What is MoneyTree?

Thomson Financial uses the term to describe the universe of all venture investing, buyout investing and mezzanine investing.

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Thomson Financial uses the term to describe the universe of venture investing. It does not include buyout investing, mezzanine investing, fund of fund investing, secondaries, etc.

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The Thomson Reuters database tracks investments made by Private Equity including Buyout Firms, Venture Capital Firms, Angel Investor Networks, SBICs, Venture subsidiaries of corporations or Investment Banks and other similar entities whose primary activity is private equity investment.

Thomson Reuters reports private equity round amounts by the Actual Equity Investment in a portfolio company, instead of the Total Announced Deal Value. Deal value is structured to include equity, debt, etc. The Round Amounts, as reported by Thomson Financial, will be purely composed of the equity portion of the investment. For deals where the actual equity investment was not disclosed, it will remain as “blank” in the Round Amount column. Thomson Reuters does not include estimated round amounts in our database.*

Drawdowns on commitments are recognized at the time the company receives the money rather than recorded as a lump sum amount at the time the term sheet is executed. Convertible debt and bridge loans are recognized only when converted to equity.

Generally, Thomson Reuters only records one Investment Round per Quarter for each portfolio company. When a portfolio company engages in multiple investment rounds in one quarter, these will be combined into One Round with the Sum of All the Amounts and Round Date based on the date of the latest round. In the case where 1) Venture Capital and Buyout financing are received in the same quarter or 2) Investments of different series are made in the same quarter, these will be recorded as separate investment rounds.

Pending or Announced Venture Capital transactions are not included. Pending or Announced Buyouts, Acquisitions or Acquisitions for Expansion are including as long as an agreement is in order.

A Company’s Nation is determined by the Location of the Company’s Main Headquarters. Investments for a Company’s regional operations are credited under its Main Headquarters.

*Reported round amounts may be allocated among investors in a round based on reported total round amount. In cases where one or more investors report their participation in a round, but the full amount raised by the company is not disclosed, Thomson Reuters will report the sum of disclosed participation only.

THOMSON REUTERS CRITERIA SUMMARY

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MoneyTree™ deals are collected via collaboration between PricewaterhouseCoopers and the National Venture Capital Association based upon data provided by Thomson Reuters. MoneyTree™ deals are a sub-set of the overall Thomson Reuters database and follow specific criteria outlined above.

The MoneyTree™ deals measure cash-for-equity investments by the professional venture capital community in private emerging companies in the U.S. Investee companies must be domiciled in one of the 50 U.S. states or the District of Columbia, even if substantial portions of their activities are outside the United States.

MoneyTree™ results exclude non-US companies, non-cash investment, Buyouts and other forms of non-Venture Private Equity investments. Angel Investment and direct investment by corporations, unless they are co-investments in an otherwise qualifying round, are also excluded.

These deals exclude debt, buyouts, recapitalizations, secondary purchases, IPOs, investments in public companies such as PIPES (private investments in public entities), investments for which the proceeds are primarily intended for acquisition such as roll-ups, change of ownership, and other forms of private equity that do not involve cash, such as services-in-kind and venture leasing.

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In the United States, the predominant vehicle for private equity investment is the independent private partnership organized as a limited partnership, limited liability partnership, or in some cases, a limited liability company. Some investment vehicles are wholly owned subsidiaries of an investment corporation or investment bank, so called "captive" or semi-captive vehicles. Some are subsidiaries of non-financial corporations - "corporate investors" who invest for strategic goals rather than strictly financial returns. The captive vehicles may be investing a pool of funds that mixes parent capital and their own capital or they may be organized to invest primarily clients’ capital. A significant amount of buyout investment is done by non-partnership captive entities, but the limited partnership, or one of its derivatives, is the predominant vehicle.

In Europe, while an important form of investing is the independent partnership, there is a large proportion of private equity investment done through captive or semi-captive vehicles as well as evergreen investment companies.

The complication that arises is that in those cases where captive vehicles are investing on behalf of the parent, there is typically no management fee or profit split, thus making it difficult to compare "net" investment results. Performance for a limited partnership is calculated on the basis of cash flows between the investors in a fund and the fund itself. In the case of captive funds, there is no parallel cash flow, as there is not really an investor in the fund. Captive funds’ and evergreen companies’ performance must be measured on the basis of the investment made by the investment vehicle in its portfolio or investee companies. Since this return is a gross return, it makes comparison of investment results difficult.

For simplicity Thomson Financial refers to all investment vehicles, either limited partnership, independent , captive or semi-captive as "funds" regardless of their true organizational structure.

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With regards to Investments information, survey respondents may designate a certain company investment as “do not disclose,” which embargoes the information from both online and printed publication. Embargoed data will be freely aggregated and used in analysis and summary statistics. Embargoes last for three (3) years. They can be lifted if the investment information is made public through a press release, a web site, etc.

With regards to Fund Performance information, individual fund performance information, cash flow information or residual values are not disclosed by individual fund name

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Prior to 1978 in the United States, much of the venture investing as a precursor to modern private equity investing was comprised of investments made into start-up and early stage companies by private individuals. While there were more than a few professional venture capital firms extant at the time, much of the industry relied on individual investments made by individuals and specialized government and university subsidized investment programs. The "prudent man" rule issued by the US Labor Department relaxed many of the limitations placed on institutional pension funds allowing for the tremendous growth of venture capital investing in the late 1970s and early 1980s. With very little in the way of true results, many of these first investments were made on the basis of faith in the venture capitalists’ ability to take young companies and turn them into phenomenally performing companies. The heyday of this investing was probably 1983 when US venture capitalists’ raised over $3 billion (a previously unheard of amount) for new investment and over 50 venture backed companies went public. Institutions took to this new asset class in a gigantic groundswell of investment.

As the 1980s progressed, however, institutions began to question how well their investments were truly performing. Much of the anecdotal evidence that was pitched to institutions in the late 1970s had some venture capitalists returning as much as 50 percent to their investors after fees, expenses, and profit splits. It was also a well known fact that the early years of a venture investment were marked by losses as investments generally took several years to mature. By the early to mid 1980s, institutions started putting large amounts of alternative investment assets into buyout funds to diversify their risk in their venture investments. These buyout funds were typically larger by an order of magnitude than venture firms and promised a high return over a shorter period of time due to the nature of their investment.

Still by the late 1980s, institutions had no good answer to the question "How well are we doing after a decade of investing?" as asked by their oversight committees. In 1985, Venture Economics issued a white paper entitled "Opportunities for investors in Venture Capital", which was a primer on the venture industry for the institutional investor. Part of this paper was a section on the performance of a small selection of venture funds from institutions who had commissioned the white paper. Venture Economics was assisted in this effort by Professor Bill Bygrave of Babson College in Wellesley, Massachusetts. This study compared performance results of the industry by a cohort group of funds formed in the same year (vintage year), and introduced the venture industry to the metric preferred by the institutional investor, the cumulative annual internal rate of return net of fees and partners’ profit split (carried interest).

In 1988, Venture Economics expanded the performance section of the report to publish the first Venture Capital Performance Report. It provided for the first time empirical evidence that while there were substantial opportunities for greater than expected returns from this asset class, the performance results were not uniform from fund to fund or firm to firm. The industry average was in the low teens rather than the high thirties as had been expected. Further research compared results of funds focusing on different stages of venture investing and fund size categories.

Controversial as these preliminary performance results were, Venture Economics expanded the performance report in 1990 to the first report under a new title Investment Benchmarks: Venture Capital using an expanded set of metrics.

In 1989, a group of venture investors presented a proposed set of valuation guidelines for venture capital backed private companies to the National Venture Capital Association (NVCA). While the association did not formally adopt those standards, the guidelines established in those proposed standards became industry standard practice.

While these metrics allowed the investor to compare their performance of their investments according to the vintage year of their investments, there was no one overall measure for the performance of the venture or private equity industry. At that time institutions had been using a time-weighted index developed by Brinson Partners as a benchmark for venture investing to compare the overall asset class with other asset classes. In 1991, in response to broader institutional adoption of the Benchmarks Report, Venture Economics began publishing time-weighted returns to complement the cumulative IRR metric and developed the first on-line offering of its Venture Capital Performance Database. This allowed the industry to compare for the first time the results of the venture industry and buyouts industry to other asset classes.

In 1994, Venture Economics added a second volume to its Benchmark Report Series with its introduction of the Investment Benchmarks: Buyouts and other Private Equity.

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In 1992 as a response to developing standards in the United States, the members of the European Venture Capital Association (EVCA) began to craft its own set of standard principals for measuring venture capital performance with research provided by many sources including Venture Economics, Bannock Consulting, academics, and practitioners. These standards were adopted by EVCA in 1993. In that same year, Bannock Consulting produced the first pilot performance study of private equity performance for the British Venture Capital Association (BVCA) using these newly adopted guidelines. By 1996, Bannock Consulting had performed another study, this time of European performance, under the aegis of the European Commission with cooperation of the EVCA.

In 1997, the BVCA and WM Consulting published the results of its study on the performance of British private equity. At the same time, Venture Economics and Bannock Consulting, with the cooperation of the EVCA, embarked on developing the most comprehensive review of Pan European and UK performance of private equity investing. The preliminary results of this collaboration were presented in London at the Venture Economics Forum in December 1996. The 1997 Investment Benchmarks Report: European Private Equity was the culmination of that first collaboration.

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While the terms above are sometimes used interchangeably, the four terms do have very distinct and precise meanings that are subtle but very important. "Return" is a mathematical calculation that can be determined from a data series, such as cash flows. It only refers to the results of the calculation. Meanwhile, "Performance" of a manager or fund can only be evaluated by comparing the returns of a manager or fund with some appropriate benchmark. The "Benchmark" to be used depends on whose investment decision is being benchmarked. The appropriate benchmarks are then used in “Benchmarking”.

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The investors' capital contributions (paid-in capital or capital calls), often referred to as "takedowns", are treated as negative cash flows. This is the capital actually paid into the partnership and should be distinguished from the total capital committed to the fund.

Cash and stock in-kind distributions to investors are treated as positive cash flows. In addition, income distributions are treated as positive cash flow distributions.

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To calculate a fund level IRR, the net investments in a fund or a fund’s inflows (negative cash flows) and any realized capital (positive cash flows) must be identified along with the timing of the cash flows.

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The most widely accepted measure by which benchmarks can be consistently compared is an internal rate of return (IRR) to the investors. This calculation is based on the cash flows to and from the fund from the fund’s investors. The cash flows are based on cash-in/cash-out returns over time, modified to include the residual value of the private equity fund’s portfolio holdings. A separate cash flow treatment is made for captive funds with no investor cash flows and is described in a separate section. The rates of return analyzed throughout the Thomson Financial private equity products are annualized returns unless otherwise stated.

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The IRR is based on a cash-in/cash-out return, with consideration of the residual value or net asset value of the partnership’s holdings. Specifically, the IRR is calculated for each fund as cash-on-cash to the investors on a cumulative basis, modified to incorporate the quarter end valuation of the partnership’s unliquidated holdings or residual value. The quarter end residual value is as-reported in audited financial reports from the partnership. The IRR is calculated as an annualized effective compounded rate of return using monthly cash flows and quarterly valuations.

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For consistency throughout the sample, transactions are recorded on the actual day they were made. However, they are attributed to the last day of the month in which the cash flow occurs when the IRR is calculated.

Cash distributions are straight forward. However, in the case of stock distributions the valuation is equal to the number of shares distributed multiplied by the quoted price per share as of the close of the day distributed or received. No discounts are applied to the valuation of the distributed securities. In some cases, they are still restricted, although the partnership itself may have applied such a discount to the reported value.

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Residual values are reported to Thomson Financial by the funds on a quarterly basis. Only the limited partners’ portion of the residual value is included in the calculations.

The residual values of the partnerships are net of current liabilities and include cash, short term investments, long term equity investments, loans outstanding and other assets. Only actual capital invested is included in the residual value. Capital committed, but not taken down, is excluded.

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The returns are net of management fees, partnership expenses and the fund manager’s carried interest. They are not net of taxes or of transaction fees incurred by the investors in disposing of any distributed securities. This cash flow component is sometimes treated differently for buyout and mezzanine funds as compared with venture funds. Venture capital funds usually subtract management fees from the partners' capital account at the end of each quarter; in other words, it comes out of contributed capital. Some buyout funds will bill their investors for management fees in excess of contributed capital.

This difference in practice has the effect of changing the investment basis. If the management fees are subtracted out of the capital accounts, as is the practice of the majority of venture funds, it tends to overstate the real return to venture funds which are capitalizing the management fees while understating the returns to buyout funds. In effect, buyout funds expense the management fee.

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The traditional academic measure of true value of an investment (in this case the portfolio companies invested in by a partnership) is the discounted future cash flow stream of the investment. The venture industry has adopted de facto standards of valuation that, while not always accurate, lend some measure of consistency. As the non-venture private equity industry has evolved, it has its own set of valuation standards, but not as consistently applied. However, in the case of buyout funds and other types of private equity funds, the fact that there are truer market comparables due to the maturity of many of the companies in the industry, measures such as EBIT multiples and public market comparables appear to meet the test of credibility. In both cases, interim valuation is the most problematic component of cash flow analysis.

In a diversified venture portfolio, there are opportunities for "re"-valuation at each subsequent round of financing in an investment. Venture funds have typically held companies at last value until a new round of financing. In the case of non-venture funds, the fact that values are set at purchase and often not subsequently valued except at exit, appear to create distortions of discrete jumps in market value of a portfolio as compared with the more continuous valuation series of a venture portfolio. Not to say that venture portfolios are not volatile–but in the case of many non-venture funds, the volatility is an artifice due to less frequent valuations. This makes interpretation of short-term returns of a private equity portfolio very difficult.

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In the case of captive/evergreen funds, where there are no outside investor flows, the methodology for determining cash flows differs in the following respect,: Investments in portfolio companies are treated as negative cash inflows. Proceeds from those portfolio company investments are treated as positive cash flows. Returns of captive/evergreen funds reflect returns to the fund from their portfolio holdings. Because captive/evergreen fund returns are not returns between the fund and outside investors, special note should be taken that returns do not reflect management expense ratios or internal costs associated with fund management. Returns of captive funds are gross and returns of independent funds are net. For this reason, returns are not comparable.

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Other benchmark measurements which complement IRR are the cumulative realization ratios–distribution to paid-in, residual value to paid-in, total value to paid-in, paid-in to committed capital and distributions to committed capital ratios. These ratios are measures of returns to invested capital. It should be noted that these measures do not take the time value of money into account.

Distribution to Paid-In (D/PI) – A measure of the cumulative investment returned relative to invested capital.

Residual Value to Paid-In (RV/PI) – A measure of how much of the investors' invested capital is still tied up in the equity of the fund.

Total Value to Paid-In (TV/PI) – A sum of Distribution to Paid-In and of Residual Value to Paid-In

Paid-In to Committed Capital (PI/CC) – A measure of the cumulative amount invested relative to the amount of capital committed to the fund.

Distributions to Committed Capital (D/CC) - A measure of the cumulative investment returned relative to the amount of capital committed to the fund.

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These measures are related to rate of return, but give a different perspective depending on the reinvestment rate assumptions of each measure. The reinvestment assumption does not mean that returns are reinvested, but that the opportunity for reinvestment exists. The IRR assumes that the opportunity exists for reinvestment at the IRR. The geometric mean assumes that the opportunity exists for reinvestment at the average annual rate of return.

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The most common measure of central tendency is the average or mean. It is measured by the simple arithmetic mean of the sample IRRs. The Thomson Financial private equity products calculate averages by (1) calculating rates of return for each fund, and then (2) calculating an average across the sample for each year of the grouped fund’s existence.

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Another common measure for central tendency is the median, which is the middle value of a group of ordered data. The median can be a misleading measure, particularly for small samples. Take, for example, three funds with returns of 10, 20, and 30 percent, respectively. The average and the median are the same, 20 percent. Take another three funds with returns of 10, 20, and 60 percent, which is skewed heavily positive. The average is 30 percent, but the median is still 20. These two examples would yield the same median, but it cannot be said that the median conveys the same information about the two samples.

Which is more appropriate, the median or the average? This is an ongoing statistical issue that does not have a definitive answer. The preferable choice depends largely on sample size and the frequency distribution of the sample. For large samples with relatively even frequency distributions, each measure gives approximately the same results. For a skewed sample, the average will give a result biased in the direction of the skewing. For small samples, the average is probably the better measure. For skewed samples, the median minimizes the impact of outliers.

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TThe capital weighted rate of return is weighted by fund size with funds contributing to the average in proportion to their size.

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The pooled method is a measure that attempts to capture investment timing and scale. The pooled return is calculated by treating all funds as a single "fund" by summing their monthly cash flows together. This cash flow series is then used to calculate a rate of return. This method implicitly would create an investment-weighted return and most closely matches the method that many investors used in measuring the return on their portfolio. Rather than averaging all the returns for their funds, they would lump all the cash flows together and calculate a return on the underlying "pooled" portfolio. In a likewise manner, rather than calculating individual returns for each fund and aggregating those returns by an average, the pooled return aggregates the cash flows for a group of funds into a portfolio and then calculates the rate of return on that portfolio of cash flows - thus treating the cash flows as if they were one fund. The advantage is that it does take the scale and timing of cash flows of large and small scale into consideration. The disadvantage is that larger cash flows will be given more weight so in a composite portfolio of small early stage funds and large later stage or buyouts funds the larger funds will have more influence on the performance than the smaller funds. However, many investors would say that this mimics the performance characteristics of their own portfolio. This measure is the most appropriate measure for aggregate performance at either the vintage year or composite portfolio level.

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Standard deviation is a standardized measure of how much the data varies around the mean. For a normal distribution +- 1, the standard deviation would include 68 percent of the sample, and +- 2 standard deviation would include 95 percent of the data in a sample

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Annualized standard deviation is the standard deviation multiplied by the square root of the number of periods in one year.

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The coefficient of variation represents the ratio of the standard deviation to the mean. It is a useful statistic for comparing the degree of variation from one data series to another, even if the means are drastically different from each other.

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Percentiles are another measure of dispersion popular in investment evaluation. One of the most commonly used measures in investments is quartiles. The first quartile is the point where 25 percent of the sample is above the quartile and 75 percent below. The second quartile is the same as the median - the point where half the sample is above and half below. The third quartile is the point where 75 percent of the sample is above and 25 percent below.

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The dollar weighted return equates all cash flows, including the ending residual value, with the beginning residual value of the portfolio. Because the dollar weighted return is affected by cash flows to the portfolio, it measures the rate of return to the portfolio owner. However, because the dollar weighted return is heavily affected by cash flows, it is inappropriate to use when making comparisons to other portfolios or to market indexes

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The best measure of the rate of return on an investment is generally the IRR since it takes into account an implied discount rate that factors in the time-value of money. However, in some cases the IRR is not indicative of performance especially when dealing with investment management performance. For that reason, other measures have been used to evaluate performance, the most common alternative measure being the time-weighted return.

The time-weighted return is calculated by calculating the rate of return between two or more periods and multiplying those returns together geometrically, then taking a geometric mean of the result. It is an approximation of the IRR.

As an example, assume that a fund has a one-year return of 4 percent, in the next year a 2 percent return, in the third year a 1.5 percent return and in the last year, 2.5 percent.

The time-weighted return would be calculated as:

TWR=[(1.04)(1.02)(1.015)(1.025)] ^(1/4)-1 = 2.496%

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There is one logistical reason and one philosophical reason. The logistical reason is that the time-weighted return is an approximation of the IRR and is usually easier to calculate than the IRR. In the days before spreadsheets and hand-held financial calculators, it was easier to calculate a time-weighted return than an IRR which can only be found through complicated mathematical trial and error algorithms.

The time-weighted return is a misnomer as the calculation does not consider the time value of money, but rather produces a return that does not penalize fund managers for timing decisions. The calculation treats a dollar distributed today the same as a dollar distributed 10 years ago. You could have had a return in the first year of 2 percent, in the second year of 2.5 percent, in the third year 4 percent, in the fourth year 1.5 percent and the stated calculation would result in the same time-weighted return.

In a public equity portfolio, secondary markets create liquidity. As a result, money can be moved in and out of an investment manager's control thus affecting their investment base. Time-weighting was created to overcome the fact that the manager has no control over the timing of cash flow into or out of his management by his clients. The investment manager's performance is measured strictly on the investment decisions they make.

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