Shareholder Letter on the First Half of 2003/2004

Dear Shareholders,

 

This past quarter saw the establishment of a new base for Private Equity Holding with the shareholders agreeing to the share capital decrease and the creation of a new authorized capital at the Annual General Meeting. This vote of confidence was greeted with great pleasure by me and my fellow board members, and we thank you for your support during a difficult period in which private equity continued to struggle, while, on the other hand, the first indications of recovery became apparent.

 

In the first half of the financial year 2003/2004, the fair value decreased from EUR 40.95 to EUR 35.91 per share.

 

The reporting period closed overall with a net profit of EUR 1.6 million (first six months 2002/2003: net loss EUR 50.0 million). The major positive contributors were income from a profit-sharing arrangement with CSFB on the sale of some of the funds included in the CSFB transaction and realized foreign exchange gains from the swap transactions, which are booked under other income. On the negative side, permanent write-downs of EUR 17.4 million were recorded in the income statement.

 

Total investments (long-term assets) declined from EUR 181.5 million (April 1, 2003) to EUR 157.6 million (September 30, 2003). During the reporting period, temporary value adjustments of net EUR 5.7 million were booked against equity. The main reasons for these adjustments were necessary valuation corrections due to market developments, operational issues of fund investee companies and currency effects.

 

In the reporting period, total commitments declined from EUR 274.9 million as of April 1, 2003 to EUR 255.9 million as of September 30, 2003. In line with this, outstanding commitments declined from EUR 38.1 million as of April 1, 2003 to EUR 28.6 million as of September 30, 2003. A major contributor for the reduction was the sale of 50% of Europe Capital Partners IV (see Manager's Report) in the past quarter and paid capital calls.

 

Capital calls from portfolio investments totaled EUR 4.7 million and distributions amounted to EUR 9.3 million.

 

At the Annual General Meeting held in August, the shareholders approved all proposals made by the Board of Directors. These included the reduction of the share capital of the company from CHF 450 million to CHF 45 million through a reduction of the nominal value of the shares from CHF 100 to CHF 10 per share. The shares have been trading at the new nominal value at the SWX Swiss Exchange since September 8, 2003.

 

The shareholders further approved the creation of a new authorized capital of CHF 22.5 million, to be issued over the next two years if certain conditions are met and the new strategy is in place. The new authorized capital will allow the appropriate asset allocation within the portfolio and a faster implementation of a new strategy for Private Equity Holding.

 

With the goal of minimizing the impact from currency fluctuations on the accounts of Private Equity Holding, the Board of Directors has decided to change the reporting currency from Swiss Francs to Euro. Private Equity Holding will issue its reports in Euro starting September 30, 2003, whilst the listing on the SWX Swiss Exchange will remain in Swiss Francs.

 

The transfer of the sold funds is in its final stages. The majority of the funds have been transferred, and we expect the CSFB transaction to be completed on schedule by the end of November.

 

As a result, securities available for sale under current assets were reduced from EUR 104.8 million as of the end of June to EUR 32.5 million as of September 30, 2003. After the close of the transaction, both this position and the position short-term borrowings will be eliminated from the balance sheet of the company, creating a debt-free balance sheet to support the future development of the company and the portfolio.

 

The private equity market has shown some positive developments in the past months and we remain confident regarding the future. Innovation, new technological breakthroughs and developments remain a driving force in the overall economic development.

 

The management of the liquidity remains an important task. We expect the liquidity constraints to ease further in the mid-term as distributions should exceed capital calls in 2004. This development, the restructured portfolio and a potential capital increase will allow us to participate in primary and secondary investment opportunities in the future market recovery.

 

I thank you for your continued support.

 

Marinus W. Keijzer

Chairman and Delegate of the Board of Directors

 

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Dear Shareholders of Private Equity Holding,

 

The situation in the private equity market has not been easy over the last years; however, recent developments show signs of an improvement. The venture-backed M&A market is growing, and the IPO window seems to be reopening: while there were only ten IPOs in the US in the first six months of 2003, in July alone there were eight. In Europe, the IPO activity in Q3 2003 was up 43% compared to the previous quarter. This IPO activity does not reach the heights of the bubble years, although it does bode for positive developments for the rest of 2003 and 2004. It remains too early to foresee whether this trend will continue but we believe it indicative of the future. Should this development continue, Private Equity Holding will achieve more liquidity from the exits of existing investments and therefore have the opportunity to build a restructured portfolio through new investments in the primary and secondary markets.

 

In the course of the last quarter, the value of the fund portfolio decreased from EUR 120.7 million to EUR 114.4 million. This decrease is primarily due to value corrections for a number of funds.

 

No new commitments were made in the quarter but new and follow-on investments were made by some of the funds held in the portfolio.

 

In line with its strategic priorities, Private Equity Holding continues its negotiations to reduce the unfunded commitments. To this effect, the following were achieved:

 

- Private Equity Holding sold 50% of its position in Europe Capital Partners IV, thereby reducing one of its largest unfunded commitments. This transaction had a positive impact on the fair value of Private Equity Holding due to the positive difference between the purchase price and the reported fair value.

 

- Furthermore, after the close of the reporting period, in October 2003, Private Equity Holding successfully negotiated the reduction of its total commitment to Formula Ventures II by USD 5 million, thereby also reducing the unfunded commitment by the same amount. This transaction will have no negative effects on the books of Private Equity Holding and will allow a full participation in the upside potential of the existing portfolio.

 

Noteworthy occurrences in the portfolio were:

 

- Minicap Technology Investment AG announced an exit on September 30 with the sale of the portfolio company Axovan AG, a company that develops drugs based on G protein-coupled receptors. The company was acquired by Actelion for an initial amount of CHF 60 million, with a potential increase of the purchase price to CHF 252 million in line with product advances.

 

- TVM III GmbH & Co. KG distributed proceeds from the sale of public shares held in GPC Biotech, a company listed on the TecDAX index of the Frankfurt Stock Exchange and dedicated to discovering and developing new anticancer drugs.

 

- After the close of the reporting period in October, Private Equity Holding received proceeds of USD 1.8 million from its investment in FV-PEH, LP through a sale of Radlan Computer Communications Ltd. to Marvell. The fund achieved a cost multiple of 3.4x on this investment.

 

In the last quarter, the fair value of the direct portfolio decreased from EUR 43.9 million to EUR 43.2 million.

 

Noteworthy events in the direct portfolio were the following:

 

- EpiCept Corporation sold to Adolor Corporation exclusive rights to develop and commercialize in North America sterile lidocaine patches for use in controlling postoperative incisional pain.

 

- Private Equity Holding invested USD 0.1 million in a follow-on financing round of Advanced Recognition Technologies Inc. (ART). ART is the acknowledged pioneer and market leader in embedded technologies for mass-market wireless devices, providing cutting-edge speech and handwriting recognition solutions. With a technological lead over competitors, ART has signed design-win contracts with more than 25 cellular handset manufacturers for the embedding of ART products in over 60 different handsets and other devices. Approximately 30 million handsets with "ART inside" have been sold to date.

 

- On the negative side, the investment in Neurotech, a company developing treatment approaches for retinal disease was written down to 50% of the original cost. This revaluation was necessary due to the company's failure to meet its development milestones and its capitalization structure.

 

One of our foremost priorities remains the reduction of outstanding commitments and we continue to actively negotiate opportunities in this respect.

Furthermore, a number of follow-on investment opportunities in the direct portfolio are being thoroughly evaluated with the objective of maximizing returns on the existing investments. We continue to assess primary and secondary investment opportunities which the market offers.

 

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