Shareholder Letter on the First Quarter of 2003/2004

Dear Shareholders,

 

In many ways the past quarter was decisive for the future of Private Equity Holding. The company was able to finally overcome a most difficult heritage enabling it to embrace the market challenges and opportunities which lie ahead.

 

In the course of the first quarter of the financial year 2003/2004 (April 1 - June 30, 2003), the fair value per share of Private Equity Holding declined from CHF 60.46 to CHF 57.64.

 

The value of the investments (long-term assets) of the retained portfolio contracted from CHF 268 million to CHF 254 million. Permanent write-downs of CHF 14 million were recorded in the income statement and upward value adjustments considered to be of temporary nature amounting to net CHF 4 million were booked against equity. Apart from a small change in portfolio composition described later, the main reasons were a realized loss on the sale of VantagePoint Venture Partners III (Q), LP, continued corrections of valuations in line with market developments as well as portfolio companies failing to resolve operational issues and to secure sufficient funding.

 

Outstanding commitments decreased further from CHF 58.6 million to CHF 54.4 million mainly due to the aforementioned sale of VantagePoint Venture Partners III (Q), LP. Total commitments declined from CHF 451 million as of April 1, 2003, to CHF 433 million as of June 30, 2003.

 

Total capital calls from portfolio investments amounted to CHF 2.4 million and distributions totaled CHF 5.8 million.

 

In order to hedge the USD foreign currency exposure of the Group in connection with the Swiss Life loan, Private Equity Holding entered into swap transactions in November 2001. Until maturity of these swap transactions, corresponding gains are reported in the fair value reserve under shareholders' equity in line with the accounting standards. Triggered by the early repayment of the Swiss Life loan, a gain of CHF 21.1 million could be reclassified and recognized in the income statement in the reporting quarter. Lower interest payments related to the swaps as well as lower long-term borrowings resulted in significantly reduced financial expenses.

 

In summary, the reporting quarter closed with a net gain of CHF 4 million compared to a loss of CHF 34.8 million in the corresponding period of the previous year. For the first time in over two years, Private Equity Holding can report a quarterly profit.

 

On June 18, 2003, final documents of the transaction with CSFB to refinance Private Equity Holding were signed. The transfer of the individual investments to the purchasers will be executed over the coming months. In a first step, a prepayment of CHF 150 million was recorded in the financial statements of Private Equity Holding as of June 30, 2003, which reduced short-term borrowings from CHF 325 million to CHF 175 million. Likewise investments to be transferred to CSFB classified as securities available for sale under short-term assets were reduced from CHF 307 million to CHF 162 million (adjusted for capital calls and distributions). With the close of the transaction expected in the fall of 2003, these two positions will be fully eliminated.

 

In the course of the final negotiations with CSFB, the following change to the initially outlined transaction was agreed:

Private Equity Holding retains the venture fund TAT Investment Fund II, LP, but sells Vantage Point Venture Partners III (Q), LP. The reclassification resulted in a net write-up of CHF 4.2 million and a positive impact on fair value of CHF 5.6 million; moreover, unfunded commitments decreased by CHF 2.2 million.

 

With the financing of Private Equity Holding secured through the CSFB-transaction, a sustainable platform for designing the future has been established. Nevertheless, at least in the near term, the strategic options and the spectrum of activities will be restricted by the limited resources available. The effective management of the liquidity will remain a central task.

 

Over the next 6-12 months we will focus on:

(i) the further reduction of outstanding fund commitments to enhance the liquidity of the company going forward;

(ii) the realization of mature investments;

(iii) a cautious and limited investment activity - mainly, but not exclusively, follow-on investments - to prevent dilution and maximize returns from the current portfolio.

 

In the mid-term, we expect returns to ease the liquidity constraints. This should allow us to take a more proactive stance with a heightened investment activity aimed at reshaping the portfolio in a broader sense by making new investments either through primary fund investments or fund acquisitions in the secondary market.

 

With regard to the private equity market we reconfirm our fundamentally positive outlook for the long term. In particular over the past few months, investors' views on the private equity markets have improved. Some markets have witnessed first public offerings suggestive of a re-opening of the IPO window.

 

We view the future as a chance for a new beginning for Private Equity Holding from a re-dimensioned but viable platform which allows us to participate in a maybe not all too distant market recovery.

 

I thank you for your continued support.

 

Marinus W. Keijzer

Chairman and Delegate of the Board of Directors

 

 

 

Dear Shareholders of Private Equity Holding,

 

The past quarter was again characterized by a relative paralysis of the markets in the wake of the venture shake-out. Although confidence has picked up, investors are still waiting on the sidelines hesitant to reinitiate their investment activity and actively participate in the market developments. Good progress was made with regard to the execution of the CSFB-transaction and the transfers of the individual fund investments.

 

Market risk remains the primary concern. Venture capital spending and the number of companies receiving funding remained at the lowest levels since 1997. Likewise, fund raising continues to reach the lowest levels in more than a decade. New groups find it particularly difficult to raise money and several large funds decreased their fund size targets. The overhang continues with significant amounts of committed but uninvested capital ready to be deployed once the venture capital markets appear more robust. Investing shifted slightly to a later stage as portfolio companies continued to mature without foreseeable exit strategies. With IPOs still representing an exception, trade sales remain the only viable exit opportunity.

 

Most of the major industries still experienced declines although first positive signs after a long period of suffering started to flare up. Fund managers reported on new signs of strength in the information technology industry as evidenced by increased IT spending and renewed capital expenditure by leading telecom service providers. Encouraging developments were also witnessed in the healthcare and biotech industry which is closely watched for first signs of a market turn. Public technology stocks appreciated significantly as reflected by the steady increase of the NASDAQ index by around 30% since April 2003.

 

The question is whether such early signs are to be interpreted as reliable lead indicators for a change and therefore as the best point in time for anticyclical investment decisions. According to a recent survey(1) nearly half of all European institutional investors are currently investing in private equity. Private equity is the second most popular alternative asset class - after real estate - in Europe with a 48% participation rate, according to the survey, which also found that eight out of ten institutional investors invest in private equity because of the potential for higher returns.

 

In the course of the first quarter of the financial year 2002/2003 the fair value of the fund portfolio decreased from CHF 199 million to CHF 186 million. The difference is primarily due to negative valuation corrections for a number of fund investments and to valuation adjustments related to the sale of Vantage Point Venture Partners III (Q), LP to CSFB and the retention of TAT Investment Fund II, LP. The largest write-downs were made for Trefoil Euro Fund, LP and US Ventures, LP due to downward revisions of the value potential of some of their largest exposures.

 

No new commitments were effected in the quarter, nevertheless, some funds held in the portfolio made both new and follow-on investments. Equally important to investing and securing a steady deal flow is working actively with the portfolio companies on both operational as well as financing issues.

 

The following is a short description of noteworthy occurrences in the portfolio in the first quarter of the financial year 2003/2004:

- NeSBic returned capital following the sale of IT Masters International SA to BMC Software, Inc., a leader in enterprise management. Privately held IT Masters is an enterprise management solutions company providing intelligent software solutions for modeling IT-infrastructures.

- Although the current exit environment remains problematical, Procuritas managed to successfully exit its interest in Scanvan, a 100-year old business and the leading provider of high-quality domestic and international relocation services to corporations, governments and consumers in Scandinavia.

- Minicap Technology Investment AG achieved the merger of one of its portfolio companies specializing in the digital film business with two foreign companies. This merger is indicative of the expected future trend towards a consolidation in the sector.

- FV-PEH, LP completed the sale of Radlan Computer Communications Ltd., a leading provider of embedded networking software, to Marvell. Marvell is a publicly traded leading global semiconductor provider of complete broadband communication solutions.

- Monadnock Venture Capital continues to implement the restructuring plans with US Ventures, LP. Two follow-on investments in promising companies specializing in web-based services were made in the reporting quarter.

 

The fair value of the direct portfolio increased slightly by CHF 1.1 million to CHF 53.3 million as of June 30, 2003. During the reporting quarter, Private Equity Holding achieved to exit its investment in Framesoft AG and the return of the outstanding loan balance plus accrued interest.

 

In light of the difficulties to raise sufficient financing, companies have become very careful when it comes to deploying their sometimes scarce resources. Several companies, especially in the biotech sector, are preparing for new financing rounds.

 

Private Equity Holding continues to actively work on reducing the amount of outstanding commitments and is currently in negotiations with various parties to this effect.

 

Following more than three years of declining and volatile public markets and major world economies performing on the verge of recession, Private Equity Holding's portfolio companies have a strong bias towards becoming viable businesses with value growth potential. In this environment, follow-on investments in the direct portfolio can be an interesting possibility and presently several such opportunities are being evaluated.

 

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

 

Swiss Life Private Equity Partners Ltd.

 

Dr. Peter Derendinger

Delegate of the Board

 

Petr Rojicek

Chief Investment Officer

 

 

(1) Source: AltAssets re: JP Morgan Fleming European Alternative Investment Strategies Survey 2003