Shareholder Letter on the First 9 Months of the Financial Year 2002/2003

Dear Shareholders,

 

Fundamentally, the market situation remained unchanged over the past three quarters. Investor confidence is still undermined, overall economic prospects and sector progress continue to be weak and volatile, and public markets are still regressing. Visibility on future developments is low and earlier expectations in 2002 for an improved outlook are further delayed into the future.

 

In the course of the first nine months of the financial year 2002/2003 (April 1 - December 31, 2002), the fair value per share of Private Equity Holding progressively declined from CHF 213.52 to CHF 154.60. During the past quarter, permanent write-downs of CHF 38 million were recorded in the income statement (first nine months 2002/2003: CHF 96 million) and value adjustments considered to be of temporary nature amounting to net CHF 12 million were booked against equity (first nine months 2002/2003: CHF 136 million). The main reasons were again (i) corrections of the valuations in response to the prevailing weak market conditions, (ii) operational issues and failure by portfolio companies to meet business targets and (iii) currency effects. Between October and December the currency exchange rate of both the USD and the EUR against the Swiss Franc had a particularly negative impact. In summary, the reporting 9-month period closed with a net loss of CHF 122 million and a loss of CHF 49 million in the third quarter alone.

 

Between April 1 and December 31, 2002, total assets declined from CHF 1.20 billion to CHF 1.04 billion. The value of the investments (securities available for sale, loans and trading securities) contracted from CHF 1.16 billion to CHF 968 million.

 

Over the 9-month reporting term, outstanding commitments decreased by nearly CHF 200 million from CHF 651 million to CHF 456 million. This reduction was brought about by capital calls met as well as the impact from the USD-CHF currency exchange rate. Accordingly, total commitments declined from CHF 1.97 billion as of April 1, 2002, to CHF 1.76 billion as of December 31, 2002. The ratio of invested capital to total commitments remained at 0.6.

 

Securing adequate financial resources continues to present the major challenge. The combination of concurrent adverse factors such as difficult market conditions, lower valuations of the portfolio investments, disproportionate commitments made in the past and a low level of distributions significantly worsened the already tight financial situation during the last quarter of 2002. By the end of 2002, CHF 350 million of the credit facility from Swiss Life had been drawn. The credit facility is governed by several covenants, one of which requires a three-fold over-coverage of the loan with certain assets of the Private Equity Holding Group. In early January, Private Equity Holding repaid an amount of CHF 25 million to Swiss Life in order to remain in compliance with the covenants and thereby reduced the total long-term borrowings to CHF 325 million. In this context, Private Equity Holding committed itself to present to Swiss Life as soon as possible an acceptable proposal on the early repayment of the outstanding balance of the loan.

 

Several alternative sources of financing, including additional or alternative debt financing as well as the sale of part of the portfolio, are being actively pursued. With regard to the longer term, the objective is also to achieve a better alignment of the maturity of the financing solution with the long-term nature of private equity commitments.

 

Therefore, the challenge for Private Equity Holding in the near-term will consequently be to bridge the financing gap and to establish a satisfactory long-term financing solution in order to preserve the value of the investments.

Notwithstanding possible further declines in valuations and the uncertain timing of a rebound, we reiterate our fundamentally positive outlook with regard to the investment portfolio. A recovery in the public markets and a pick-up in M&A and trade sale activity, however, are a prerequisite for any benefits to materialize.

 

I thank you for your continued support.

 

Marinus W. Keijzer

Chairman and Delegate of the Board of Directors

 

* * *

 

Dear Shareholders of Private Equity Holding,

 

One of the most difficult years for the venture capital and private equity markets came to a close. The impending market consolidation is expected to lead to a reduced number of private equity funds, albeit with better prospects. At the fund level, the investment rate remains low and there are still extensive capital resources to be deployed. Any acceleration in the investment pace will be subject to clearer view on the improvement of the public markets.

 

In the venture segment, companies struggle to raise adequate funding and to meet their operational targets. The lack of capital available for sound seed investments remains a major concern. In contrast, 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 usually not an issue as buyout operations are normally cash-flow positive. The investment activity has 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.

 

Overall, the downward value adjustments in the last quarter related equally to lower valuations of the investments and unfavorable USD-CHF and EUR-CHF currency exchange effects. In the fund portfolio the bulk of write-downs were made for venture funds, in particular those active in the sectors IT, software, internet and communications. A major breakthrough was achieved last quarter at the fund US Ventures, LP. The once largest venture capital commitment of Private Equity Holding that invested mostly in the communications equipment and internet sector was fundamentally restructured. The fund manager was replaced by an experienced group of venture capitalists from Boston. The strategy going forward is to maximise the value from the existing investments through actively working with the companies and selective follow-on financings.

Noteworthy news from the fund portfolio in the last quarter of 2002 include:

- In a secondary transaction Nordic Capital sold Nycomed Holding A/S, a European market-driven pharmaceutical company, to a group of private equity investors.

- Private Equity Holding made a follow-on commitment to the Abingworth Bioventures Annex Fund which will provide further funds for promising later stage life science companies.

- TVM III made a distribution following the sale of a stake in Actelion Ltd., a Swiss biopharmaceutical company. Its first drug Tracleer(TM) has been approved as therapy for pulmonary arterial hypertension.

- Cox Insurance, a fast developing player in the UK retail insurance market and the largest investment of the fund Palamon, successfully restructured its operations and was recapitalized.

 

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.

The funds held in the portfolio made total capital calls amounting to CHF 41 million for their investment activities during the last quarter. Distributions in same period totaled CHF 15 million and originated predominantly from exits from the buyout funds.

 

Value adjustments related mostly to unfavorable currency effects. The investment activity was limited to several smaller follow-on investments including 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 investment activity in the venture segment is not expected to pick up until more visibility is reached. Valuations will suffer from further adjustments in the near future. Buyouts will take advantage of the disposal programs from multinationals refocusing on core business. In the short term, the focus will remain on portfolio triage and follow-on financing. In the absence of new investments, our operational activities continue to focus on an active management of the existing portfolio, predominantly supporting and monitoring funds, annex funds and follow-on direct investments, by taking proactive measures where needed.

 

We remain fundamentally positive about the prospects for private equity in the long term even if investor expectations will need to adjust to more realistic scenarios in the aftermath of the boom area.

 

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

 

Swiss Life Private Equity Partners Ltd.

 

David Salim, Partner & CEO

Dr. Dominik Meyer, Partner