4.3.3 Integrity of the Legal System0.250.250.251.2 Ination 0.330.330.33 4.3.4 Rule of Law0.250.250.251.3 Unemployment 0.330.330.33 4.4 Regulatory Quality 0.250.250.252 Depth of a Capital Market0.230.190.29 5 Human and Social Environment 0.180.190.182.1 Size and Liquidity of the Stock Market 0.200.250.20 5.1 Education and Human Capital0.250.252.1.1 Market Capitalization of Listed Companies0.330.330.33 5.1.1 Quality of the Educational System0.500.502.1.2 Total Trading Volume 0.330.330.33 5.1.2 Quality of Scientic Research Institutions 0.500.502.1.3 Listed Domestic Companies0.330.330.33 5.2 Labor Market Rigidities0.250.250.332.2 IPO Market Activity0.200.250.20 5.2.1 Difculty of Hiring Index0.250.250.252.2.1 Market Volume0.500.500.50 5.2.2 Rigidity of Hours Index0.250.250.252.2.2 Number of IPOs 0.500.500.50 5.2.3 Difculty of Firing Index0.250.250.252.3 M&A Market Activity0.200.250.20 5.2.4 Firing Costs 0.250.250.252.3.1 Market Volume0.500.500.50 5.3 Bribing and Corruption 0.250.250.332.3.2 Number of Deals0.500.500.50 5.3.1 Bribing and Corruption Index 0.330.330.332.4 Debt and Credit Market 0.200.20 5.3.2 Control of Corruption0.330.330.332.4.1 Domestic Credit provided by Banking Sector 0.170.17 5.3.3 Extra Payments/Bribes0.330.330.332.4.2 Ease of Access to Loans0.170.17 5.4 Costs of Crime 0.250.250.332.4.3 Credit Information Index 0.170.17 5.4.1 Business Costs of Crime and Violence 0.500.500.502.4.4 Soundness of Banks 0.170.17 5.4.2 Costs of Organized Crime 0.500.500.502.4.5 Interest Rate Spread 0.170.17 6 Entrepreneurial Culture and Opportunities0.180.190.062.4.6 Bank Non-performing Loans to Total Gross Loans 0.170.17 6.1 Innovation and R&D 0.250.252.5 Financial Market Sophistication0.200.250.20 6.1.1 General Innovativeness Index 0.200.203 Taxation 0.090.100.06 6.1.2 Capacity for Innovation0.200.203.1 Tax Incentives 0.500.501.00 6.1.3 Company Spending on R&D0.200.203.1.1 Marginal Corporate Tax Rate0.250.250.50 6.1.4 Utility Patents0.200.203.1.2 Entrepreneurship Incentive 0.250.25 6.1.5 Scientic and Technical Journal Articles 0.200.203.1.3 Labor Tax and Contributions0.250.25 6.2 Ease of Starting and Running a Business0.250.253.1.4 Prot and Capital Gains Tax0.250.250.50 6.2.1 Number of Procedures to start of Business0.200.203.2 Administrative Tax Burdens 0.500.50 6.2.2 Time needed to start a Business0.200.203.2.1 Number of Payments 0.500.50 6.2.3 Costs of Business Start-Up Procedures0.200.203.2.2 Time spent on Tax Issues 0.500.50 6.2.4 Minimum Capital0.200.204 Investor Protection and Corporate Governance 0.180.190.24 6.2.5 Administrative Requirements0.200.204.1 Corporate Governance 0.250.250.25 6.3 Simplicity of Closing a Business 0.250.251.004.1.1 Disclosure Index 0.200.200.20 6.3.1 Time 0.330.330.334.1.2 Director Liability Index 0.200.200.20 6.3.2 Costs0.330.330.334.1.3 Shareholder Suits Index0.200.200.20 6.3.3 Recovery Rate0.330.330.334.1.4 Legal Rights Index 0.200.200.20 6.4 ICT Infrastructure 0.250.254.1.5 Efcacy of Corporate Boards0.200.200.20 6.4.1 Broadband Subscribers0.250.254.2 Security of Property Rights0.250.250.25 6.4.2 Fixed Line and Mobile Phone Subscribers0.250.254.2.1 Legal Enforcement of Contracts 0.330.330.33 6.4.3Internet Users0.250.254.2.2 Property Rights0.330.330.33 6.4.4Secure Internet Servers 0.250.25 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 17 16. The Global VC/PE Country Attractiveness IndexThe countries we coverThe VCPE country attractivenessThe selection of our sample countries isrankingpurely driven by the availability of data.We gathered the data from Table 1 for theWe would like to include many more na-66 countries as far back to the past, and astions but the lack of data is the constraint. recent as possible. We calculated the in-At present, the African continent is un-dex scores for 2009/2010 and realized, notder-represented with only four countries, surprisingly, that the United States is thebut we hope to expand the number of most attractive country for VC and PE al-countries in future editions of the index.locations, with some remarkable distanceWe consider the following 66 nations andto its followers. Therefore, we use the USassign them to eight different geographic as the world benchmark: we rescale theregions.index score for the US to 100. This enablesus to directly compare all other countrieson a percentage scale. We explain the res-caling procedure in the appendix to thisAfrica: Kenya, Morocco, Nigeria, South Africa index, and rst present the ranking of the2009/2010 VCPE Country AttractivenessAsia: China, Hong Kong, India, Indonesia, Japan,Index.Malaysia, Philippines, Russian Federation, Exhibit 1 shows the ranking of theRepublic of Korea, Singapore, Taiwan, 2009/2010 VCPE Country AttractivenessThailand, Vietnam Index. We know that this exhibit opensroom for discussion. Some readers mightAustralasia:Australia, New Zealandthink that particular countries are ran-ked too high, others too low. However, weEastern Europe: Bulgaria, Croatia, Czech Republic, Estonia, want to stress that the index ranking is theHungary, Latvia, Lithuania, Poland, Romania,result of commonly available, aggregatedSlovak Republic, Slovenia, Turkey, Ukrainesocio-economic data. The results can betraced to the level of the individual dataLatin America:Argentina, Brazil, Chile, Colombia, Mexico, series, and hence, can be conrmed. WeParaguay, Peru, Uruguay, Venezuelawant to remark that the underlying datais historical, and does not include futureMiddle East:Egypt, Israel, Kuwait, Oman, Saudi Arabia,estimates. Therefore, we show the attrac-United Arab Emiratestiveness ranking as of today and want toleave it to investors and advisers to en-North America:USA, Canada rich the information we prepared withown knowledge, and expectations to drawWestern Europe: Austria, Belgium, Denmark, Finland, France, their conclusions.Germany, Greece, Ireland, Italy, Luxembourg,Netherlands, Norway, Portugal, Spain,Sweden, Switzerland, United Kingdom18The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 17. Exhibit 1: 2009/2010 VCPE Country Attractiveness Index 0 102030405060708090 100United States (1.) 100,0Canada (2.)85,8United Kingdom (3.)84,3Australia (4.) 81,9 Hong Kong (5.)79,5 Singapore (6.)78,5 Japan (7.)76,5Switzerland (8.) 76,3Netherlands (9.) 70,1Germany (10.)69,1Sweden (11.) 69,0Denmark (12.)67,7 Republic of Korea (13.) 67,5Norway (14.) 66,3Finland (15.)65,9France (16.) 65,2 Belgium (17.) 61,1New Zealand (18.)60,0 Austria (19.) 58,6 Spain (20.) 58,3 Ireland (21.) 58,3Israel (22.) 55,8 Taiwan (23.)55,3Luxembourg (24.) 54,6 Malaysia (25.)54,4United Arab Emirates (26.) 51,7 Portugal (27.)49,5 China (28.) 48,5 Italy (29.) 47,5Saudi Arabia (30.) 46,4 Poland (31.)45,8Chile (32.)45,8 Slovenia (33.)45,6 Czech Republic (34.)45,5 Estonia (35.) 44,5 Thailand (36.)41,4 Hungary (37.) 41,1India (38.)40,9 Greece (39.)40,7Lithuania (40.)40,4 Slovakia (41.)40,3 Kuwait (42.)40,1South Africa (43.) 39,5Turkey (44.) 39,1 Croatia (45.) 38,6 Oman (46.)38,1 Romania (47.) 38,1Russian Federation (48.) 38,0 Mexico (49.)35,8 Latvia (50.)35,6 Brazil (51.)34,6 Uruguay (52.) 33,4 Peru (53.)32,4 Indonesia (54.) 30,7 Bulgaria (55.)30,6 Morocco (56.) 30,3 Egypt (57.) 30,1Colombia (58.) 29,4 Argentina (59.) 29,1 Vietnam (60.) 27,1Philippines (61.)26,1 Nigeria (62.) 24,4Ukraine (63.)23,6Kenya (64.)19,3Paraguay (65.) 14,9 Venezuela (66.) 8,9The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 19 18. The Global VC/PE Country Attractiveness IndexRankings according to the separateFor the PE index, we discard all constructsVC and PE indices that are related to innovations, and foun-Exhibit 2 combines the prior results andding or running a business in early stages.the ranking according to the separate VCWe realize that Brazil, India, China, France,and PE indices. The red squares mark theSpain and Malaysia gain many ranks withVCPE index ranks. The white squares desi- respect to their attractiveness for PE in-gnate the VC index, and the grey squaresvestments. The rationale is simple: thethe PE index ranks. The VC index countryaforementioned countries show relativeranking does not change greatly. The ran- liquid and developed capital markets. Asking remains because we only discard thethe measure for the depth of a capitallevel 2 construct to assess the Debt and market gains a higher weight in the PECredit Market from the VC index. Howe- index, these countries rank on superior le-ver, we receive a stronger ranking varia- vels, consequently.tion if we focus on the PE segment only.20The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 19. Exhibit 2: Rankings of the three different indicesUnited States (1.)Canada (2.)United Kingdom (3.)Australia (4.) Hong Kong (5.) Singapore (6.) Japan (7.)Switzerland (8.)Netherlands (9.)Germany (10.)Sweden (11.)Denmark (12.) Republic of Korea (13.)Norway (14.)Finland (15.)France (16.) Belgium (17.)New Zealand (18.) Austria (19.) Spain (20.) Ireland (21.)Israel (22.) Taiwan (23.)Luxembourg (24.) Malaysia (25.)United Arab Emirates (26.) Portugal (27.) China (28.) Italy (29.)Saudi Arabia (30.) Poland (31.)Chile (32.) Slovenia (33.) Czech Republic (34.) Estonia (35.) Thailand (36.) Hungary (37.)India (38.) Greece (39.)Lithuania (40.) Slovakia (41.) Kuwait (42.)South Africa (43.)Turkey (44.) Croatia (45.) Oman (46.) Romania (47.)Russian Federation (48.) Mexico (49.) Latvia (50.) Brazil (51.) Uruguay (52.) Peru (53.) Indonesia (54.) Bulgaria (55.) Morocco (56.) Egypt (57.)Colombia (58.) Argentina (59.) Vietnam (60.)Philippines (61.) Nigeria (62.)Ukraine (63.)Kenya (64.)Paraguay (65.) Venezuela (66.) PE 2009/10 VC 2009/10VCPE 2009/10 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 21 20. The Global VC/PE Country Attractiveness Index Comparisons of regions and countries The general pattern: What renders enforcement possibilities with respect to More details the US so attractive? investor protection and corporate gover-We can brake-down our analysis to the le- Next, we break down the index scores to nance. This pattern becomes even more vel 2 constructs and provide more details the level of the six key driving forces, andobvious in the analyses presented in theto support the general pattern we detect. further down to the level 2 constructs to appendix, where we benchmark every in- Exhibit 4 points to the remarkable dis- enhance the discussion about the ranking. dividual country with the US: there are tance between the scores of the US, Slo- We nd a typical pattern with respect tomany economically strong nations with venia and Venezuela with respect to the the dominating attractiveness of the US vibrant entrepreneurial cultures and op-level 2 constructs that assess the capital for VC and PE allocations. We can de- portunities, with excellent human capi- market, investor protection and corporate monstrate this pattern by comparing the tal and social environment. However, thegovernance. rst ranked with the medial ranked, and nally decisive criteria are the nancial the nal ranked country, the US, Slovenia,markets, and investor protection and cor- and Venezuela. Exhibit 3 presents the key porate governance. That nding points to driver scores of Slovenia and Venezuela the discussion about the competition of relative to the scores of the US (which legal systems, and the relation between scores 100 for each key driver).law and nance: all strong countries showExhibit 3 reveals that the US rankshigh scores for the Investor Protection ahead of Slovenia and Venezuela with res- and Corporate Governance key drivers. pect to all key drivers but Taxation. Emer- This likewise spurs the development of a ging economies often attract investorsnational capital market, which is required with tax incentives. The criteria that really for the establishment of VC and PE deal make the difference are the depth of thesupporting institutions. US capital market and its legislation and22 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 21. Exhibit 3: Six key driving forces. Comparison of the US, Slovenia and Venezuela1. Economic Activity 125 100 6. Entrepreneurial752. Depth of a Culture &Opportunities 50Capital Market25 5. Human &3. TaxationSocial Environment United States 4. Investor Protection & SloveniaCorporate Governance VenezuelaExhibit 4: Level 2 constructs - Comparison of the US, Slovenia and Venezuela 1.1 Gross Domestic Product1.2 Inflation 1.3 Unemployment2.1 Size and Liquidity of the Stock Market 2.2 IPO Market Activity 2.3 M&A Market Activity 2.4 Debt & Credit Market 2.5 Financial Market Sophistication3.1 Tax Incentives 3.2 Administrative Tax Burdens4.1 Corporate Governance 4.2 Security of Property Rights 4.3 Quality of Legal Enforcement4.4 Regulatory Quality 5.1 Education & Human Capital 5.2 Labor Market Rigidities 5.3 Bribing & Corruption5.4 Costs of Crime6.1 Innovation & R&D 6.2 Ease of Starting & Running a Business 6.3 Simplicity of Closing a Business United StatesSlovenia 6.4 ICT Infrastructure Venezuela020 4060 80100 120 140160The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 23 22. The Global VC/PE Country Attractiveness IndexRegional comparison included sample countries only. Hence,Beside the analyses for the individualespecially for Africa, where we cover onlycountries, we can benchmark geographicfour countries, the results should be inter-regions against each other. We are awarepreted with caution.that we should interpret regional compa- Exhibit 5 presents the regional ranking.risons with special care and want to hi-Again, the score of the US is rescaled to 100.ghlight that many of our sample countries It is in line with the contemporary use of thealready represent somehow geographicterms emerging regions and developed mar-regions. The point is that within large kets. Braking-down the index scores to thecountries, such as the US, Russia, China, six key driving forces reveals the same pat-India, or Brazil the internal socio-econo-tern as described before. First, we comparemic differences might be larger than thosethe four leading regions North America,between e.g., some European countries.Australasia, Western Europe, and Asia.Therefore, the scores of these large Exhibit 6 highlights that only thecountries represent averages. We know common-law Australasian countries canthat California attracts more VC and PE compete with North America with res-than Montana, but we cannot control for pect to investor protection and corporatesmall clusters, and the US still receives one governance. It also shows that, comparedsingle average country score. Hence, we to the North America, all other regionalalso keep our approach to calculate the capital markets can be considered minis-index scores for the different geographic cule. A closer look to the emerging regionsregions rather simple: we calculate eitherconrms this.GDP-weighted, population-weighted, orExhibit 7 compares the emerging re-arithmetic averages of the different data gions Middle East, Eastern Europe, Latinseries, and aggregate the regional scores America, and Africa. It reveals weaknesseswith these values. We use GDP-weightedespecially with respect to entrepreneurialaverages for the data series that are rela- cultures and opportunities. Attempts toted to the size of the economy, we use po-attract investors simply by tax incentivespulation weighted averages for those that will probably not be fruitful as long asare related to people and we use arith- the obstacle of missing deal opportuni-metic averages for the rest. We highlight ties remains.that, of course, these averages base on the24The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 23. Exhibit 5: Ranking of geographic regions North America 97 Australasia 76Western Europe67 World 55 Asia54Middle East 46 Eastern Europe42Latin America35 Africa 33 0 20 40 6080 100Exhibit 6: Key driver scores of geographic regionsExhibit 7: Key driver scores of geographic regions1. Economic Activity 1. Economic Activity125 125100 1006. Entrepreneurial6. Entrepreneurial 75752. Depth of a2. Depth of aCulture & Culture &Capital Market Capital Market Opportunities50 Opportunities 50 2525 5. Human & 3. Taxation 5. Human & 3. TaxationSocial Environment Social EnvironmentNorth America (I.) Middle East (V.) 4. Investor Protection & 4. Investor Protection & Eastern Europe (VI.)Australasia (II.)Corporate Governance Corporate GovernanceLatin America (VII.)Western Europe (III.)Asia (IV.) Africa (VIII.) The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual25 24. The Global VC/PE Country Attractiveness IndexHistoric comparison improvements Exhibit 8 underscores what we are usedof VCPE investment conditions to learning from daily news about China,We can calculate back the index to theand India. Additionally, Poland impro-past, as far as 2005/2006. Thereby, weved its attractiveness for limited partnersshould note that some of the data seriesquite substantially during the last fourused (e.g., the General Innovation Indexyears. For details, we refer to the indivi-[GII]) do not date back to 2005. However, dual country analyses in the appendix ofwe assume that indicators like this one this index. On the left axis of Exhibit 8, wedid not change to a large extent over the nd the countries current ranks and theperiod of interest, and hence, keep thembars document the rank changes betweenconstant. The calculation of the 2005/2006the 2005/2006 and the 2009/2010 indexindex allows interesting insights, and re-versions. Kuwait, Latvia, and Oman areveals the development and rank changesthe countries that decreased remarkablyof particular countries.in their rankings. Kuwait lost many ranksbecause of a tax reform with increasingcorporate tax rates and deterioratingconditions regarding the protection of in-vestors and corporate governance. Latviaand Oman were both exposed to worse-ning economic conditions with high in-ation during the observed period. Howe-ver, it should be stressed that the indexscores are always calculated relative tothe other countries. That means that allthe countries that lost ranking positionsdid not necessarily deteriorate their in-vestment conditions in absolute terms.They might just have been outperformedby others in the international competitionfor capital resources.26The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 25. Exhibit 8: Rank changes between index version 2005/2006 and 2009/2010 -15 -10-5 0 5 1015United States (1.)Canada (2.)United Kingdom (3.)Australia (4.) Hong Kong (5.) Singapore (6.) Japan (7.)Switzerland (8.)Netherlands (9.)Germany (10.)Sweden (11.)Denmark (12.) Republic of Korea (13.)Norway (14.)Finland (15.)France (16.) Belgium (17.)New Zealand (18.) Austria (19.) Spain (20.) Ireland (21.)Israel (22.) Taiwan (23.)Luxembourg (24.) Malaysia (25.)United Arab Emirates (26.) Portugal (27.) China (28.) Italy (29.)Saudi Arabia (30.) Poland (31.)Chile (32.) Slovenia (33.) Czech Republic (34.) Estonia (35.) Thailand (36.) Hungary (37.)India (38.) Greece (39.)Lithuania (40.) Slovakia (41.) Kuwait (42.)South Africa (43.)Turkey (44.) Croatia (45.) Oman (46.) Romania (47.)Russian Federation (48.) Mexico (49.) Latvia (50.) Brazil (51.) Uruguay (52.) Peru (53.) Indonesia (54.) Bulgaria (55.) Morocco (56.) Egypt (57.)Colombia (58.) Argentina (59.) Vietnam (60.)Philippines (61.) Nigeria (62.)Ukraine (63.)Kenya (64.)Paraguay (65.) Venezuela (66.) The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 27 26. The Global VC/PE Country Attractiveness Index Tracking power of our index The idea of our index is to assess the at-the actual VC and PE activity in the va- The statistical measure for such a com- tractiveness of a country to receive VC/rious countries. We use data from Thom- parison is the Pearson Correlation Coef- PE allocations from institutional investors son Financial on VC and PE activity. Ourcient. It ranges between 0 and 1, where 0 based on socio-economic parameters that activity measure is the natural logarithm signals no and 1 perfect tracking. The we regard relevant. The composite measure of an average of all VC and PE invest-coefcient for our index is 0.8104, signa- can deviate from the actual risk capitalments made by the general partners in a ling that the index excellently(!) tracks market activity, and deviations between certain country over the last three years.a countrys capacity to actually absorb our attractiveness score and actual acti- We use the natural logarithm to account the committed capital. If we compare the vity might either point to under- or over-for the large activity divergence (e.g., ac-results of our VC index with VC activity, funding of particular countries, or to thetivity in the US vs. Venezuela), and we use analogue to the above dened activity fact that our chosen criteria are not rele- an average over three years to smooth measure, the correlation is 0.8100. The vant for VC and PE investors. Experienceuctuations. Especially for some emer-correlation of our PE index with actual reveals that investors are often inuencedging countries, annual activity uctuates PE activity is 0.7807. Both results are still by herding behavior and follow trends tostrongly from peak levels to zero in sub- conrmative. However, the slightly de- invest in certain countries or regions. The sequent years. We chose the criterion lo- crease of the tracking power regarding the countries might not have the infrastruc- cation of the general partners - and nottwo separate indices is partly due to inho- ture to absorb the investments, leadingof the investments - for the followingmogeneous denitions of the two market to over-funding. The infrastructure isreason: some nancial centers serve assegments in different parts of the world. exactly what we aim to measure: can wehubs and channel VC and PE investmentsIn other words, in some cases, VC transac- expect sufcient deal opportunities resul-abroad. Investors allocate their capital in tions in emerging countries might rather ting from the entrepreneurial culture in athese hubs because they rely on the ef-be called infrastructure investments, or country, from its economic soundness, orciency of the nancial community there. project nancing (but not VC transac- from innovations? Are potential transac-This is exactly what we measure with ourtions) in more developed economies. tions sufciently supported by the nan-index. In fact, we focus on the demand for cial community? Are the stock and M&A VC and PE in a particular economy, andDoes the global nancial crisis have markets sufciently liquid to facilitatelikewise on the state of the professional an impact on the robustness of our divestments? Are investors concerns le-nancial community to support the supplyindex? gally taken care of? We do not claim that side. Therefore, investments, according toWe have seen the biggest crisis since the our index provides the correct answersthe location of the general partners, cor-great depression and the question remains to these questions. But, we claim thatrespond best with the idea of our index.whether this has an impact on the robus- our index is very helpful in this respect.Additionally, we use investments - and nottness of our index. The data for the last Therefore, we expect deviations between raised funds - because our index targetsquarter of the year 2008 (where quar- our attractiveness measure and actual VCthe absorption-capacity (either causedterly data is available) and later captures and PE activity in the particular countries.by direct local demand or by channeling the major consequences of the nancial However, these deviations should not be funds abroad) of the particular econo-crisis. We realize that the impact on eco- great on average. If they are great wemies. Funds raised might deviate from thisnomic activity and the depth of the ca- would doubt the reliability of our index. capacity due to herding behavior of inves-pital market is large for many countries, Hence, we compare our index scores with tors or negligence. especially for those that had high ran-28 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 27. kings with respect to these two key driverswe expect several emerging countries tobefore the nancial crisis. IPO and M&Astrongly improve their position over theactivity has come down signicantly. The course of 2009/2010. However, we have tosize and liquidity of the stock marketswait for the following edition, to providemelted down. The access to loans deterio-evidence for our expectations.rated and interest rates increased to peaklevels. It became clear that the fractionHow our index differs fromof non-performing loans is probably theother, more general indices onhighest seen in banking history, and the competitivenesssoundness of banks might be doubted in Some institutions provide competitivenessseveral countries. These are all data series indices or assess the general conditionswe use for our index construction, and wefor making business in various countries.believe that the nancial crisis will have These indices have a broader scope and doa strong impact on all of them. However, not focus on the particularities of the VCthe data series are not yet updated for alland PE capital market segment. Therefore,countries, and hence, we are not able to their rankings usually differ from ours anddraw conclusions for the quality of ourtheir tracking power to explain VC andindex at that time.PE activity is lower. For example, the Glo- We assume that these effects will movebal Competitiveness Index from the WEFseveral emerging countries to higher ranks tracks VC and PE activity with 0.69, whilefor one simple reason. The rationale is thethe IMD World Competitiveness Indextypical pattern we discussed above: thecorrelates with 0.57 only. This reveals thathigh ranked countries are particularly our index is the more precise indicatorstrong with respect to their capital mar-for VC and PE country attractiveness. Thekets. They will be affected most by the - reason for the superior tracking power ofnancial crisis because they lose dispropor-our index is simply that it is tailor-made,tionally their competitive advantage byaccording to the particular determinantsthe deteriorated capital market conditions.for vibrant VC and PE markets. There is noSeveral emerging countries with soundother indicator tracking the actual VC andgrowth opportunities, but negligible ca- PE activity over the 66 countries, and overpital markets will benet (in terms of in- time as good as our index.dex scores) from the crisis. It is said thattheir economic growth will be affected toa minor extend, only. The crisis will har-dly impact their scores with respect to theother key drivers such as Taxation, Inves-tor Protection and Corporate Governance,the Human and Social Environment, ortheir Entrepreneurial Culture. Therefore,The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 29 28. The Global VC/PE Country Attractiveness Index Summary and outlook We provide a composite measure that We nd a general pattern if we com- bor markets, bribery, and corruption, there determines the attractiveness of 66 pare the country characteristics. There is awill be no demand for VC and PE. If there countries to receive capital allocationslot of dispersion with respect to the six key is no demand, there is no opportunity to from investors in the VC and PE asset drivers. Especially, the emerging countries establish a vibrant VC and PE market. class. The composite measure is based onattract investors with tax incentives. ManyWe invite you to observe and thorou- six main criteria: Economic Activity, the countries show strong Entrepreneurial ghly analyze our results. If you are an Depth of Capital Markets, Taxation, Inves-Culture and Opportunities. There is great investor, please enrich the provided in- tor Protection and Corporate Governance,dispersion in Economic Activity, and in the formation with your own expertise and the Human and Social Environment, and Human and Social Environment. However,knowledge about the key driving forces Entrepreneurial Culture and Opportu-the two key criteria, Investor Protection and market conditions in the particular nities. The denition of these criteria isand Corporate Governance, and Depth countries to make your allocation deci- based on an extensive review of academicof Capital Markets, make the difference.sions. If you are a politician, please use our literature, and on a survey we conductedThe common law countries dominate the analyses as demonstration how investors among institutional investors prior toothers regarding these criteria. We can evaluate and benchmark your country. If our study. The six criteria are not directlyconclude that strong investor protectionyou are a researcher, and this is equally observable, so we use proxy variables toleads to liquid and efcient capital mar- valid for the whole constituency, please assess them for each country. As a result,kets, and these evoke the required profes-do not hesitate to criticize our approach. we receive a country ranking, and pro-sional community to secure deal ow and We will continue with annual updates of vide detailed analyses on the strengths exit opportunities for VC and PE funds. our index. Thereby, we aim to cover more and weaknesses of the particular nationsThis ultimately affects a countrys attrac- and more countries, include new data se- and information on the historic develop-tiveness for institutional investments in ries (discard others), and we will optimize ment of the criteria. Our index tracks real the VC and PE asset class.the data selection and index structure. VC and PE activity better than any otherHowever, this discussion reects theHence, we very much appreciate any cri- existing indicator. However, it shall not capital supply side only. We should alsotique and comments. be interpreted as a crystal ball for invest-take into account that, as revealed in our ment advisers. We highlight our intention analyses, many countries lack several im- to challenge discussion and to propose aportant attractiveness criteria. Without a valuable informational tool, but not an sufcient entrepreneurial culture and en- arbitrage instrument. trepreneurial opportunities, with rigid la-30 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 29. II.32The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 30. Legal systems, taxesand VC and PE activityThe Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 33 31. Legal systems, taxes and VC and PE activity After the storm: a global view on post-recession opportunities and challenges for the PE and VC industry While the Global PE/VC Country Attractiveness Index reveals contrasting levels of opportunity, Ernst & Young takes a strategic view on the changing conditions, challenges and opportunities around the world. After a period of remarkable growth inlatory and tax regimes in which these riod of ownership and then selling well. the amount of money raised and inves- funds operate. But the dynamic environ- There are many elements to picking the ted by VC and PE funds in the periodment also brings with it opportunitiesright deals, of course, but a proper un- up to 2007, the past two years have for the funds to make impressive returnsderstanding of the geographies in which brought a number of major challengesfor their investors through backing the businesses operate is clearly a key part to the industry supporting existing right businesses through the upturn.of the assessment. investee companies, the backlog ofThe VC and PE industry has a history of exits, new deal pricing, debt nanceevolving to meet the challenges and op- Signs of a positive future constraints, fundraising, and the regu- portunities it faces, and is doing so again PE funds have a signicant amount of in the context of the recent turbulence.capital available to invest, and the PE ownership model can play a key role in Talent comes to the forehelping businesses and the wider econo- Article written by : In investing, as in many industries, amy recover from the downturn. In the Simon Perry boom period can allow average perfor- current environment, PE can be a solu- Partner, Ernst & Young LLP, London mers to look very good, whilst challen- tion for large corporates who may divest [email protected] ging times are more likely to differenti- divisions where they can put the capital Alexander Reiter ate between the best performers and the to better use elsewhere, for companies Partner, Ernst & Young GmbH, Munich rest. Many PE and VC funds made excel-which need to time and investment to [email protected] lent returns in the boom years, aided byrestructure. It can also be appropriate Gil Forer plentiful cheap debt for the LBO dealsfor companies with the potential to Partner, Ernst & Young LLP, New York and rising underlying markets in gene-grow through investment, or through [email protected] ral. Many PE funds have spent much of the minority investments and strategic the past 18 months or so working with partnerships we have seen evolving in This publication contains information in summaryportfolio companies whose leveraged recent times. There is recognition that a form and is therefore intended for general guidance only. It is not intended to be a substitutebalance sheets have been strained by thelot of people made very strong returns in for detailed research or the exercise of professional economic downturn. With debt capacity the upturn from the last recession, but judgment. Neither the authors nor Ernst & signicantly reduced and new debt moreat the same time there is a real sense of Young member rms can accept responsibility for loss to any person relying on this article. expensive and equity markets less re- caution not to jump too early. liable as a driver of sustainable increases In the VC sector, on a longer times- in valuations, the challenge for funds is cale, the innovation pipeline is quite ro- to prove to existing and potential LP in- bust, there is no shortage of capital and vestors that they can outperform on the capital markets show signs of recovery. fundamentals in both the PE and VCThe indicators of recovery are, however, segments this at its most basic level isstill just signs. about picking the right businesses andIn both the PE and VC segments, the management teams, investing at thedramatic slowdown in exits remains a right time and price, working with thekey challenge, as the PE and VC business businesses to create value during the pe- models only work if the funds can return34 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 32. money to their investors. We have seenItaly which could continue to creepsome VC-backed IPOs starting to comeacross Europe. Venture capital has alsothrough again, and there is much spe- been pressured by the changing rules forculation around the return of IPOs forthe carry-forward of losses in the cur-large PE portfolio companies, but no- rent environment, many companies areone really knows the pace of recovery ormaking losses, but if the tax treatmentwhat volume we are going to see. Theof how those losses are carried forwardreopening of exit routes for PE and VCchanges then the investment may be-funds will be a major enabler of future come unattractive. But for all of this,fundraising and investing activity. the tax implications on PE and VC areGeography will continue to be a key largely secondary to the overall qualityfactor in future buoyancy, as the Glo-of investment and the likelihood of abal VC/PE Country Attractiveness Indexgood fundamental return.shows it has in the past, although it isnot always possible to generalize about Picking the winnerswhich types of areas will prosper. Many As LPs consider where to allocate theirpeople talk about China as a whole as capital, and PE and VC funds look tobeing strong, for example, but in the USmake the right investments themselves,the VC ecosystem of Silicon Valley is the the investing landscape will inevitablystandard against which every other area change. There will undoubtedly beis benchmarked. comparative winners and losers, andthe Global PE/VC Country AttractivenessA changing tax topography Index could prove to be a valuable toolThe tax treatment of venture capital andin helping funds navigate through thisprivate equity is also changing rapidly.uncertain time.With governments easing scal pursestrings but tightening anti-avoidance inways pertinent to both VC and PE, in-vestors need clear and up-to-date adviceon what to do. In July, for example, theObama administration proposed legisla-tion that affects foreign investment inUS funds from next year, funds mighthave to consider how they restructureto attract foreign investment. Anotherbig issue is the limitation of interestdeductions rst applied by Germanyand subsequently seen in Denmark and The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 35 33. Legal systems, taxes and VC and PE activity Global Venture Capital and Private Equity Country Attractiveness Index - Legal Conclusions From the perspective of a lawyer involved in private equity transactions and fund formation, the results of the Global Venture Capital and Private Equity Country Attractiveness Index invite certain conclusions. The following will highlight these general conclusions. Legal systems tions and protecting investor equity. PElawyers to give unqualied opinions on There is a traditional distinction betweeninvestors have until very recently relied such structures. legal systems of Anglo-Saxon countries, on leverage and debt push down struc- The second, arguably more perti- whose legal system built on a commontures to increase their return multiples. nent reason may be that common law law, and so-called civil law countriesIn most jurisdictions following the conti-countries whose economies are based on whose legal system is in the most partnental European law tradition such struc- strong capital markets traditionally give built on statutory law. Results of the in-tures are either prohibited or discouragedvery strong protection to minority share- dex seem to suggest that countries whoseunder strict capital maintenance and/ holder rights and offer a greater transpa- legal systems are based on common law or creditor protection rules. As a conse- rency to such shareholders. Therefore, gi- are clearly the more attractive countries quence, structuring and executing suchven the need for exibility in structuring for VC and PE. The top six spots in all in- transactions in jurisdictions following and strong investor protection rights, it is dices are taken by countries deeply roo-the continental European law tradition is not surprising that countries which have ted in the common law tradition.cumbersome and introduces an additio- common law systems are at the top of theA birds-eye view across jurisdictions nal element of risk because investors and index. suggests that the increased attracti- nancing banks will not be able to rely onIn our view the German, Scandina- veness of countries following the Anglo-unqualied legal opinions.vian and Netherland civil law systems Saxon common law system vis--vis theVC transactions usually require ratchets offer slightly stronger investor protection civil law systems are twofold.and other anti dilution mechanisms to rights and exibility with regard to struc-PE and VC requires a certain degree of bridge the valuation gap between inves- turing than the more Roman law based exibility with regard to capital creationtors and management/founders. Investors countries following the French, Italian and capital maintenance rules, in parti-will under preset circumstances require and Spanish tradition. This may be part cular with regard to structuring transac- the issuance of additional free shares (e.g., of the reason why countries following when certain milestones are not met or in the German, Scandinavian and Nether- the event of "down rounds"). The exibility land legal regimes are in terms of attrac- in terms of timing when executing suchtiveness in the second tier of the index. Article written by : mechanism will in most civil law jurisdic-The third obvious reason is that com- Phillip Dubsky tions not be possible because the creationmon law jurisdictions have traditionally Partner of new shares requires shareholder appro- relied more on capital markets as a source DLA Piper Weiss-Tessbach, Vienna val with qualied majorities the adherenceof nancing while jurisdictions following [email protected] to certain notice periods. Moreover, most the continental European approach have jurisdictions will not allow the creation ofresorted to lender nancing. As a result, shares without a minimum issue price. common law jurisdictions have deve-Common law countries generally showloped capital markets systems which of- greater exibility with regard to capital fer strong investor protection rights and creation. Most common law jurisdictions forcefully prohibit insider dealings. The allow issuance of no-par-value-shares common law history of transparency and or shares with negligible par-value. In investor protection has resulted in sophis- addition, rules on capital maintenanceticated and mature capital markets. Such will under certain circumstances allowmarkets in turn offer both the sources debt-push-down structures and enable(i.e., targets) for PE as well as an impor-36 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 34. tant exit route. In summary, the commonSpecic regulation targeted towardsso high that in practice most funds tendlaw countries were until now more suc- private equity to not use the specically targeted struc-cessful in creating a PE and VC friendly The VCPI shows a certain trend: countries, ture but resort to more traditional or/andenvironment with an experienced indus- which have enacted specic incentivesoffshore fund structures. This may help totry of market participants and advisers. for VC and PE, tend to be more attractiveexplain the comparatively low rank Aus- than countries which have not enactedtria takes among industrialised nations.Investor protection - strength ofsuch rules.Other jurisdictions such as Germanyjudicial system corruptionThe UK, for example, offers generoushave very recently enacted legislationThe index clearly shows that countries tax-incentives to investments in certain which generally abolishes most tax ad-with a strong judicial system and little orfunds that target small unquoted high- vantages of certain types of PE funds byno perceived corruption take the top 20tech companies, companies in disadvan- introducing a at rate withholding tax ofplaces in terms of attractiveness. taged areas or start-ups. Under certain25% percent for distributions. Countries such as Nigeria, Venezuelacircumstances private individuals can ob-or the Ukraine where judicial systemstain tax relief on investments in unquoted Summaryare generally said to be not very reliable companies and offset losses against in-In summary it appears fair to concludeand a certain degree of corruption is per- come tax should there be no capital gainsthat jurisdictions with exible and trans-ceived by market participants rank at theagainst which to offset them.parent legal systems with an emphasis onbottom of the index. While economic and Another good example is Israel whoseinvestor protection offer a fertile bree-tax incentives are helpful ingredients bri-economy relies heavily on the high tech- ding ground for PE and VC investments.bery and uncertainty of enforcement of nology sector. Israel offers generousSpecic legislation targeted towardscontractual commitments remain strongtax breaks for founders of start up bu-improving PE will only improve such en-deterrents for building a vibrant VC and sinesses as well as VC funds. This is onevironment if tax incentives are not en-PE community. An example for this trendof the reasons why Israel has one of the cumbered by hurdles which contraveneis Bulgaria which European Union mem-most vibrant VC scenes outside the Uni-established commercial market practice.bership notwithstanding remains trou-ted States. Therefore, notwithstandingbled with regard to enforcement andits precarious geopolitical situation, Is-transparency and thus ranks in the bot-rael remains comparatively attractive fortom tier of the index. VC and PE nancings and is ranked top A good example for the positive deve- among its peer group.lopment of a country is, in our view, Slove-Another example for a regional winnernia. Slovenia has since its accession to the (Latin America) is Chile where tax protsEuropean Union introduced the VC Act ofmade by angel or seed capital investors2007 and has made particular strong ef-in risk-capital funds are exempted formforts to reform its judicial system and ght capital gains.corruption. As a result, it ranks rst amongIn some instances, however, speci-the former communist countries.cally targeted but cumbersome regula- Therefore, one can conclude that an tions may not have the desired effect.experienced and non-corruptible judiciaryOne example is Austria, where notwiths-are the bed-rock for a country to be at- tanding certain legislative efforts, thetractive for VC and PE investments.hurdles to qualify for tax exemptions areThe Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 37 35. III.38 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 36. An insight intodifferent VCand PE marketsThe Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 39 37. An insight into different VC and PE markets Africa: Governance, development and budding VC and PE activity Introduction although well behind Asia (58%), held uplivering attractive returns to sophisticated According to a 2008 Organization for well compared to other emerging regions investors. Consequently, as the previously Economic Co-operation and Develop- (Latin America: 8%; Middle East/North cited OECD report put it, PE investments ment (OECD) report, PE is the African Africa: 8%; and CEE/Russia: 10%).5 in consumer-related and communica- investment story to watch.4 The Inter-Signicantly too, local sourcing of ca- tions sectors ... have an arguably stronger national Monetary Fund (IMF) estimates pital has also been on the increase, with a impact on Africans daily lives ... and stand that between 2000 and 2007, privatequarter of the funds raised for the conti-out as a dynamic and diversied counter- capital ows into sub-Saharan Africannent coming from South Africa e.g., Pa- point to classic sources of foreign invest- countries increased almost vefold, from modzi, a South African private equity rm,ment in Africa.7 US$11bn to US$53bn, with Nigeria and launched a US$1.3 billion fund in 2007, South Africa accounting for about 47%Africas largest. Overall, a lot of the re- Structural problems continue to limit of these gures. Within this, the amount cent activity is coming from sub-SaharanVC and PE growth of private equity raised, jumped by 200% Africa, with South African funds managing Nonetheless, although African funds might between 2004 and 2006, to reach US$2.3 80% of total sub-Saharan VC/PE capital, post higher returns than in many other billion in 2006. followed by Nigerian funds with 10%.6 markets, VC/PE investors in Africa have to According to the OECD, This brought Much of this growth is driven by thecontend with a number of socio-political sub-Saharan Africas share of emerging efforts of an increasing number of Africanproblems which still continue to act as a market private equity funds to 7%, which governments to encourage foreign par- dampener on growth. Fragile or/and oftenticipation in newly liberalized industriesunrepresentative democratic institutions 4. Dickinson, T. 2008. Private Equity: An Eye for Investment such as telecommunications and banking. are still more the rule, than the exception. under African Skies? OECD Development Centre PolicyIn addition, increasing government em-In many countries, freedom of the press, Insights 60: 1-2.phasis on investments in infrastructure,the rule of law and government transpa-along with a growth in the popularity ofrency remain weak, and corruption is oftenpublic-private partnerships (PPPs), wereextensive in the public sector. Article written by Tunji Adegbesan also determining factors for the consi-Although the effects of the global re- Lagos Business Schoolderable chunk of funds that ended up in cession, in the main, are not as severe as Lagos, Nigeria infrastructure-related projects. As African in most parts of the West, Africa has not [email protected] turn to the private sectorbeen spared either. The OECD expectsfor help in funding urgently needed in- Africas growth for 2009 to fall to 2.8%,frastructure investments (via PPPs), rms after growing above 5% for four conse-and funds with prior experience (mostly cutive years. Nevertheless, a return tolocated in South Africa and Nigeria), are 4.8% growth is expected for 2010. In therolling out and replicating their businessmeantime, economies like Nigeria, whichmodels across other countries.are heavily reliant on commodity exports,Thus, VC, and especially PE, are acqui- will be harder hit in 2009/2010. In addition,ring a reputation for driving development,persistent high prices of internationallyalongside considerable prot, in Africantraded food (e.g., grains and vegetable oils)countries. Investments in social and eco- and moderately rising ination, will affectnomic infrastructure in the areas of nan-consumers, especially the urban poor.cial services, transportation and informa- As a result, in the short to medium term,tion and communication technologies are most of the promising deals will continueenhancing African development while de- to revolve around infrastructure, both so-cial and economic, as well as around basic5. Ibid.6. Ibid.7. Ibid.40The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 38. needs, such as power and communication. is emblematic of the rising opportunities some of the advances made toward grea-For as long as consumer purchasing powerin Africas telecommunications and otherter democracy and better governance. Yet,remains low, there will be limited absorp-infrastructure-related sectors. Similarly,compared to 10 years ago, wiser macroe-tive capacity for major funds outside the Vodafone recently acquired full control conomic policies and recent multilateralrelatively wealthier African countries. of Vodacom Group Ltd, South Africas lea- debt-relief will stand African economiesding wireless operator. In November 2008, in good stead. In addition, growing tiesAfrica retains a very strong medium-it bought an additional 15% of Vodacomwith Latin America and Asian emergingand long-term potential from Telkom South Africa Ltd., for US$2.82economies as development and trade par-Nevertheless, there is a virtual consensusbillion, raising its stake to 65%. The pur- tners reduce the continents vulnerabilitythat Africas long-term prospects remainchase valued Vodacom, which has 39.6 mil- to the global recession.attractive. Very often, steady positive and lion customers in ve African countries, ateconomically signicant progress goes about US$19.3 billion. Meanwhile, BhartiGovernance and investmentunnoticed by news channels more attuned Airtel Ltd., Indias largest mobile-phone In the long term therefore, Africas pros-to spectacular (usually negative) news. operator, and Johannesburg-based MTNpects are hinged on balancing macroeco- For example, although democracy ad-Group Ltd., Africas largest operator, are in nomic fundamentals and structural reformsmittedly remains weak in many African talks