Shareholder Letter

Dear Shareholders

 

Securing adequate financial resources represented the major challenge throughout 2002/2003. By the end of the financial year, the combination of concurrent adverse market conditions including declining valuations of the portfolio investments, disproportionate commitments made in the past and unprecedented low levels of distributions brought the company on the verge of illiquidity. Thanks to the efforts of all parties involved, their constructive cooperation and determination to find an optimal solution for the shareholders of Private Equity Holding, financing was finally secured through a transaction with Credit Suisse First Boston (CSFB). Today we are able to embrace the future with a repositioned, unleveraged, and healthy company.

 

In the course of the financial year 2002/2003 (April 1, 2002 - March 31, 2003), the fair value per share of Private Equity Holding progressively declined from CHF 213.52 to CHF 131.70, not taking into account the effects from the refinancing transaction. The refinancing necessitates additional write-downs of the portfolio as investments are sold to CSFB at a discount to fair value; the adjusted fair value per share, taking into account the effects from the transaction, therefore amounts to CHF 60.46. The attached audited financial results for 2002/2003 and the figures presented in the following reflect the full effect and value impairment of the transaction.

 

Permanent write-downs of CHF 711 million (2001/ 2002: CHF 259 million), thereof CHF 311 million resulting from the CSFB transaction, were recorded in the income statement. Furthermore a value appreciation of CHF 34 million (depreciation of CHF 551 million) was booked against equity, resulting in a net decline in value of the portfolio of CHF 677 million (CHF 810 million). The main factors were (i) the additional write-downs in connection with the CSFB transaction, (ii) corrections of the valuations in response to the prevailing weak market conditions, and (iii) operational issues and failure by portfolio companies to meet business targets. The effects of fluctuations in the USD-CHF-exchange rate were mostly offset through currency hedges. As a result of weak markets, gains on securities available for sale declined to CHF 16 million (CHF 68 million). In summary, the financial year 2002/2003 closed with a net loss of CHF 747 million (CHF 265 million).

 

In the reporting period, total assets declined from CHF 1.20 billion to CHF 604 million. The value of the investments (securities available for sale, loans and trading securities) contracted from CHF 1.16 billion to CHF 577 million.

Outstanding commitments decreased substantially from CHF 652 million to CHF 59 million. This reduction was primarily achieved by the sale of part of the portfolio to CSFB and capital calls met, the sale of a venture participation as well as the impact of the USD-CHF currency exchange rate.

 

Total capital calls from portfolio investments amounted to CHF 172 million (2001/2002: CHF 249 million) and distributions totaled CHF 83 million (2001/2002: CHF 102 million).

 

In our letter to shareholders dated May 14, 2003, we informed you already about the sale of part of the investment portfolio of Private Equity Holding and the repayment of the loan to Swiss Life.

 

A private equity fund managed by CSFB will take over investments from Private Equity Holding with a total unadjusted fair value as of March 31, 2003 of CHF 616 million for a purchase price of CHF 305 million; included is the assumption of outstanding commitments amounting to CHF 305 million. This transaction reduces the fair value per share as of March 31, 2003, from CHF 131.70 to CHF 60.46. In addition, Private Equity Holding has been granted an earn-out to share in future net distributions, above defined hurdles, originating from the qualitatively best part of the portfolio sold to the CSFB-fund. The value of this earn-out will naturally depend on future market developments and is not included in the current fair value per share of CHF 60.46.

 

Swiss Life Private Equity Partners, given their intimate knowledge and understanding of the issues, will continue to manage and monitor the remaining investment portfolio of Private Equity Holding.

 

As a result of this transaction, Private Equity Holding is able to repay the outstanding loan from Swiss Life amounting to CHF 325 million in full. The cash repayment amounts to CHF 175 million (CHF 155 million from CSFB plus CHF 20 million from Private Equity Holding), whilst the remaining outstandings of CHF 150 million are set off against a loan of Swiss Life to a CSFB-managed private equity fund.

 

We are convinced this transaction is the best possible outcome for Private Equity Holding:

(i) The liquidity problem is solved through a substantial reduction of the unfunded commitments.

(ii) The repayment of the Swiss Life loan has resulted in a debt-free balance sheet.

(iii) Retention of a re-dimensioned portfolio of fund and direct investments; profit participation on certain investments to be sold to CSFB (earn-out).

(iv) The price achieved reflects a discount to the most recent fair value of 50% which compares favorably with current secondary sales of private equity portfolios.

 

The overriding objective was to remove the severe liquidity crisis facing the company. In light of the urgency of satisfying this objective, the mid-term strategy of achieving a better balance in the investment portfolio needed to be deferred.

 

The Board of Directors of Private Equity Holding will propose to the Annual General Meeting on August 26, 2003, that the accumulated deficit be booked against the share capital premium and the nominal value of the shares of Private Equity Holding be reduced.

 

As a result of this repositioning, Private Equity Holding has restored its financial health and the associated managerial freedom by means of the complete debt redemption and the massive reduction in capital commitments.

The Board of Directors of Private Equity Holding, together with Swiss Life Private Equity Partners, is now in a position to confront the challenges of the future with enthusiasm and determination. The objective for the coming months is to define the new strategy moving forward and to continue the repositioning of the company based on a financially secure, unleveraged platform.

 

I thank you for your continued support.

 

Marinus W. Keijzer

Chairman and Delegate of the Board of Directors

 

 

 

Dear Shareholders of Private Equity Holding,

 

Few would deny that these are challenging times for the private equity industry. The steep decline in portfolio valuations combined with a severly weakened IPO market and a lack of viable exit opportunities has shaken the confidence of investors. Needless to say, these developments coupled with a difficult financial situation have also had an impact on the performance of Private Equity Holding.

 

Venture capital investing has steadily declined following the dramatic shakeout in 2001 and the correction of the public markets. Venture capitalists are lengthening their investment horizon to five to six years and have become more cautious and diligent in making investments. The prolonged closing of the IPO window and the simultaneous drying-up of private equity funding continues to cause difficulties for many companies which are struggling to raise adequate funding and meet their operational targets. As a result, underlying companies have either gone out of business or been forced to accept follow-on funding at substantially lower valuations. With a shift towards later-stage funding, the lack of capital available for sound seed investments remains a major concern.

 

Amidst the gloomy outlook, however, there are unmistakable signs of a rebound. According to Ernst & Young/Venture One, some USD 19.4 billion was invested in more than 2,050 companies in 2002, with 70% going to existing portfolio companies. Whilst half the level of 2001 (and 79% less than the peak of USD 93.8 billion invested in 2000), 2002 investment still represents the fourth-highest ever recorded and compares favorably with the level of investment as recently as 1998 (viewed by many as the last "pre-bubble" year).

 

The buyout segment continues to hold up well with several companies preparing themselves for going public once the IPO window re-opens. Funding still is less of an issue as buyout operations are normally cash-flow positive. Investment activity picked up in the second half of 2002 and trade sales as well as secondary sales are important exit opportunities. The prime driver for this sector is the economic development in the main markets.

 

Private equity markets are never static and we have identified a number of important trends as we entered 2003:

(i) Entrepreneurial abilities and vision have taken on new importance in what will surely be a far tougher and less forgiving commercial and exit environment.

(ii) Investors in private equity will rediscover the necessity of investing for the longer term and as a result will be much more selective in allocating capital.

(iii) Growth and development in the secondary markets will further accelerate.

(iv) The impending market consolidation is expected to lead to a reduced number of private equity funds, albeit with better prospects.

 

Looking ahead, we expect that valuations in most sectors are probably bottoming out; however, the market is still volatile and offers relatively low visibility. Until the public markets and other liquidity opportunities such as M&A-activity show signs of sustainable improvements, venture capital and private equity will not rebound.

 

In parallel with the weak developments in the venture capital and private equity markets the fund portfolio of Private Equity Holding suffered. The buyout investments proved to be relatively resistant, while the venture portfolio was more affected by the downturn. Investment activity in the buyout segment has picked up slightly over the past 12 months and, in the absence of any IPO activity, trade sales have gained importance as exit opportunities.

 

In the course of the financial year 2002/2003 the fair value of the fund portfolio was reduced by CHF 540 million, from CHF 1.05 billion to CHF 506 million, thereof funds of a total value of CHF 305 million are to be transferred to CSFB. The majority of value adjustments were made for venture investments active in the IT, software, internet and communications sectors.

 

No new commitments were made during 2002/2003, with the exception of a follow-on commitment to the Abingworth Bioventures Annex Fund which will provide further funds for promising later-stage life science companies and Star Venture Enterprises No. VIIa. Nevertheless, the funds held in the portfolio were able to take advantage of interesting investment opportunities. Despite challenging markets a number of funds were able to realize exit opportunities.

In the last quarter of 2002, we achieved the replacement of the manager of the fund US Ventures, LP and subsequently fundamentally restructured the fund. The previous fund manager was replaced by Monadnock Venture Capital, a group of experienced venture capitalists from Boston. The strategy going forward is to maximize the value from the existing investments by actively working with the companies and selective follow-on financing. We expect that the active engagement of this team in managing the fund will positively influence its performance.

 

Several funds proactively reduced their management fees and/or reduced the size of the funds amid concerns from investors about the scope for new investments and to adapt to structural changes in the private equity markets.

 

In May 2003, after the close of the financial year 2002/2003, the participation in VantagePoint Venture Partners IV (Q), LP was sold in a secondary market transaction. As of March 31, 2003, this investment represented a total original commitment of CHF 54 million (USD 40 million) and a fair value of CHF 2 million. The transaction reduced the total unfunded commitments of Private Equity Holding by CHF 41 million (USD 30 million) or approx. 10% with a minimal loss on fair value. In May 2003 Private Equity Holding also announced the sale of a major part of its portfolio to a fund managed by CSFB; we already informed you about this transaction and its effects.

 

In the financial year 2002/2003 the value of the direct investment portfolio including loans declined by CHF 32 million, of which CHF 28 million were permanent write-downs, CHF 7 million unrealized depreciation and net additions of CHF 3 million. As of March 31, 2003, the fair value of the portfolio of direct investments amounted to CHF 69 million (March 31, 2002: CHF 101 million).

 

The investment activity was limited to smaller follow-on investments totaling to CHF 3 million (2001/2002: CHF 9 million). One follow-on investment, for example, was the additional funding of EpiCept, a New Jersey based company which develops pain products delivering drugs to a target area by using a topical delivery approach. The financing will allow EpiCept to complete several pivotal clinical trials, the results of which will form the launchpad for the company's further development.

 

The main event in the past financial year was the merger of Cytos Biotechnology AG with Asklia Holding and the subsequent listing on the SWX Swiss Exchange. Cytos develops so-called immunodrugs, which trigger the human body's own immune system to create defense mechanisms in the form of antibodies against body proteins causing diseases, such as the proteins of cancer cells.

 

Over the last 18 months, Private Equity Holding has proactively adjusted the valuation of its investments to reflect market conditions and upside potential. We consider the current valuations as prudent.

 

The retained portfolio of now CHF 268 million in fair value comprises 33 private equity funds and 22 direct and loan investments, representing 74% and 26% of the fair value respectively. The unfunded commitments, which will be primarily financed with distributions from the portfolio, have been reduced by more than 80% to CHF 59 million.

 

With regard to geographic and industry exposure, the retained portfolio remains diversified: While the exposure is certainly more European-centric with 64% of fair value, the portfolio remains geographically diversified with investments in Israel (6%) and in the USA (30%). Private Equity Holding remains committed to industries offering high growth potential while retaining some exposure to more traditional industries. The portfolio is well diversified by industry with communication accounting for 26% of total fair value, IT/software 26%, life science 14%, semiconductors 11% and others 23%.

 

In general, we believe that the venture funds retained in the portfolio of Private Equity Holding are maturing well. The majority of them has reached a stage in their life-cycle where they will only require limited additional financial resources and are expected to increase the rate of distributions in the near-term.

 

The direct and loan portfolio offers interesting upside opportunities, particularly in life science and communications. One example is the breakthrough of Genesoft, a South San Francisco based pharmaceutical company, which received FDA-approval for Factiveâ for the treatment of respiratory tract infections. The compound is one of the fastest-growing classes of antibiotics, representing a market of almost USD 3 billion a year in the USA alone.

 

Following the completion of the CSFB transaction, Private Equity Holding will focus its activities on the further reduction of the unfunded commitments, realization of mature direct investments, and, very selectively, follow-on direct fundings to avoid dilution on attractive investments and maximize the return potential of the portfolio.

 

We thank you for the confidence you have placed in us.

 

Swiss Life Private Equity Partners Ltd.

 

Dr. Peter Derendinger

Delegate of the Board of Directors

 

Petr Rojicek

Chief Investment Officer

 

The full Annual Results Report as of March 31, 2003 is available on our website at www.peh.ch from May 27, 2003. The Annual Report will be published in July 2003.

For additional information please contact Investor Relations; Private Equity Holding AG, Innere Güterstrasse 4, CH-6300 Zug, Switzerland, Phone +41 41 726 79 80, email info@peh.ch