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Introduction to Private Equity

For other titles in the Wiley Finance series
please see www.wiley.com/ﬁnance

Cyril Demaria
A John Wiley and Sons, Ltd., Publication

This edition first published 2010
C
2010 Cyril Demaria
Registered office
John Wiley Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom
For details of our global editorial offices, for customer services and for information about how to apply for
permission to reuse the copyright material in this book please see our website at www.wiley.com.
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product names used in this book are trade names, service marks, trademarks or registered trademarks of their
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is sold on the understanding that the publisher is not engaged in rendering professional services. If professional
advice or other expert assistance is required, the services of a competent professional should be sought.
Library of Congress Cataloging-in-Publication Data
Demaria, Cyril.
Introduction to private equity / Cyril Demaria.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-470-74596-0 (cloth)
1. Private equity. I. Title.
HG4751.D46 2010
332.6—dc22
2010005161
A catalogue record for this book is available from the British Library.
ISBN 978-0-470-74596-0
Set in 10/12pt Times by Aptara Inc., New Delhi, India
Printed in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire

Contents
Foreword xi
Acknowledgements xiii
About the Author xv
Introduction xvii
A moving target xviii
A consubstantial lack of information xviii
Benign neglect, malign consequences xix
Knowing the devil to circumvent it xx
PART I WHAT IS PRIVATE EQUITY? 1
1 Private Equity as an Economic Driver: An Historical Perspective 3
1. Pooling interests to identify and exploit sources of wealth 5
(a) Identify, control and exploit resources 6
(b) Leverage public policies and a favourable business environment 8
2. Championing entrepreneurship 9
(a) No private equity without entrepreneurs 10
(b) Convert ventures into business successes 12
(c) Entrepreneurship and private equity form a specific ecosystem 14
Conclusion: an attempt at definition 15
(a) A negotiated investment in equity or quasi-equity 15
(b) A fixed maximum term 16
(c) Implying specific risks 16
(d) With high expected returns 16
(e) Undertaken on behalf of qualified investors 16
2 Modern Private Equity – A French Invention? 19
1. USA: the foundry of modern private equity 20
The strict separation of public policies and public financing 20

viii Contents
The separation of public endeavours and private efforts; the subsequent
support of the former for the latter 20
(a) Governmental input: SBA, DARPA and ERISA 21
(b) Universities, defence and disruptive innovation 22
(c) Challenges 23
2. Europe: adapting a successful model or creating its own? 24
(a) Governmental input: legal changes, tax rebates, infrastructures
and EU market 25
(b) National champions, information technologies and incremental
innovation 28
(c) Challenges 33
Conclusion: Emerging markets, building castles on sand? 38
PART II THE PRIVATE EQUITY ECOSYSTEM 41
3 Private Equity: A Business System Perspective 43
1. We are all investors in private equity 43
(a) Sources of capital 43
(b) Private equity investment rationale 47
2. Organisation and governance of private equity funds 53
(a) Private equity fund managers are financial intermediaries 53
(b) Incentives and fees 54
(c) Conflicts of interest 57
(d) Power, checks and balances 60
3. Measuring performance, managing risks and optimising returns 61
(a) Measuring performance in an uncertain context 61
(b) Managing risks and optimising returns 66
4. Pitfalls and challenges 71
Conclusion 74
4 The Universe of Investment 75
1. Venture capital: financing company creation 77
(a) Venture capital investment targets 78
(b) Actors and structures 78
(c) Operational activities 80
(d) Challenges 81
(e) Limits 84
2. Growth capital: financing companies’ expansion 84
(a) Growth capital investment targets 84
(b) Actors and structures 85
(d) Challenges 86
(e) Limits 87
3. Leveraged buy-out: financing companies’ transmissions 87
(a) LBO investment targets 87
(b) Actors 87

Contents ix
(d) Challenges 90
(e) Limits 92
4. Other interventions in private equity 95
(a) Targeting the stock exchange 96
(b) Turn-around capital and special situations 99
(c) Distressed debt 99
(d) Quasi-equity instruments (mezzanine) and second lien debt 105
(e) Merchant banking, investment banking and private equity house
intervention 117
(f) Secondary market 118
(g) Real estate, infrastructure and exotic assets 120
Conclusion 122
5 The Process of Investment: A Matter of Trust and Mutual Interest 125
1. Step 1: Preliminary analysis 126
2. Step 2: Valuation 126
3. Step 3: Negotiating 127
4. Step 4: Structuring 129
5. Step 5: Complementary due diligences 131
6. Step 6: Transaction 131
7. Step 7: Monitoring and exit 132
Conclusion 133
PART III PRIVATE EQUITY IN TEENAGE TIME: TREND SETTING, FADS
AND RESPONSIBILITIES 135
6 Private Equity Evolution: Trends or Buzzes? 137
1. Is private equity going mainstream? 137
2. Is private equity (still) creating value? 140
3. Private equity: between bubbles and crashes 144
Conclusion 148
There is no such thing as ‘capital overhang’ 149
7 Private Equity and Ethics: A Culture Clash 153
1. Greed 153
2. Destruction 157
3. Philanthropy 162
4. Transparency 163
5. Conﬁdentiality and self-regulation 164
Conclusion 167
General Conclusion – Private Equity Today and Tomorrow 169
1. Core target: manage the volatility of performance 169
2. The only valid leitmotiv: long-term thinking 172
3. The impact of the fair market value 174
4. A long-term trend: the attractiveness of private equity 176
5. Private equity: future victim of its own success? 179

x Contents
6. The impact of a better knowledge of private equity 184
(a) Understanding the risk and managing the J-Curve 184
(b) Innovating through structuring 185
(c) Private equity and universal owners 186
(d) Change or die: the pressure on general partners 188
(e) Regulation: Damocles’ sword looming over private equity 189
Glossary 193
Bibliography 203
Index 207

Foreword
Private equity can be described as ‘investments in private companies in privately negotiated
transactions’. This means that private equity is an asset class that is normally opaque, illiquid
and difficult to analyse.
However, private equity investing offers many advantages compared to investing in public
and more liquid asset classes. The underlying companies can be acquired in a private trans-
action, often in a specific process leading to attractive acquisition. The companies can be
developed privately on the long term, hence maximizing their chances to succeed, when most
public companies are only targeting short term benefits. Fund managers active in private eq-
uity normally have much more information when they make investment decisions compared to
those investing in public companies. Incentives for the management can be better aligned with
the investors’ interests. Fund managers exercise a higher degree of control on the companies
they have invested in, and develop them aggressively without having to worry about how every
decision is understood by the public. Through private equity investments, investors can target
industries or niches where there are no public companies.
Private equity is a very complex asset class, more of an art than other forms of investments
which are analyzed and compared quantitatively. Private equity is an asset class where manager
selection plays the highest role of all asset classes. There are normally several private equity
managers that are in the same state of development of their own activities. Some have decades
of experience and some have worked as a team for a long time. Some have made several
investments in the same industry repetitively and some of them have sold their investments
at significant levels of profit. This means that analysing private equity investments and fund
managers requires skill and experience.
Private equity is no longer as private as it used to be. Because of all the large leveraged
buy outs during the end of 1980s and the mega leveraged buy outs during the past few years,
private equity transactions have been widely reported and followed. Private equity is a long
term asset class and investors will realise the final return long after they have made decision to
invest. Warren Buffett stated once that it is extremely important to understand where to invest
in because eventually ‘only when the tide goes out do you discover who’s been swimming
naked’.
Despite all these mentioned difficulties and hurdles, Cyril Demaria has been able to write
an interesting and extremely well formulated book about private equity. Cyril has seen and
experienced private equity from many angles and in different roles. Cyril has been an investor
directly in start-up companies and more developed and well established businesses. Cyril has

xii Foreword
also been an advisor and investor in private equity funds. Most importantly, Cyril has been
writing about the private equity industry in many papers and magazines for more than a decade.
The experience Cyril has gathered from all his professional activities and his passionate interest
in private equity has enabled him to write this book in an easy and understandable way but
still giving the reader a very good picture of the asset class and also its pitfalls. In this book,
Cyril has been able to give the topic of private equity more ﬂavour with a lot of anecdotes and
historical references which hopefully shows the reader that private equity as such is not a new
invention.
I have had the honour of working together with Cyril and have read his articles and papers
for many years. Cyril is a very knowledgeable person in private equity, he is critical and does
not swallow all the polished information that is generally written about private equity.
This book opens the world of private equity to the reader in a very understandable way,
making this opaque asset class more understandable for the reader and hopefully an interesting
asset class to invest in.
Tom Eriksson
Aeris Capital

Acknowledgements
I would like to thank Tom Eriksson and Gesa Eichler for their help in the review of the contents
of this book; Pete Baker and Aimee Dibbens, of John Wiley Sons, for their patient and very
kind support.

About the Author
Cyril Demaria is a Partner at Tiaré Investment Management AG, a Zürich-based wealth and
investment management company. Prior to that, he created a multi-strategy fund of funds
focused on the environment. He was also an Associate in private equity funds of funds
(Zürich, CH). He participated in the market development in France, and evaluated American,
European and Middle Eastern private equity funds. As a Portfolio Manager responsible for
private equity fund investments at a major French insurance group (Paris, FR), he managed
27 investments totalling EUR 60 million in private equity funds and funds of funds. As Head
of Corporate Development at Externall (Paris, FR), he managed four asset acquisitions and
raised debt financing to do so. He started his career in a hybrid venture capital and funds of
funds firm (San Francisco, US; Paris, FR). He currently manages a small business angels fund
(Pilot Fish I, vintage year 2009).
A French citizen, Cyril Demaria holds a BA in Political Sciences from the Institut d’Etudes
Politiques (Lyon, FR), Master in Geopolitics applied to Money and Finance (Paris, FR), Master
in European Business Law (Paris, FR) and a Diploma from HEC (Paris, FR). He is a DBA
candidate at University Sankt-Gallen (CH, graduation: 2012).
An Associate Professor at ESSCA (Angers, FR Budapest, HU), EADA (Barcelona, SP),
and ZHAW (Zürich/Winterthur, CH) he lectures on Private Equity, LBO, Money and Finance
and International Finance. He collaborates regularly as an expert with the SECA, AFIC and
EVCA. He is the author of:
– Développement durable et finance, Maxima, 2003;
– Introduction au private equity, Revue Banque Editeur, 2006, 2nd ed. 2008, 3rd ed. 2009 –
foreword by Xavier Moreno (former President of the AFIC, Managing Partner of Astorg
Partners);
– Profession: business angel – Devenir un investisseur providentiel averti, with Fournier
M., Revue Banque Editeur, 2008 – foreword by Claude Bébéar (Chairman of the Board of
Axa, Chairman of the think tank Institut-Montaigne);
– Le marché, les acteurs et la performance du private equity suisse, with Pedergnana M.,
SECA, 2009 – foreword by Patrick Aebischer (President of the Ecole Polytechnique Fédérale
de Lausanne).
cyril.demaria@tiare-im.ch, +41 79 813 86 49

Introduction
Why another book about private equity, and especially an introductory one?
The answer lies in my experience of reading the different kinds of literature available and
my recurring lack of satisfaction regarding their ability to combine so as to formulate an
articulate theory. Each piece of the private equity puzzle is interesting, but they somehow
do not represent an harmonious and clear picture. I am obviously not the only one to be
dissatisfied: the success of the abridged French version of this book (Demaria, 2006 2007),
of which the first edition as well as the updated reprint were sold out each within less than a
year, tends to confirm it.
Cartoon I.1 The potentially disruptive impact of a French input ...
C
2009 Wiley Miller and Universal Uclick. Reprinted by permission.
There have been honourable attempts to paint a portrait of this emerging asset class, by
famous and reputable institutions, such as The Institute of Chartered Accountants of England
and Wales (ICAEW). Many academics from different disciplines as well as finance practition-
ers have also tried to contribute to public enlightenment. One of the criticisms made of these
written works is that they remain prisoners of ill-adapted theoretical frameworks. Designed
as toolboxes for analysing quantitative data, these frameworks soon reveal their limitations as
they were not designed specifically to analyse this asset class. Hence, private equity cannot be
turned simply into equations as is done for hedge funds. Qualitative analysis is a determining
factor at every level of the private equity pyramid of financing. For that reason, using math-
ematical tools designed for other areas of financial or economical analyses means taking the
risk of encountering the limitations of such an exercise.

xviii Introduction
The second reason lies in the discrepancies which can be observed between academic
research and empirical observations by practitioners. There are constant gaps between the
findings of the former and the facts as reported by the latter. This holds true for the analysis
of fund performance, for the source of value creation in private equity, for the origin of the
relative decline of venture capital in certain countries and many other areas. However, highly
acclaimed academics, such as Josh Lerner, Antoinette Schoar and Paul Gompers, are extending
our knowledge of this difficult and largely misunderstood part of a broader category of finance
called ‘alternative assets’.
A MOVING TARGET
Private equity is constantly being redefined. Establishing a typology of transactions is thus
especially tricky, notably when there is semantic confusion. Although being only one of the
components of the private equity market, LBO and private equity are used interchangeably
in the United States. Beyond the fact that LBOs represent the great majority of investments
made in private equity (whether in the US or in Europe), it is its bad reputation which got
the word ‘LBO’ blacklisted. Associated historically with asset-stripping, this reputation is
now contaminating the expression ‘private equity’. Warren Buffet classified private equity
managers as being ‘porn shop operators’, and the semantic confusion between private equity
and LBO as ‘Orwellian’.
Because of its intrinsically changing nature, the expression ‘private equity’ covers only part
of its field of action. The ‘private’ or unlisted element is no longer decisive; nor is that of
‘equity’.
One mistake is to state that ‘private equity’ is (just) ‘equity’. From this assumption, it might
also be assumed that private equity may be analysed validly with the tools used for public
equities. This has so far been proven wrong: the timeframe, the risks, the skills required and the
returns associated with private equity investments differ substantially from those associated
with public equities.
If not ‘equity’, then ‘private’ could appear as defining the sector and open it to the non-listed
methods of analysis. Once again, this has been proven wrong: not only is there no proprietary
private finance method of analysis which could be transposed as such, but that which defines
‘private’ assets is more their lack of listing than common factors defining them as belonging
to ‘alternative assets’.
A CONSUBSTANTIAL LACK OF INFORMATION
Ill-adapted theoretical modelling and the frequent gaps between research and the facts result
from a lack of information: information is collected scarcely, heterogeneously and unsystem-
atically. Not only has this been the case to this day, but will remain as such for the foreseeable
future.
Producing information costs the economic agents a great deal and is sometimes dispropor-
tionately expensive compared to their size and revenues. As private equity deals with small-
and medium-sized companies and these account for most of their activity (the criteria being
the size and number of companies being financed), it is highly unlikely that there will be a
‘pure and perfect information context’ any time soon for non-listed companies – which happen
to make up 99% of the total number of companies in a given economy.

Introduction xix
This lack of available information has resulted in some methodological simplifications. For
example, observers assimilate casually the findings for a part of the sector, for example large
buy-outs operated in listed companies, as a general rule for the entire activity of leveraged
buy-outs. This is proven wrong regularly. Small- and medium-sized companies are bought out
by different fund managers, with substantially different financing techniques and investment
purposes.
Another inaccurate simplification is to assimilate the private equity sector with private
equity funds. Even though these intermediaries are probably a good indication of the trends in
the sector, they certainly do not sum up private equity activity. Fund managers have organised
themselves in rich and powerful national (such as the British Venture Capital Association or the
Association Française des Investisseurs Capital) and regional associations (e.g. the European
Venture Capital Association and the National Venture Capital Association) which tend to hide
the existence of other players.
For example, business angels play a significant role in the venture capital sector – even
though largely yet unknown. These business angels, also called angel investors, are the very
first individuals willing to support an emerging venture. Corporations, endowments, founda-
tions, high net worth individuals, state-owned structures, banks, insurance groups and other
economic players are also making direct investments which are not necessarily observed by
the associations mentioned above.
BENIGN NEGLECT, MALIGN CONSEQUENCES
Those simplifications have significant consequences: findings are not put into perspective;
action plans taken, notably to correct market imbalances, are ill-adapted; and there is a
growing antagonism between the different parts of the private equity system for that reason.
For example, the French (2007) and British (2009) governments have been focusing on
start-ups at seed stage, because according to public statistics, venture capital funds have not
been investing in them sufficiently. This was perceived as a market imbalance which had to
be corrected. Whether true or not, this gap in financing has been targeted by a set of measures
heavily financed by the tax payer’s money.
Another example is to be found in federal venture capital funds of funds in the US and
the UK (2009). Innovation America and the National Association of Seed and Venture Funds
(NASVF) suggested the set-up of a USD two billion fund of funds dedicated to supporting
business angels and to funding public programmes. This would be an extension of the Small
Business Administration (SBA) programme, which has experienced difficulties in staying
afloat. Unfortunately, the track record of public funds of funds is bad (Arnold, 2009b), notably
because of the proximity effect and the local political agenda which affects public investment
structures (Bernstein, Schoar Lerner, 2009), whether they are sovereign wealth funds or
funds of funds. In the UK, state-backed venture capital funds have underperformed by com-
parison with their commercial couterparts. The returns of the latter (2002–2004) were 7.7%
whereas all VC funds (commercial and public) of the same vintage were 1.7%.
Thus, statistics of private equity performance and activity should be read with caution. They
are the result of periodical polls of private equity fund managers answering on a voluntary
basis. These figures are not audited; they cover a different sample of funds over time depending
on the answer rate, and are applicable in any case to only a portion of the private equity industry.

xx Introduction
KNOWING THE DEVIL TO CIRCUMVENT IT
This book will (unfortunately) not be able to avoid the above-mentioned traps completely. I
am a prisoner of the same constraints my peers have had to deal with (see Cartoon I.2). The
value of the book, if there is one, could be that it was written with these limits in mind. This
gives the content a critical perspective which could thus highlight its originality. I will keep in
mind the need not to be totally blind to the bias conveyed by the data I am using.
Cartoon I.2 Writing a book about private equity and taking the time to enjoy it
C
The second reason why this book differs from the rest lies in its approach to private equity
financing as a cycle, and not a static body of financial practices. Two factors motivate this
approach:
• Private equity has been attracting an ever increasing amount of capital over the course of
the last two decades. This capital inflow has contributed to changing the dynamics of the
sector, its structure, its practices and its influence on the overall economy over the course
of only four to five business cycles (that is to say on average three years of economic
growth and two years of recession). The source of this inflow, notably pension funds,
has also exposed the private equity sector to exogenous influences as its visibility has
increased.
• Private equity players are constantly innovating and at a fast pace. This innovation po-
tentially explains the persisting gaps between the academic literature and the daily activ-
ities of practitioners, as the scientific body struggles to catch up with the pace of inno-
vation. Unfortunately, the lack of available data does not help the work of the scientific
community.
Because private equity is evolving constantly and rapidly, it can only be captured partially
by a single book. For that reason, dear reader, this book will focus on identified trends; practical
and theoretical dialogue; and draw some hypotheses to guide you towards an understanding
of upcoming events.
This book will be structured to identify the critical elements that have shaped the private
equity industry (Chapter 1) and which remain necessary for those countries willing to establish
this industry (Chapter 2). Once these founding parameters have been analysed, we will see how
the private equity sector is organised as an ecosystem (Chapter 3) centred on the entrepreneur
and the lifecycle of companies (Chapter 4). In that respect, the investment process and the

Introduction xxi
entire private equity activity is based on interpersonal relationships and on arm’s length
interactions (Chapter 5). These conclusions will allow us to distinguish the trends and fads
affecting an activity in ‘teenage time’ (Chapter 6), before examining the responsibilities
(Chapter 7) that the sector will have to handle. The Conclusion will provide some prospective
analysis.

Part I
What is Private Equity?
Whenever a company needs financing, two solutions come to mind: the stock exchange and
bank loans. The stock exchange is a limited solution. It provides only access to funding for
medium- and large-sized companies that meet specific criteria (sales figures, total of balance
sheet, minimum number of years of existence, etc).
The conditions for taking out a loan are also strictly defined. Companies must prove their
abilitytopaybackthebankinfixedinstalments, whichmeans that theymust show acertainterm
of existence, stability of cash flows, healthy activity and also a limited existing indebtedness.
If neither the stock exchange nor banks finance business creation and development, then
who, or what, does? Where does the money come from to finance the transmission or take-over
of family businesses, for example? Or to restructure an ailing business? It is ‘private equity’
for that matter.
The expression ‘private equity’ was coined by reference to equity which is not listed and
whose exchange is not regulated (Chapter 1). However, this definition only partly reflects
the scope of action of private equity players, which has diversified and spread considerably
(Chapter 2).
by Cyril Demaria
Copyright © 2010, Cyril Demaria

1
Private Equity as an Economic Driver:
An Historical Perspective
Christopher Columbus convinced, after seven years of lobbying, the Spanish Kings (Ferdinand
II of Aragon and Isabella I of Castile) to sponsor his trip towards the West. His ‘elevator pitch’
must have been the following: ‘I want to open a new and shorter nautical route to the Indies in
the West, defy the elements, make you become even more powerful and rich, and laugh at the
Portuguese and their blocs on the Eastern routes’ (see Cartoon 1.1).
“It is more than a voyage of discovery ...
It is a branding opportunity.”
Cartoon 1.1 A modern view of Columbus’s pitch to the Spanish Kings
Bottomliners C
Eric Bill Teitelbaum. All rights reserved.
He probably did not know by then that he was structuring a private equity deal (here, a
venture capital operation). He was indeed, as his project combined these elements: ﬁnanced
by an external investor, a high risk, a high return potential and protection of this competitive
advantage.
These elements form the common ground for all private equity deals (venture capital, devel-
opment capital, leveraged buy-out, etc.). Another element lies in the ‘private’ characteristics
of private equity deals negotiated privately between the parties: historically, they were made
with non-listed companies.
by Cyril Demaria

4 Introduction to Private Equity
Even though it is difficult to imagine whether, and how, Columbus did his risk/return
calculation when assessing the viability of his project, we can assume that the risks borne by
the operation were identified and that there was a plan to mitigate them – or at least sufficiently
well identified to light enough candles in church.
The risks were high, but not unlimited (thus distinguishing his venture from pure gambling).
The prospect of reaching the Indies gave quite a good sense of what could have been the
return on investment for the financial sponsors: the Spanish Kings and the private investors
from Italy. Not only did the potential return exceed by far that which a conventional investment
could provide, but the new route had a potentially disruptive impact on international commerce,
giving the new born unified Spanish Crown a much needed mercantile boost.
This example illustrates the fact that private equity has always existed, in one form or
another, throughout history. Examples of historical buy-outs are more difficult to identify,
hence the focus of this chapter on venture capital. Buy-outs transfer majority ownership in
exchange for cash and are generally friendly. Typically, buy-outs are conducted with insider
knowledge. They have only recently started to become important, as they require sophisticated
financial markets and instruments.
Historically, large buy-out operations were ‘barters’, with a strong real estate/commercial
focus. This involved mainly swapping countries or towns for other ones. The state today
known as New York was swapped by the Dutch West Indies Company (WIC) for Surinam, a
plantation colony in northern South America, in 1667 (Treaty of Breda). This turned out to be
a bad deal.
In 1626, Peter Minuit, then Director General of the WIC, acquired the island of Manhattan
from the Indians and began constructing Fort New Amsterdam. In 1664, owing to commercial
rivalry between the Dutch and the English, an English fleet sent by James, Duke of York,
attacked the New Netherlands colonies. Being greatly outnumbered, Director General Peter
Stuyvesant surrendered New Amsterdam, which was then renamed in honour of James. The
loss of New Amsterdam led to the Second Anglo-Dutch War of 1665–1667. This conflict
ended with the Treaty of Breda, under which the Dutch gave up their claim in exchange for
Surinam.
The emergence of private equity as a dynamic financial tool required the interplay of
(i) a supportive social, legal and tax environment, (ii) adequate human resources and (iii)
sufficient capital. Together, these three conditions have developed slowly until they reached
the current level of professionalism and formalism which characterises private equity. The clear
identification and separation of the three conditions forming the ‘private equity ecosystem’
has been a continuous process, which is still under way.
The purpose of this chapter is to identify the key elements distinguishing private equity
from other categories of investment. Private equity financing in the early days of venturing
was an intricate mix of public policy, entrepreneurship and financing. The quest of European
monarchs for greater wealth and power is emblematic for this mix, pooling public and private
resources in order to identify and exploit sometimes remote resources (see section 1).
Public policies, entrepreneurship and financing became less complex and slowly gained
autonomy. The public interest and policies were separated clearly from the King’s personal
interest and will. Once the basic legal and tax framework had been established and adapted to
the alterations in social and economic factors, the entrepreneur emerged as the central figure
of the private equity ecosystem (see section 2).
Private equity investors developed a capability to identify them, providing capital and key
resources to help with their venture and get their share of success. By gaining this know-how

Private Equity as an Economic Driver: An Historical Perspective 5
and expertise, those investors contributed to further professionalisation, developing strategies
to mitigate risks and optimise returns (see Chapter 2).
1. POOLING INTERESTS TO IDENTIFY AND EXPLOIT SOURCES
OF WEALTH
The fundamental objective of any rational investor is to increase his wealth1
dramatically.
Private equity offers investors the opportunity to finance the development of private companies
and benefit from their eventual success. Historically, the raison d’être of those companies has
been to identify and control resources, thereby developing the wealth of venture promoters by
appropriation.
The main financial sponsor might have been a political leader, who would legally and finan-
cially ease the preparation and the execution of the venture for the benefit of the Crown and
himself. The control of resources and the conquest of land motivated the launch of exploration
ventures (a). Companies were created to support political efforts, thereby guaranteeing the
demand for their product in exchange for their participation in a public effort to build infras-
tructures, create a new market and more generally encourage commerce and the generation
of wealth. They could leverage public action (b). Apparently, conflicts of interest did not ring
any bells at that time (see Cartoon 1.2).
Cartoon 1.2 A modern perspective on the old ages’ resolution of conflicts of interest in private
equity. . .
C
Often, private investors were complementing this public initiative, convinced by the pitch
made by a person combining technical competence and know-how, with a vision and genuine
marketing talent. This person would be identified nowadays as an entrepreneur – or the
precursor of televangelists, when the marketing presentation becomes a seven-year sermon, in
the case of Columbus.
1 Selectively, some investors may add secondary items on their agenda, which can vary from gaining a foothold in
the market/in a given company (corporate investors), to monitoring technical progress, achieving social recognition
and other specific issues. However, viable investment programmes usually put financial returns at the top of their list
(at least in order to achieve self-sustainability within a certain period of time).

(a) Identify, control and exploit resources
The quest to master time and space has given birth to pioneering public and private initiatives,
bearing a substantial risk but also a potentially high reward. This reward was usually associated
with the geographical discovery of new resources (land control) and/or effectiveness (new
routes to the Indies, for example), allowing a better rotation of assets and improving the
returns.
Columbus’s project supported a substantially higher risk than the equivalent and usual
routes to the East. This project was deemed to be possible thanks to progress in navigation and
mapping, and some other technical and engineering discoveries. In that respect, Columbus’s
expedition was emblematic of the technological trend, as well as being political, religious and
scientific; which he mastered so as to present his project.
The risks taken by Columbus were of two different kinds:
(i) Initial validation of theoretical assumptions, with substantial risks linked to the transition
from a theoretical framework to an operational process.2
Columbus’s prediction of the
diameter of the Earth (3 700 km instead of 40 000) proved wrong, but his venture was
successful in the sense that he reached an unknown new continent. This kind of outcome
(refocusing the ‘research and development (RD) effort’ towards a different outcome)
occurs from time to time in companies financed by venture capital even today. Hope-
fully, not all venture-backed companies have a CEO who under-evaluates the effort to be
produced by 10 times;
(ii) Execution of the four successive trips, with the presence of favourable winds and currents,
the correct calculation of the time spent at sea with embarked supplies, navigation hazards
(storms), morale of the crew and other operational aspects. Operational risks are generally
financed by later stage venture capital and expansion investors.
For all of the reasons above, Columbus’s project was innovative in many respects. It was
guided by ambition and a vision. It was designed to test concretely the validity of a certain
number of theories, which would be of great reward if Columbus touched Indian ground after
journeying to the West.
The high return potential was related to Columbus’s calculations, according to which the
new nautical route could save a substantial amount of time (and risk) to reach the Indies
despite the Portuguese land bloc. The return potential would be earned not from the initial trip
itself, but from opening a new route for future trips to gather expensive goods (mainly silk and
spices) and bring them back to Europe.
Another key element was that this new nautical route would have paved the way to devel-
oping a certain number of other new ventures using the route to gain other valuable goods.
Columbus’s success would not have been a one-time pay-off but the source of recurring and
long-term income.
The time horizon of the trip was calculated in months, which represents a long-term invest-
ment, and the pay-off would have been calculated in years. This represents another element
that qualifies Columbus’s trip to the West as a private equity project.
Protection by the Spanish Kings of this advantage, by giving a legal right to the private
sponsors of the project to the use of this new route (the historical equivalent of the current
‘barriers to entry’ in a given market) was a crucial element of the evaluation of the return on
2 Today, this would qualify as a transition from ‘research and development’ mode to ‘go to market’ mode.

investments. Columbus was promoted to the status of ‘Admiral of the Seas’ by the Spanish
Kings, and then to Governor once he succeeded in his venture. This meant that he just had to
sit and wait for the profits to come, after making this initial breakthrough (see Cartoon 1.3).
Cartoon 1.3 A modern perspective of the royal advantages given to Columbus. . . Or the advantages
of barriers to entry!
Bottomliners C
Eric Bill Teitelbaum. All rights reserved.
This pooling of the energies and resources of an entrepreneur (Columbus); of Italian private
investors (representing 50 % of the pool of money) and of the Spanish Kings as a sponsor
syndicate for the project, is another criterion for its qualification as a private equity project. Its
commercial purpose, even if not exclusive in this example, is another.
As an additional incentive, Columbus would have received a share of all the profits made
via this nautical route. More specifically, Columbus asked, aside from the titles and an official
charge, for a 10 % share of the profits realised through the exploitation of the route to the West.
He had option rights to acquire one eighth of the shares of any commercial venture willing
to use the nautical route that he had opened. This kind of financial incentive (percentage on
profits realised and the equivalent of stock options; in private equity this incentive is called
carried interest) is often used to reward the management of a company, should it reach a certain
number of targets.
Columbus’s venture, however, stands out as different from a typical private equity invest-
ment. He benefited from political and legal support which would not be sustainable in an open
and fair trade market today – or at least not so openly provided.
The Italian investors were ‘hands off’ in the project. However, Columbus convinced them
and enrolled the providers of the three ships in his venture. This implies that even if there

was no equivalent of a ‘lead investor’ and ‘investment managers’ (see Chapter 2) to look after
Columbus’s project, the monitoring was done according to historical standards, that is to say:
on site, day-to-day and probably with vigorous debates about the option of continuing and
taking the risk of wreckage; or returning and saving both fleet and crew.
In that respect, the dispute about the reward to be granted by the Kings of Spain to Columbus
after his journeys, as well as the difficulty of providing a quick and easy return for the Italian
investors (as there was little gold to capture on the Caribbean Islands), is another point
comparable with typical private equity operations, an outcome different than that originally
planned. Some disputes held in recent years between creators and managers of Internet start-
ups and their financial backers prove that this still happens today – and, just like back then,
before the courts.
(b) Leverage public policies and a favourable business environment
Even if Columbus’s project was driven by religious and commercial purposes, the political
ambitions of the Spanish Kings were the key factor triggering public commitment. Govern-
mental, and more generally public, support is instrumental in contributing to the emergence
of private equity ventures by funding fundamental research, financing key infrastructures and
creating a favourable environment for the development of ventures. However, private equity
projects which qualify as such and which have served public policies are limited in number.
The separation of public and private financing as a key element of the emergence of an
autonomous private equity sector
This stems from the fact that with separation of the King as a public body and the King
as a private person, projects were no longer financed by public subsidies and the specific
convergence of interest which had allowed Columbus to set up his project slowly became a
rarity.
The increased control of the use of public money, a greater focus on fair trade and the
will to let market forces act as far as possible in favour of private and public interests have
played a significant role in the limitation of the state’s direct intervention in private equity
projects. This, however, does not mean that this role has totally disappeared: it has evolved
towards the establishment of an appropriate legal and tax framework, as well as more complex
intervention, mixing public contracts and the active management of public money.
The transformation of public intervention: setting up a legal and tax framework
With progress in commerce, transportation and techniques, entrepreneurs could reach a higher
number of clients, as well as producing in quantity and more capital intensive goods. To follow
this trend, and finance the investments needed, the entrepreneur often had to seek outside
financing, and thus set up a formal company, with agreements, contracts and partnerships with
third parties.
To enforce these conventions, a legal and tax framework has to be in place and respected.
One of the most ancient examples of a legal framework is known as the Code of Hammurabi,
King of Babylonia (1792–1750 B.C., see Gompers Lerner, 2006). This set of 285 laws was
displayed in public places to be seen by all, so that it could be known and thus enforced.
This Code liberated the commercial potential of the Babylonian civilisation, notably paving

the way for the creation of partnerships. Until then, most companies were initiated and were
run by families. Financial support at that time often came from personal or family wealth,
and/or from guilds that helped their members set up their venture after being admitted as a
member.
With partnerships, Mesopotamian families could pool the necessary capital to fund a given
venture, spreading the risk. However, these ventures were not financed by equity investment.
Capital infusion mostly took the form of loans, which were sometimes secured by the pledge
of a man’s entire estate, with his wife and children considered as being a part of it. If he
defaulted on payments, his family would be sold into slavery to pay his debts (Brown, 1995).
In that respect, the Code of Hammurabi initiated the distinction between the entrepreneur
and the financier, with the distinction between equity and debt, the creation of collateral for
the debt and the privileges attached to loans (such as priority of reimbursement in the case of
liquidation of the company).
The transformation of public intervention: infrastructure financing
However, this legal and tax support may not have been sufficient for the emergence of private
equity. Besides law, other public actions are usually geared to helping entrepreneurs, directly
or indirectly, and create favourable conditions that nurture the creation of companies. Direct
help, because of its cost to the public budget and the distortion in competition that it introduces,
tends to be confined to a more indirect mode of intervention. This indirect mode of intervention
had already been identified and used by Hammurabi, who, aside from being a military leader,
invested in infrastructures in order to foster the prosperity of his empire.
During his reign, he personally supervised navigation and irrigation plans, stored grain
against famine and lent money at no interest to stimulate commerce. Broad wealth distribution
and better education improved standards of living and stimulated extra momentum in all
branches of knowledge, including astronomy, medicine, mathematics, physics and philosophy
(Durant, 1954). In that respect, the liberation of private energy and the symbiotic relationship
between public and private investments greatly rewarded the King for his action.
Public initiatives and private equity financing are still acting in an intricate way in many
respects, but the relations between these two spheres have evolved towards autonomy of the
private equity sector and a ‘hands off’ approach in public intervention. As a result, public
intervention is creating the backdrop for private equity, paving the way for a more subtle
interaction, combining contracting, incentives and soft regulations.
2. CHAMPIONING ENTREPRENEURSHIP
However, this favourable legal and tax environment is useless if the social acceptance of risk
and innovation is low. The figure of the entrepreneur, as the individual willing to take the initial
risk of creating and developing a venture, is therefore central in the private equity landscape.
Without him, private equity does not have any reason to exist (see (a)). However, private
equity needs very specific entrepreneurs and companies to finance. The role of the entrepreneur
is to support the creation of value (for example by converting product/service innovation into
business successes), and therefore generate a financial return (see (b)). Entrepreneurship acts
as a transformer of disparate elements in a venture, making it blossom and become an attractive
fruit. As a metaphor, private equity could be described as an ecosystem in itself (see (c)).

(a) No private equity without entrepreneurs
The figure of the entrepreneur is at the centre of the private equity universe. He is the one who
can transform inputs into something bigger than the sum of the elements taken separately,
which are time, capital, work, ideas and other elements. What distinguishes the entrepreneur
from other workers is his ability to innovate (at large), to take risks and to create and manage
a company. However, not all entrepreneurs are able to manage a company successfully.
What makes private equity attractive is the reasonable and proven prospect of getting a
substantially higher reward than on the financial markets (i.e., listed stocks or bonds, often
the result of privately negotiated transactions and not efficient and transparent markets). This
reward is the counterpart of a risk that would not be borne by the rest of the financial system
(banks, individuals and other sources of capital). Thus, private equity-backed entrepreneurs
are in fact a small portion of the pool of entrepreneurs that are active in any given country.
The chief image of the entrepreneur is the ‘company creator’. This individual is guided by
a vision (see Cartoon 1.4), often supported by an innovation. The emblematic entrepreneur
financed by venture capital investors is building a company willing to capitalise on a ‘disruptive
innovation’, which could radically change a market or create a new branch of a given industry.
James Watt (1736–1819) is probably the incarnation of this category.
Cartoon 1.4 An entrepreneurial vision
C
This Scottish mathematician and engineer improved the steam engine, set to replace water
and muscle power as the primary source of power in use in industry (Burstall, 1965). Although
created in 1689 to pump water from mines, steam power existed for almost a century and
several cycles of improvement before the steam engine made a breakthrough. In 1774, James
Watt introduced his disruptive ‘Watt steam engine’ which could be used not just in mining
but in many industrial settings. Using the steam engine meant that a factory could be located
anywhere, not just close to water. Offering a dramatic increase in fuel efficiency (75 % less
consumption), the new design was retrofitted to almost all existing steam engines in the country.
Another figure which has emerged over time is the ‘serial entrepreneur’, an emblematic
figure in the US which has still to appear in Europe. This is probably related to the different
cultural contexts and the social fluidity on the two continents. Thomas Edison (1847–1931)
invented and developed many important devices such as the light bulb, the phonograph and
the stock ticker. He patented the first machine to produce motion pictures and planned the
first electricity distribution system to carry electricity to houses (Bunch Hellemans, 2004).

‘The Wizard of Menlo Park’ was one of the first inventors to apply the principles of mass
production to the process of invention. One of the most prolific inventors, Edison held more
than 1 000 patents at a certain stage.
In 1878, Edison convinced several investors such as John Pierpont Morgan, Lord Rothschild
andWilliam Vanderbilt toinvest USD 300000inthecreationof theEdisonElectricLight (EEL)
Co., and to fund his experiments with electric lighting in return for a share in the patents derived
from his research. J.P. Morgan continued to support the growing company by acquiring shares
and backing the company’s merger with EEL’s main competitor, the Thomson-Houston Electri-
cal Company. This merger resulted in the creation of General Electric (Frederick Lewis, 1949).
Not every entrepreneur is able to come up with an idea ready to be produced. Inventors and
developers are sometimes hatched in a laboratory and can develop their ideas before spinning
off, but most are developing new products and technologies in their garages or other more
casual places. To help them support their efforts, some funds have developed ‘incubators’ or
‘entrepreneurs-in-residence programmes’. These programmes offered by venture capital funds
provide facilities, support and money to entrepreneurs with interesting ideas. Once the idea
has matured, the investors can take an early lead on the development of the company and get
a greater share in the company in exchange for past efforts.
One of the most famous ‘entrepreneurs in residence’ was probably Leonardo da Vinci
(1452–1519). As well as being an inventor, he was also a sculptor, architect, engineer, philoso-
pher, musician, poet and painter. These activities generated substantial investment opportu-
nities, either for mercantile or for patronage purposes. Da Vinci met ‘investors’ who aspired
to both, such as Ludovico Sforza, Duke of Milan, in 1482. Da Vinci wrote a letter to the
Duke in which he stated that he could build portable bridges; that he knew the techniques of
bombardment and the engineering of cannon; that he could build ships as well as armoured
vehicles, catapults and other war machines. He served as principal engineer in the Duke’s
numerous military enterprises and was also active as an architect (Encarta Encyclopedia). He
spent 17 years in Milan, leaving after the Duke’s fall in 1499.
Under the Duke’s administration, Leonardo designed weapons, buildings and machinery.
From 1485 to 1490, Leonardo produced studies on multiple subjects, including nature, flying
machines, geometry, mechanics, municipal construction, canals and architecture (designing
everything from churches to fortresses). His studies from this period contain designs for
advanced weapons, including a tank and other war vehicles, various combat devices and
submarines.
These examples are provided by way of illustration, to show the continuity with the figures
of entrepreneurship currently backed by venture capital throughout history. Da Vinci was
probably more interested by research than entrepreneurship, but the ‘entrepreneur in residence’
model that is active in the Silicon Valley today finds its roots in the Italian financial and political
support of exceptional men who were able to make breakthrough discoveries.
Interestingly, the model of entrepreneur in residence was developed in Europe throughout
the Middle Ages and the Renaissance, but did not manage to survive after the European
Revolutions. The incubator model failed. It was only in the US that entrepreneurs in residence
programmes managed to gain a hold. This is linked to the fact that most of these entrepreneurs
in residence are serial entrepreneurs, which are still a rarity in Europe.
The difficulty for the entrepreneur is to communicate his innovation, spread the word of
his vision and thus convince his partners (employees, managers, financial backers, bankers,
clients, providers. . .) that he is able to lead the company to the next stage and transform his
young venture into a business success.

(b) Convert ventures into business successes
Normally, there is innovation in companies financed by private equity, either in the product
or in the service it delivers (innovation by destination); or else in the processes it has engi-
neered (innovation by processing); in the way it contributes to structure its market (strategy
innovation); or in the way it is managed (financial and management innovation). In order to
be able to deliver a consistent and high level of returns, a private equity firm has to focus
on value creation and develop specific expertise which is applied to a certain type of innova-
tion (Guerrera Politi, 2006). However, value creation is not only related to innovation and
value creation can be generated in leveraged buy-outs by boosting companies through top line
growth, operational improvements or some other area of company improvement. Innovation
financing provides us with a template illustrating the logic behind private equity.
In the process of mastering space and time, entrepreneurs have discovered breakthrough
technologies and invented new ways of communication. The infant equivalent of private equity
was instrumental in financing the development and the deployment of these new technologies.
An example of this public action helping to convert innovation into business success lies within
the support provided to Galileo Galilei (1564–1642) by the Medici family, and especially
Cosimo de Medici.
Galileo’s achievements included demonstrating that the velocities of falling bodies are not
proportional to their weight; showing that the path of a projectile is a parabola; building the first
astronomical telescope; coming up with the ideas behind Newton’s laws of motion; and con-
firming the Copernican theory of the solar system. Galileo translated his scientific knowledge
into various technologies. In 1598, Galileo developed a ‘Geometric and Military Compass’
suitable for use by gunners and surveyors. For gunners, it offered, in addition to a new and safer
way of elevating cannons accurately, a way of computing quickly the charge of gunpowder for
cannonballs of different sizes and materials. In about 1606, Galileo designed a thermometer,
using the expansion and contraction of air in a bulb to move water in an attached tube.
In 1609, Galileo capitalised on the invention of the telescope, a patent for which was denied
to a Flemish designer, Paolo Sarpi, a friend of Galileo, and lobbied the Venetian government
against purchasing the instrument from foreigners, since Galileo could at the very least match
such an invention. By then, Galileo had improved upon the principle of the telescope. The
Venetian government subsequently doubled his earnings, even though Galileo felt that the
original conditions were not honoured (Kusukawa and MacLean, 2006).
However, public intervention itself does not provide the support necessary to create and
develop a company and follow it through every step of its life. This is where private equity’s
intervention is fundamental. Galileo and da Vinci could have greatly benefited from their
inventions, if they could have created companies to exploit them. Columbus’s wealth was
built on his project to go West, which was probably as risky and theoretical in its reach as
the discoveries and inventions of the two Italian geniuses. What distinguishes them from
Columbus is the fact that they were treated as civil servants, receiving a salary and some
additional resources for their work. Columbus’s travels were financed at 50 % by Italian
investors willing to benefit from the new nautical route.
Converting a disruptive innovation into a commercial success therefore requires not only an
entrepreneurial talent, but also some additional competences and resources that only private
equity investors can provide. This is not only capital, but also an ability to help tailor a company
project to a viable reach and ambitious goals. The expertise of the private equity investor is
thus often used in the shadow of the entrepreneur himself. An illustration of this comes from
the partnership between Matthew Boulton and James Watt. The innovations of Watt would

have never seen daylight without the ever-cheery Boulton, who funded the venture and took a
share of the patent rights, even if Watt almost gave up on the project several times.
The responsibilities were clearly distributed: Watt was the inventor and Boulton provided
the management experience and the capital. This is one of the first examples of a successful
venture by a duo combining entrepreneurship and innovation on one side; and finance and
operational management on the other. The separation of the entrepreneur and the investment
manager is a key landmark to the emergence of the private equity sector as such and this is what
was missing from Columbus’s project, to transform it into a complete commercial success.
The impact of this separation is not theoretical: it changes the way an idea can be converted
into a commercial success dramatically. Offering a very high increase in fuel efficiency for
what was a minor design change, Watt’s new design for the steam machine was soon retrofitted
to almost all of the steam engines in the country. Watt’s design used about 75 % less fuel than
the most established steam engine at that time: the Newcomen engine. Since the changes were
fairly limited, Boulton and Watt licensed the idea to existing Newcomen engine owners, taking
a share of the cost of fuel they saved.
Ten years after Boulton and Watt entered formally into partnership (and after Boulton
invested GBP 40 000, taking all the financial risks on his own), the venture began to produce
the expected returns. In 1800, the two partners retired from business, now extremely wealthy,
and handed it over to their sons, Matthew Robinson Boulton and James Watt junior. This
configuration, even though illustrating the separation between investors and entrepreneurs,
would be considered as unusual now. First, because the investor did not cash out from the
company but rather adopted a long-term approach and was willing to stay in the company
as long as possible. This implies a perfect alignment of interests between the entrepreneur
and the investor, which may not be the case nowadays, as investors usually sell their stake in
companies after three to five years. Closed end funds are usually created for 10 years, and they
must manage to invest and divest from the companies within this time frame.
The fact that the company that Boulton and Watt created broke even after 10 years would
not disqualify the company from being financed by private equity investors. Investors would
probably sell their stake prior to that, either by listing the company (which is what happens
for biotechnology companies) or by selling it to competitors, who will be able to generate
economies of scale and benefit from the growth prospects of the company. What is unusual,
however, is that the entrepreneur and the investor managed to focus on this venture without
making a living out of it for a long time. The rule of risk diversification and the necessity
to generate returns early would not allow an investor to invest 100 % of his time on a given
portfolio company, nor wait for such a long time before getting a return.
This is probably because Boulton was investing his own money and that private equity
investors today invest as professionals (‘general partners’) the money they have collected from
third parties (‘limited partners’). This is another source of possible misalignment of interests.
The pressure from limited partners to generate stable and consistent returns above a certain
threshold stems from the fact that these limited partners have to deliver a certain return to their
shareholders (corporations), or to be able to cash in at least under a certain time constraint,
with a given risk/return profile (banks, insurers).
This pressure is then transmitted along the investment value chain to the fund and its
managers. These managers have to deal with these constraints and thus exert pressure on the
managers of companies to deliver the expected returns within a given time frame. This pressure
should, however, not be perceived as negative.
As seen with the historical examples, the fact that Columbus and Watt had some investors
on their side also helped them to get results and stay focused on the outcome. The delicate

equilibrium to be maintained between innovation and the strategy to go to market with this
innovation is probably the key differentiator between aborted companies and successful but
meteoritic successes on the one hand; and long-standing and growing companies on the other.
The investor must not only have a genuine know-how and talent to support the entrepreneurs,
but also challenge them and guide them towards the market. Even though big corporations
have financial and technical know-how, very few have the expertise to nurture innovation and
bring it to the market. This means that private equity has its own specificities which are not
only difficult to replicate, but also to copycat outside of a given ecosystem.
(c) Entrepreneurship and private equity form a specific ecosystem
The separation of the roles of entrepreneurs and investors, associated with the emergence
of partnerships, has paved the way towards a better collaboration between the financial and
the entrepreneurial worlds. Not every partnership was built under the same conditions as the
template-like Watt-Boulton relationship. Most of the time, partnerships have to be established
between entrepreneurs and investors who did not know each other prior to the contact leading
to a potential investment from the investor in the projected venture of the entrepreneur.
Aside from these conditions, the existence of exit strategies from a given investment for
professional investors is crucial. If an investor chooses to back an entrepreneur, he usually does
it with a certain roadmap in mind. Entrepreneurs can afford to spend all the time necessary to
lead a venture to succeed, their own expectations and the money available being the only limit.
This means that, theoretically, an entrepreneur with a company generating positive income
could continue to run it for a very long time (possibly until his retirement).
Investors have a given time frame to make an investment and get the return from it, as their
activity is usually to generate profits and redistribute them. In that respect, the presence of
an active private equity sector is determined by the existence of exit scenarios, that is to say
opportunities to sell investments to third parties. These exit scenarios are usually:
• A listing on the stock exchange, offering to the private equity investor the opportunity
to sell his stake on the market. This stock exchange must exist, offering certain liquidity
and attractive listing conditions, including adapted regulations. This exit route remains an
exception as the majority of exits are trade sales;
• A profitable trade sale to another company or private equity group, offering to the private
equity investor the opportunity to sell his stake to a third party. For some sectors, this exit
scenario may prove to be difficult, given the concentration of the number of players (anti-
trust regulations) or the nature of the sector (banks and insurers are sometimes barred from
take over by foreign players, and must comply with specific regulations preventing certain
operations). Trade sale is the main exit route in private equity;
• A sale to the management, which is rare as this means that the management must structure
a private equity operation with its own capital (otherwise, this operation would fall within
the trade sale scenario). This, however, could happen in the event that a venture-backed
company becomes profitable. As it is debt free, the management could try to structure a
management buy-out (MBO) to acquire the stake of the investors in the company, if no other
exit scenario is offered;
• End of activity, bankruptcy or sale of remaining assets. This exit is more common in venture
capital than in other segments of the private equity market. It is compensated by the fact that
successes are also more rewarding in absolute terms.

One of the first historical examples of a professional exit from a private equity-like operation
is the introduction of the company created initially by Thomas Edison. In 1896, General Electric
was one of the original 12 companies listed on the newly-formed Dow Jones Industrial Average,
and is the only one remaining from that time today. This listing allowed its investors to exit
from their investments and realise a profit. However, this exit route is an exception as most of
the exits in private equity are trade sales with longer holding periods for companies.
The rise of private equity as a financial tool for funding companies has been enabled by the
growth of the stock exchange. Private equity could find not only an exit path for financing on
the stock exchange, but also a source of opportunities such as corporate spin-offs, or delisting
companies, and even taking parts of public companies.
Private equity has also influenced the way business is done. More specifically it contributed
to create a true entrepreneurial ecosystem, with booms and busts, and a process of ‘creative
destruction’. This process bears a certain risk and it is the role of professional private equity
investors to manage this risk, mitigate it and generate a return which is commensurate to this
risk. Chapter 2 will explore this question in more detail.
CONCLUSION: AN ATTEMPT AT DEFINITION
So far, Chapter 1 has identified the main elements which are necessary for the emergence of a
private equity sector. In that respect, an investment in private equity could be defined as:
(a) A negotiated investment in equity or quasi-equity
Shareholders’ equity is the sum of the capital brought into the company by the shareholders
and the undistributed profit left in the company (retained profits). Investment in capital may
take the form of capital increases (venture capital, expansion capital), replacement (leveraged
buy-out) and even reconstitution (turn-around capital) of the company’s capital.
To address the increasing complexity of deal structuring and funding requirements; better
master the risks inherent in their investments; and calibrate the anticipated returns, private
equity investors innovate constantly. The underlying trend is to negotiate counterparts for their
investments with company managers, such as:
(i) Preferred returns and/or an increased control over decisions
The risk that is taken by professional investors, as compared to other shareholders, increases
with the average amount invested in a given business. Professional investors have therefore
asked for preferential rights associated with their shares. These rights are negotiated in share-
holders’ agreements and grant investors such rights as additional voting rights attached to their
shares; priority dividends; and even preferential and guaranteed profit, to match a predefined
multiple of their initial investment in the event that the business is sold.
(ii) Additional cover for the risks entailed by the investment
Furthermore, some investors prefer to reduce the relative risk of their investment, even if it
means reducing their potential added value. This is how investment in quasi-equity emerged,
with less risk than an investment in pure equity: bonds or debts repaid in fine, sometimes
associated with options to convert them into the company’s shares under certain conditions.

This particular kind of debt is riskier than ordinary debt, since it is subordinated to the
priority payment of other bank loans. The payment of subordinated debt depends therefore
on the complete success of the deal. This justifies a higher interest rate and the creditors’
participation in the possible success of the business. The mezzanine debt, usually undertaken
in leveraged buy-outs, illustrates this: it is a debt repaid after other debts, so-called ‘junior’ and
‘senior’, or even ‘second lien’. This debt benefits from options to be converted into capital.
Venture lending is the equivalent of mezzanine debt for venture capital and growth capital
deals. It is quite common in the United States but still rare in Europe.
(b) A fixed maximum term
Irrespective of which type of instrument is used (listed or unlisted shares, mezzanine, etc.),
a private equity investment is usually held for four to seven years. At the early stage of its
investment in a given business, the private equity investor must evaluate when and how it will
liquidate this investment. As we shall see in Chapter 4, this is due to a contractual requirement:
funds are created for 10 (and maximum 12) years.
(c) Implying specific risks
These investments bear specific risks as they target businesses in special situations – such as
creation or restructuring, for example. This is the intrinsic risk of each of the segments of
this asset class. Furthermore, they are subject to the cyclical nature of private equity as an
emerging asset class, and to the general business cycles.
(d) With high expected returns
As compensation for the risk borne by private equity investors, return expectations are higher
than those from comparable investments in listed securities. Private equity investments theo-
retically offer a premium compared to listed securities returns. The long-term immobilisation
implied by private equity investment is a specific risk remunerated by an ‘illiquidity premium’.
(e) Undertaken on behalf of qualified investors
Given the lifetime of a private equity fund (usually 10 years), the risk borne by this type of
deal; the relative illiquidity of investments, and the need to diversify investment among several
funds to apply a sound investment policy, the great majority of limited partnerships (LPs)
are subscribed by institutional investors, that is to say pension funds, insurance companies,
banks or even endowments in the United States. According to the European Private Equity
and Venture Capital Association (EVCA, 2009), in 2008 banks represented 6.3 % of the EUR
79.6 billion (down from 11.8 % of the EUR 81.4 billion in 2007) collected by private equity
funds in Europe, ranking after pension funds (25.2 %), funds of funds (14.5 %) and insurance
companies (6.6 %). Figure 1.1 shows the breakdown of private equity subscribers in Europe.
Being part of the ‘alternative investments segment’ (see Figure 1.2), a private equity in-
vestment is ‘a negotiated investment in equity or quasi-equity with a fixed maximum term,
bearing specific risks, and generating hopefully high returns on behalf of qualified investors’:
this definition is an attempt to pin down a sector in constant evolution.

Corporate investors
2.9%
Banks
6.3%
Capital
markets
1.6%
Endowments and
foundations
4.5%
Family offices
4.3%
Funds of funds
14.5%
Government agencies
4.9%
Insurance companies
6.6%
Other asset managers
6.4%
Pension funds
25.2%
Private individuals
4.9%
Unknown
17.6%
Academic institutions
0.2%
Figure 1.1 Breakdown of investors in Europe in 2008 according to their nature
Source: EVCA, 2009.
Figure 1.2 Simpliﬁed categorisation of ﬁnancial assets
Source: CalSTRS, Author.

This deﬁnition provides the opportunity to discuss some of the socio-economic conse-
quences which have emerged with the rise of the private equity sector. For example, in the
United States serial entrepreneurs appeared because of the ﬁxed maximum term of investments
and high expected returns. Slowly, entrepreneurs have begun to specialise in certain roles such
as the creation, the development, the internationalisation, the restructuring or the turn-around
of companies. This list is not exhaustive.
Chapter 2 will take a closer look at the structuring of the private equity sector, the emergence
of its key elements and its dynamics. This will be done through an analysis of recent history.

2
Modern Private Equity – A French
Invention?
Human needs have increased and diversified throughout history. The subsequent ventures
evolved substantially as well, notably with the agricultural and industrial revolutions. Ven-
ture capital has mutated with these ambitions. Just as Columbus was a European individ-
ual discovering America, it was a European going to the US who would formalise modern
venture capital: Georges Doriot. In the early stage of venture capital, the entrepreneur and
the investment manager were slowly emerging as distinct figures. Modern venture capital
oversaw the differentiation between the capital provider (the investor) and the investment
manager.
By pushing the differentiation of roles further, the different actors of the venture capital
industry paved the way for its professionalisation. Investors were monitoring and controlling
the investment managers. Investment managers were selecting ventures and monitoring the
investments. Entrepreneurs were building the ventures and were structuring the companies
effectively.
Entrepreneurs learn mainly by doing, which is a constantly renewed process as each venture
is unique. With regard to investments, investors often adopt a ‘hands-off’ attitude. Investment
managers, by offering investors the opportunity to dedicate their time to investing concretely,
had to develop their own methodology and a philosophy of investment.
The French General Georges Doriot initiated this effort in 1946 (Gupta, 2004). Does this
mean that modern venture capital is a French invention? The word ‘entrepreneur’ certainly
is, and in many respects France had the assets to thrive in venture capital. Nevertheless, it is
in the US and at Harvard Business School that the ‘father of modern venture capital’ Doriot
created, with Ralph Flanders and Karl Compton, the American Research and Development
Corporation (ARD). Despite its successes, ARD was mainly the creation of one man and had
to merge with Textron in 1972, when Doriot retired.
This difficulty in managing the transition from the founding partners to the next generation is
a recurring problem in the private equity industry, but in the case of ARD, it was also linked to
a structural rigidity: ARD was still an old-fashioned structure in its legal organisation (Hsu
Kenney, 2004). There was no formal separation between the capital to invest and the capital
spent on operations. Corporate governance was greatly limited by corporate law, which is not
designed adequately for controlling investments.
The limited partnership, which emerged at that time in the US, was more attractive than a
typical industrial holding structure for many reasons. First, the limited partnership separated
the capital providers and the capital managers. Then, the limited partnership was setting a
limit to the life of the investment structure without forcing capital managers out of activity. The
limited partnership was also distributing profits, which were taxed differently – and particularly
on a lower level than dividends. Through its investment methods, it was also possible to trace
the cash-flows and to clearly distinguish the investment refunds from the profits. By separating
investment management from capital provision, it was possible to audit the two structures on
by Cyril Demaria

a stand alone basis and check if the management was done according to the fund regulations
(the limited partnership agreement).
Despite its rigidities, ARD was the home of many successful venture capital investments,
the most emblematic being the Digital Equipment Company (which later merged to form
Compaq, which then merged eventually with Hewlett Packard). The legal framework, even if
it is important and nice to have, is not enough to guarantee the success of investment structures
if the economic and social environment is risk averse. David Landes, an economic historian,
states that ‘if we learn anything from economic development, it is that culture makes almost
all the difference’ (The Economist, 2009b). In that respect, HIS Global Insight found that in
the US, in 2005, venture capital backed companies represented almost 17 % of the national
GDP and 9 % of private sector employment (The Economist, 2009b). Culture is one of the
main factors which are holding back private equity in Europe, but it is certainly not the only
one: to this effect, economic policies and openness to immigration are important, too.
Culture is not the only and cannot be the main factor in the success of venture capital.
Emerging markets, despite their social and cultural eagerness to take risks, are still lacking
fundamental elements such as transparency, rule of law and fair business practices – including
the application of economic policies and regulations. This development is crucial for building a
long-standing private equity environment, and benefiting from its impact. The rush to emerging
markets has anticipated this fragile evolution and may shake up the shy local initiatives.
1. USA: THE FOUNDRY OF MODERN PRIVATE EQUITY
In many respects, the industrial revolutions before the 20th century belonged to the categories
described in Chapter 1, that is to say innovation combining political and financial sponsors.
Railroads, canals and other infrastructure projects belong to this category. However, the intri-
cate mix of political and private interests led to financial scandals which were increasingly
incompatible with the democratisation of Western societies. The Panama Canal project of-
fers an example of a major financial bribery scandal in France, combining public and private
interests in a toxic mix. There were other scandals of this kind in Europe at that time.
The strict separation of public policies and public financing
To avoid further scandals, the application of public policies was separated from public financial
backing, thus introducing controls in the management of public finances. This is the case, for
example, in the creation of the War Finance Corporation in 1918 by the American Congress.
Originally set up to support the war-related industries, the WFC was converted to support
agricultural and railroad industries (Cendrowski, Martin, Petro Wadecki, 2008).
The separation of public endeavours and private efforts; the subsequent support of
the former for the latter
This initiates the tradition of public support to private companies which are serving a public
interest. The Reconstruction Finance Corporation, set up in 1932 in the US, is another example.
The Second World War gave birth to another initiative. In 1942, Congress created the Small War
Plants Corporation (SWPC), which, as its name states, was dedicated to small companies. This
is the first initiative which recognised the need of helping entrepreneurs and small businesses
for the sake of national and public interest.

Modern Private Equity – A French Invention? 21
This help was of a financial, educational and legal nature. Not only did the SWPC set the
trend for financing through loans to small businesses, but later the Office of Small Businesses
also created educational programmes. During the Korean War, small businesses could apply
for certification entitling them to participate in requests for proposals from the Government.
This paved the way for the creation of the Small Business Administration in 1953.
(a) Governmental input: SBA, DARPA and ERISA
The creation of an administration which was specifically formed to promote and to protect
the interests of small businesses is a manifestation of the early awareness of this category’s
importance for companies in the US. Interestingly, one of the main activities of the SBA
was to provide educational programmes and financial assistance to entrepreneurs. In many
respects, the administration placed the ability to grow businesses at the centre of its policy. To
support entrepreneurs further, and go beyond public support, the Small Business Investment
Companies were created in 1958. This is the unofficial date of birth of the modern venture
capital industry in the US.
The SBIC is the result of the statement by the Federal Reserve which says that ‘in simplest
terms, the small business could not get the credit . . . needed to keep pace with technological
advancement’ (Cendrowski, Martin, Petro Wadecki, 2008). This statement remains true,
and the 2007–2009 financial crisis made it even more obvious when suddenly, liquidity dried
up for small- and medium-sized companies. By promoting access to public markets and orders
for small- and medium-sized businesses, the SBA has been supporting not only the birth but
also the growth of young companies – something that Europe still needs.
New technologies were at the core of the SBIC initiative, and the access to public markets
was necessarily a major support to help small companies to innovate and to compete with
the larger businesses. In the context of the Cold War, armament and defence industries had
the lion’s share of public expenses – and hence led the way in research and development.
The Defense Advanced Research Projects Agency (DARPA) was leading the American effort
to gain the technological advantage over the USSR. Created as ‘ARPA’ in 1958, the agency
represented an answer to the launch of Sputnik in 1957. It was renamed DARPA in 1973, and
gave birth to major technological innovations such as hypertext, computer networks and the
graphical user interface.
The switch from infrastructure and equipment budgets to defence had a significant impact on
entrepreneurial thinking. This shows just how much not only the provision of business ideas,
but also a market for them (even a small or highly specialised one), is important. The separation
of political decisions from public funding was the first step towards the transformation of public
action. Increasingly, public-private cooperation was expected, notably because public budgets
had reached their limits. Public intervention was hence situated on the incentive side, with
help for start-ups and early venture capital firms; or on the market side, with the equivalent of
an ‘affirmative action’ for public orders in favour of small businesses.
Not every public initiative was in favour of the venture capital industry. The 1970s saw a
strong market downturn where IPOs were scarce and many investors could not realise their
investments. Private equity investments suffered under these conditions and their returns were
significantly affected. The financial downturn led Congress to vote in the Employee Retirement
Income Security Act in 1974, to prevent pension fund managers from taking excessive risks.
Private equity being seen as a high risk/high return investment, in 1975 pension funds halted

$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
Venture Capital
Buyouts
1975 1977 1979 1981 1983 1985 1987 1989
Year
Investment
($
Mil)
$-
Figure 2.1 Historical venture capital and buy-out annual investment levels (1975–1989)
Source: Thomson Financial, Cendrowski, Martin, Petro Wadecki, 2008.
their investments (venture capital funds raised USD 10 million that year). In 1978, ERISA
was clarified to explicitly enable pension fund managers to invest in private equity.
The fourth element helping the entrepreneurial ecosystem was the change in capital gains
tax rate, from 49.5 to 28 % (later decreased to 20 %). To help venture capital firms in raising
funds, one of the ways was to show promising net returns – and lowering the tax impact had an
immediate and visible effect on the bottom line for institutional and private investors. Figure
2.1 shows the combined impact of the regulatory, financial, tax and public order measures on
the rise of private equity.
In the space created by direct and explicit public intervention, there emerged slowly a
new set of actors, such as universities, spin offs from large groups and professional venture
capitalists.
(b) Universities, defence and disruptive innovation
The first modern private equity initiative, in 1946, was the American Research and Develop-
ment Corporation. Doriot was a former member of the military who was teaching at Harvard
and decided to set up an investment structure. The location had a significant impact on the
activity and the success of ARD. Doriot chose the US to where he had emigrated, and not
France, to where he could have returned. He then chose Harvard to create ARD, and did not
reproduce his initiative at INSEAD – the top European business school that he cofounded.
Indeed, ARD’s best investment was a company created by two Massachussets Institute of
Technology (MIT) engineers: the Digital Equipment Corporation (DEC). MIT and Harvard
are located in the same Bostonian area, which helps to create a solid network of relations. The
initial public offering of DEC in 1970 was a landmark of what venture capital could achieve
in the new technologies, having funded an emerging start-up and leading it towards the stock
exchange.
The relationships between universities and venture capital are strong, not only to feed VC
firms with a strong and qualified deal flow, but also to invest in them. The alumni network is a
very valuable asset that VC firms can tap into in order to expand their portfolio companies, to
recruit talent, to evaluate opportunities, to recommend investments and more generally provide
a wealth of goodwill to the universities and their partners.

As universities have contracts with the defence industry, notably in research and develop-
ment, VC firms are strongly connected to this sector as well. The US Government has its own
structure (In-Q-Tel), but VC firms are keen on financing technologies which will eventually
have a civil application. The most advanced model in that respect is Israel. This country of
7.4 million inhabitants counts 100 funds and 4 000 high tech companies (The Economist,
2009b). These companies are connected to the Israeli defence industry in many respects, no-
tably in IT protection (Checkpoint), communication (voicemail, instant messaging and unified
communications) and semiconductors.
However, because the Israeli market is small and its stock exchange cannot absorb the flow
of new companies, according to the Israeli VC model, these companies are being actively
reincorporated as local US companies once they have reached the pilot mode. The strategy is
then to invite US VC firms to finance the go-to-market and eventually list the company on the
NASDAQ. Roughly 70 Israeli companies are traded on this stock exchange (The Economist,
2009b).
Public and private initiatives have propelled Israel ahead of innovation through education,
and in the universities in particular. Promising students achieve a graduate degree, do their
mandatory military service where they can work over two to three years on high level tech-
nology, and then return to civil life with a significant theoretical and practical background.
They are even allowed to keep the intellectual property of the innovations which they have
developed while in the army. They are then ready to create a start-up, which is financed through
the VC firms based in Tel Aviv. Israel has the highest ratio of PhD, engineers and scientists
per person in the world – with very influential institutions in the IT sector and medical in-
dustries such as the Technion (The Economist, 2009b). Instead of replicating the American
venture capital industry, Israel has developed its own model and integrated it when needed in
the American framework to create synergies. This is a radically different approach from the
European perspective.
(c) Challenges
The success of Doriot’s initiative lies in the development of the venture capital industry, fuelled
notably by the stock exchange boom in the 1960s. Some teams, which were created by former
ARD executives, could generate their own track record. In that respect, the educational aspects
of Doriot’s approach and of the SBIC system, as well as the strong ties to the university system
could give birth to an even more dynamic centre on the US West Coast, with Silicon Valley.
The strength of Silicon Valley lies in its ties to local industry giants, which are more diversified
than around Boston and less dependent on military contracts.
The stock exchange boom of the 1960s also gave birth to the leveraged buy-out industry.
The take-over of the Orkin Exterminating Company, by Lewis Cullman and his team, in 1964,
was probably the first LBO in history (Cendrowski, Martin, Petro Wadecki, 2008). The
stock exchange provided a final confirmation of the success of VC investments, and is in at
the origins of the LBO industry. This explains not only the different approaches of the two
activities, but also the skills required to practice venture capital and leveraged buy-out.
Nevertheless, despite this rapid development, the private equity industry faces multiple
challenges in the US. Its legal and tax system is complicated and burdensome. The sanctions
are difficult to predict and to evaluate, notably for product liabilities through punitive damages.
Its patenting system is a source of regular litigation which is holding back innovation, and also
over-protecting patent holders.

Intellectual property is a major issue when it comes to innovation, investment and returns.
It is especially difficult to strike the right balance between the reward of innovation and the
excessive protection of minor improvements. Even worse, the patenting system can be used
unfairly to protect a collective innovation or a technological element which is necessary for
an industry and could later be used against an innovator. This can substantially decrease or
annihilate the returns on investments.
Intellectual property rights do not create any value by themselves. They provide protection
for the production of goods or services. The processing remains necessary in order to realise
the investments made in intellectual property. In that respect, unused patents which are later
activated in order to sue companies are a major problem when venture capitalists want to
finance incremental innovation (which is their core activity).
Another challenge which is associated with venture financing in the US is the increasing
cost of a start-up. Not only are fixed investments costly, but also the variable expenses (office
space, salaries, etc.). The logical solution would be to delocalise the start-up, and set it
in a less costly area. The problem is that venture capital firms usually finance the pool of
their neighbouring companies – which is not the case for LBO investors, who usually target
companies nationwide. The centres of competence such as Silicon Valley and the Boston area
are a determining factor in the success of start-ups, notably because they do attract talent and
can benefit from the local socio-economic environment.
Israel benefits from a relative cost advantage by nurturing early stage ventures and transfer-
ring them at a later stage to the US. Europe also has a cost advantage, but cannot use it fully
to compete with the US, because its venture capital model has still to be invented.
2. EUROPE: ADAPTING A SUCCESSFUL MODEL OR CREATING
ITS OWN?
Inventing a ‘European Silicon Valley’ has been the dream of many countries in Europe.
The candidates were numerous in the United Kingdom, France, Germany, Scandinavia and
Switzerland. However, this dream has never materialised despite public policies promoting
this model and public funds supporting those policies. The advent of the European Union,
and the perspective of a pan-European market, reinforced the conviction that Europe could
compete by applying a successful foreign model. This conviction was further supported by the
thriving venture capital industry in Israel, which despite its geographical and financial limits
could use Silicon Valley to its advantage.
This conviction is unfortunately ignoring a fact which has already been mentioned: culture
plays a major role in the process of innovation. Risk-prone populations in California and Israel
cannot be compared to the somewhat risk-averse populations in Europe. The reasons for these
differences are numerous and deep-rooted. There is no simple way to change them in order to
transpose the American model: Europe has (yet) to build its own venture capital model (see
Figure 2.2). Europe is actually leading the US in innovations and technological development,
but these innovations rarely go on to be a commercial success.
Local venture capital firms are eagerly trying to spot opportunities, as European venture
capital investments grew by 23 % on average in Europe (versus 0.3 % in the US) between 2003
and 2006 (The Economist, 2009c). However, funds are merely allocated on a national basis,
which is a significant issue in terms of efficient venture capital allocation on an EU scale.
Given the role of venture capital in the growth of countries, this allocation is important in

Grants
Tax incentives
Subsidized loans
Venture capital
Guarantees
Other form of funding
No direct funding
provided
0% 10% 20% 30% 40% 50% 60% 70% 80%
2007–2008
all measures
2.8%
7.8%
9.7%
7.3%
1.7%
5.5%
3.4%
4.2%
3.4%
7.3%
5.1%
8.0%
65.9%
67.7%
Figure 2.2 Forms of funding in Europe
Source: TrendChart-ERAWATCH database, Pro-Inno Europe (2008).
order to foster economic growth for the next 15 to 20 years. It is also important that companies
target a continental market, to be able to compete with American companies which have an
immediate access to a market of this size.
To go beyond a purely national allocation, and truly compete on a pan-European scale,
the EU has to transform four obstacles into assets: a fragmented market, the strong risk
aversion of its population, a recurring lack of immigration and a lack of direction for industry.
The size of the capital market also plays a role in monetising innovations and technological
development.
(a) Governmental input: legal changes, tax rebates, infrastructures and EU market
Europe has deployed a wealth of initiatives to create a viable venture capital sector. Each
nation has adopted some ideas coming from the US, such as the limited partnership and the
SBIC system, to generate national support for its start-ups. These initiatives were difﬁcult,
tortuous and costly. The UK has imposed itself as the leading European market, thanks notably
to its early listing of venture capital vehicles such as 3i in 1994. 3i was in many respects the
‘private equity’ school of the UK.

Capitalising on this, as well as on the influence of its financial centre, its cultural and
linguistic proximity to the US and a tradition of innovation, the UK became the place of
choice for the creation of a private equity structure. Regional or pan-European LBO fund
managers have elected London as the main location for their headquarters.
France tried to go its own way, combining public initiative with semi-private financing. The
Sociétés Régionales de Développement (SDR) were created in 1955 to nurture local ventures
and help them grow at a national scale. Even though this was a very costly initiative, which
eventually failed, this was the occasion for the French venture capitalist and LBO investors to
acquire their know-how and thus to prepare for the emergence of independent funds (some of
them being initially transatlantic structures, such as Sofinnova and Apax France).
However, modern venture capital sectors in Europe were initiated by major changes gen-
erated by the adoption of the limited partnership/general partnership structure. The UK has
its local (British and Scottish) versions of the US structure. France adapted this framework
to its local law by creating the Fonds Commun de Placement à Risque (FCPR). Switzerland
also created its own version, as did Luxemburg. One of the motivations was to offer to local
venture capital firms the same advantages as off-shore structures. In many respects, European
countries have set a specific tax framework for capital gains, as well as a defined term in order
to encourage investors to invest in venture capital firms.
The UK and France even went a step further by enabling retail investors to participate in
venture capital vehicles. The UK created the venture capital trusts, and France developed the
Fonds Communs de Placement dans l’Innovation (FCPI). Regarding the returns, the success
of these two forms of vehicle remains to be seen, but they have attracted significant amounts
of capital to an emerging sector.
Despite the adoption of the best practices from the US, which is an unusual move on a
European scale, the venture capital industry has only recently emerged as a significant private
equity actor, able to attract international limited partners. The reason is that until 2001, the
returns in the US were looking significantly more attractive than in Europe, for a given level
of risk. Because of the crisis that venture capital is experiencing in the US, European venture
capital managers have taken the lead in the fundraising scene. However, European venture
capital funds still raise only a fraction of that raised by American funds.
The US has been experiencing four effects that did not reach Europe, apart from the crash of
IT investments in 2000. First, the amounts raised by existing and emerging venture capital fund
managers have increased very quickly. This had an impact on the valuation of the portfolio
companies, which as a consequence has increased. Second, the cost of creating a company in
the US was increasing comparatively faster due the scarcity of talent and space in the right
location. And third, the exit scenarios of VC investors relied increasingly on IPOs, which
eventually failed to materialise. Finally, the returns dropped significantly as a consequence of
the first three effects.
By comparison, European start-ups were cash starved, owing to a lack of interest by potential
investors (or, for UK pension funds, regulatory constraints) in this asset class. Costs remained
relatively low, notably when the ratio quality/cost of infrastructures and education systems
were factored in. Talent was available, as well as space, at a much cheaper price. IPOs were,
and remain until now, a rarity in Europe for venture backed start-ups. Exit scenarios were
factoring in trade sales as the main exit paths. As a result, with progress in the learning curve,
the European VC industry appeared to be more attractive.
The limits of this virtuous circle appeared when the EU economic and financial union
materialised. Suddenly, not only could local companies target EU markets with significantly

lower barriers, but so could foreign companies with a local subsidiary. As local companies
in Europe were cheaper than in the US, and American start-ups were more often listed, fast
growth companies in the US could buy their passport to the EU with very attractive conditions.
Yahoo, eBay and other major companies emerged from the 1997–2003 cycle and entered the
EU in this way.
The same applies to VC investments. The first pan-European venture capital firms were
coming from the US and directed their main focus at late stage investments, such as IDG
Ventures, Benchmark Capital and other famous general partners from Silicon Valley. One of
the ways to learn the workings of the European markets was to tag along with local players
and identify promising potential acquisitions for an American champion.
Without a financial market of reference (the equivalent of the NASDAQ) to list the most
promising venture backed companies, European start-ups are still cheap. As the exit path is
still trade sales, venture capital investors can only invest a certain amount to help develop their
portfolio companies. But in order to target the different national markets, these amounts are
insufficient because of the costs involved.
Despite EU legal convergence, national laws remain as an entry barrier on the national
markets. Therefore, the start-ups target first and foremost their national markets (see Figure
2.3). One example is the patenting system, which is very expensive and burdensome in
the EU. Another example is the lack of common practices in corporate law, even though
the European corporation (societas europaea, SE) has existed officially since 2001 and was
adopted by member states progressively. However, the main reason for the slow growth of
European companies is the problem of expanding sales into other European countries, the
biggest challenge being the differences in language and culture.
Since Europe has a certain legacy, its innovating processes are the result of a common
cultural background and national differences. A large part is hidden from the statistics and
clear identification, notably because venture capital financing was for a long period of time
the business of rich families (family offices), of corporations, of public finances (directly
or indirectly), of banks (directly or through captive structures) and not least, of personal
connections. Depending on the national specificities, and aside from the independent venture
capital firms, some of the sources of financing are dominating others: corporate venturing
and family offices in Switzerland; public finances and corporations in France; banks and
In the home country
3
11
4
1
10
70
EU countries or Norway or Switzerland
In other countries
No notable difference by market area
Not applicable
DK/NA
Figure 2.3 Location of companies’ lead markets
Source: EU Innobarometer 2009.

corporations in Germany; family offices and personal connections in Italy; family offices and
corporations in Scandinavia. . .
(b) National champions, information technologies and incremental innovation
However, the role of large corporations remains crucial for innovation in Europe (see Figure
2.4). Not only have corporate giants a tradition of spinning off some of their business units,
but they have also set up corporate venturing programmes to maintain a foothold in the fields
of innovation.
They are also crucial customers in markets where access to public orders is difficult and
means having three to five years of existence and profitable activity. Only 27 % of corporations
in the EU had won a public procurement between 2006 and 2008 (see Figure 2.5).
Even worse, the administration is highly averse to innovative products and services. This
attitude is reducing the interest of start-ups in applying for the grant of such contracts (see
Figure 2.6).
82
67
79
64
87
87
70
73
73
85
74
56
64
92
82
62
60
100
87
77
86
74
79
62
92
100
100
81
80
80
85
95
EU27
COMPANY SIZE
small (20–49 empl)
medium (50–249 empl)
medium-large (250–449 empl)
large (500+ empl)
LAST YEAR TURNOVER
Increased
Did not change
Decreased
EXPENDITURE ON INNOVATION
Increased
Did not change
Decreased
INNOVATION CONTRIBUTION TO SALES
Primary source
Significant
Not significant
INTERNATIONAL ACTIVITY
Manufacturing or sales abroad
Primary activities only domestic
Any innovation
Product or service-related innovation
Figure 2.4 Innovation activity in the various segments among enterprises in innovation-intensive
business sectors

won at least one public procurement contract
3
42
20
2
6
27
submitted at least one tender for a public
procurement, but none was successful
investigated opportunities to sell to governments
or public bodies, but not submitted any tender
did none of these, not interested in public
procurement
Not applicable
DK/NA
Figure 2.5 Companies’ participation in public procurement
As a result, large corporations earn the lion’s share of these public procurements (see Figure
2.7). They are also usually located in each and every signiﬁcant national EU market, which is
very helpful for a small company setting foot abroad.
Notably, opening subsidiaries in the EU continental markets is complex, owing to the
difﬁculty of opening bank accounts, setting up shop, understanding the legal and tax system,
as well as local corporate and business practices. Having close partnerships with a large
corporation is hence a factor of success in Europe, which may not be that important in the
US. This is also adapting to the potential of innovation in each country, and in the EU overall.
Either a start-up designs a product/service which is complementary to the business lines of
won at least one
public procurement
contract
submitted at least
one tender for a
public procurement,
but none was
successful
POSSIBILITY TO SELL NEW OR IMPROVED SERVICES:
Yes,
31
Yes,
20
Yes,
27
No,
67
No,
77
No,
64
investigated
opportunities to sell
to governments or
public bodies, but not
submitted any tender
27
6
3
Figure 2.6 Innovation in public procurement

29
EU27
ACTIVITY
High medium high tech
Low medium low tech
Knowledge intensive service
Less knowledge intensive service
28
24
34
29
29
25
36
55
43
30
27
39
23
23
COMPANY SIZE
small (20–49 empl)
medium (50–249 empl)
medium-large (250–449 empl)
large (500+ empl)
INNOVATION IS ...
... a primary source of income
... a significant source of income
... a non-significant source of inc.
EXPENDITURE ON INNOVATION
Increased
Did not change
Decreased
Figure 2.7 Opportunity to sell innovation on public tenders
a corporate giant, or its product/service is an input for a corporate giant. This means that in
any case, the start-up will be active in the same sector as these corporations: biopharma in
Switzerland, infrastructures in France, mobile communications in Scandinavia, software and
services in the UK. . .
The industrial revolution in the information technologies area has changed the landscape
slightly. Europe now beneﬁts from high quality telecommunications infrastructures, and the
advent of the ‘information age’ has opened doors to start-ups willing to set up shop in their
national countries despite the lack of obvious tradition and expertise in that sector.
The reason is that the IT industry has become the glue inside and between companies. Roger
McNamee has summed up this perspective (AlwaysOn, 2005):
The 1990s were characterized by three gigantic waves of applications, [that] every enterprise
in the developed world adopted at the same time. . . . We’re now between big waves, with the
next huge opportunity [coalescing] around enterprise web services that require creating best
practices . . .. People don’t even know what the business processes are yet, so I think we’re going
to spend . . . money where it’s mostly build rather than buy. As a consequence, that money gets
fragmented and spread over this really wide array of things.

This opens up a wide perspective for European start-ups, as suddenly it is not the size
that matters much, but the ability to adapt to the customers’ needs and to local specificities.
In fact, the impact of the IT revolution still varies widely from one industry to another.
Information-intensive sectors, such as the travel industry, have been completely redesigned,
with airlines reporting that 90 % of their bookings are now done on-line. However, labour-
intensive industries are still largely unaffected, but should be targeted by the next corporate
and consumer IT trend. Pervasiveness, existing infrastructures to be leveraged, and the need
to automate business processes will probably spread IT further through the economy, creating
new opportunities in traditional sectors while adapting IT to the sectors’ needs.
European venture capital will have its fair share of challenging evaluations. The distinctions
between industries will start to blur, and corporate giants are developing activities designed
to adapt to this change. The difficulty for venture capitalists is to adjust to this change by
financing those start-ups which can provide them with the necessary products and services,
while going beyond a niche market.
Europe has imposed its leadership in many industries such as mobile communications, GPS
systems, IT systems integration and convergence, and even more in emerging sectors such
as clean technologies, biocomputing, medical systems and nano-technologies. But its core
competence lies in incremental innovation, following the pace of the national champions in
their developments. Even though less visible, the incremental innovations are the source of
regular and long-term economic growth. This competence in incremental innovation could
explain why Europe is catching up with the US and Japan in the domain of innovation (see
Figure 2.8).
Information and Communications Technologies is the engine that drives European economic
growth and innovation. Virtually all of the returns in the industry over the past decade have
come from the ICT sector, with capital being spent in it growing at nearly three times the rate
of GDP growth. ICT capital spending represents almost 40 % of the entire capital spending
(see Figure 2.9).
ICT helps companies in a variety of industries to do business better, faster and cheaper.
Europe is leading the pack in various labour-intensive industries, such as transport, energy and
healthcare, which are willing to integrate IT, to organise the virtualisation of their production, to
differentiate themselves from their competitors and to provide their customers with innovative
products.
EU-US
2004 2005 2006 2007 2008
0
−10
−20
−30
−40
−50
−41 −40
−33 −29 −28
EU-Japan
2004 2005 2006 2007 2008
0
−10
−20
−30
−40
−50
−42 −44
−42 −40 −38
Figure 2.8 EU innovation gap towards the US and Japan

50%
RD embodied in imported capital goods
RD embodied in domestic capital goods
RD embodied in imported inputs
RD embodied in domestic inputs
RD own
40%
30%
20%
10%
0%
I
C
T
A
u
t
o
m
o
t
i
v
e
C
h
e
m
i
c
a
l
s
M
a
c
h
i
n
e
r
y
S
o
f
t
w
a
r
e
T
O
T
A
L
F
o
o
d
T
e
x
t
i
l
e
s
E
n
e
r
g
y
Figure 2.9 Average European share of total RD content in various industries (%)
Source: Europe Innova Synthesis Report 2008.
In that respect, the compared risk/return profiles of American and European venture capital
firms are relatively different. While American venture capital firms aim at realising some of
their investments through an IPO, and hence focus on a limited number of start-ups; European
venture capital firms are growing a larger panel of start-ups at a more moderate speed and try
to avoid losses.

0.750
0.700
0.650
0.600
0.550
0.500
0.450
0.400
0.350
0.300
0.250
0.200
0.150
−1.0% 0.0% 1.0% 2.0% 3.0%
Average annual growth in innovation performance
Innovation
performance
(SII
2008)
4.0% 5.0% 6.0% 7.0%
RO
BG
CY
IS
EE
SI
HU
ES
FR
IE
CH
FI
DE
SE
DK UK
LU
NL
BE
AT
NO
IT
HR
LT
PL
CZ
GR PT
MT
SK
TR
LV
8.0%
Figure 2.10 Convergence in innovation performance
Shape coding matches the following groups of countries: squares are the innovation leaders, triangles are the innovation
followers, diamonds are the moderate innovators and circles are the catching up countries. Average annual growth
rates are calculated over a five-year period.
(c) Challenges
In many respects, Europe has reached a first level of maturity in the professionalisation of its
venture capital market. However, the situation is variable. The UK, France and Scandinavia
are the most advanced markets, with active and numerous venture capital firms. Other markets
lag behind (see Figure 2.10).
The challenge is hence a double one: offering a way for lagging markets to catch up with
the most advanced markets; and developing a European platform in order to gain competitive
advantages and leadership in certain industries.
A fragmented market
Some of the European difficulties are due to discrepancies in industrial policies (see Figure
2.11). For example, RD can be tax deductible by up to 20 % or above in certain countries;
and not at all in others.
Building an active European venture capital sector, notably in seed and late stage financing,
implies the lowering of the barriers of intervention at the late stage in order to build pan-
European champions at a cost equivalent to American champions. As for seed investments, it
is necessary to rely on national (or even local) initiatives as they are the closest to the needs,
with control of the cost of capital – notably when it comes to public financing.

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sugge 52, suggeð 167; eo in heoreð 58 (if from herian): bærnan
gives berneð 108, forbærnan, forbærnen 165, ærnan, ærneð 108,
mengan, mæingde 292, beside mengde C 15530 (Morsbach, § 107,
anm. 3). i is i, blisse 146, wille 25, but u in nulle 191, nuste 264, us
62, wulle 25, and the pres. forms of willan; before lengthening
groups i, child 44, þinge 61. o is o, folc 36, hope 58, but durste 137,
dursten 158; on is mostly an or o, once æn 211; before lengthening
groups o, bord 215, wolde 20 (4), wolden 19, 192, but walden 12,
42. u is u, burh 173, cumen 137, iwune 117, but ilomp 122, sonedæi
75; before lengthening groups u, funde 298, murnede 293. y is
normally u, cume 118, wunne 188, but kime 263, kineborne 168,
kineliche 173, kinelond 56, 192; before lengthening groups u,
guldene 257, vmbe 36: king 139 is the regular form, but kenge 94.
ā is regularly a, hali 66, ihaten 34, but æ in bræd 218, bræ[d]ne
209, mære 42, særi 103; before two consonants a, hatte 32, ladlic
294, madmes 134, but hæhte 59 (7). ǣ1 is æ, bilæfuen 24, hæðene
8 (3), sæ 2, spræde 210, or e, bitechen 191, breden 250, stenene
222, but a in bitache 173, haðene 295 (possibly Scandinavian), ea in
leare 150; before two consonants æ, ælche 129, æuer 44, læfdi 74,
lædden 259, næuere 176, or a, alc 51, alchen 280, auere 7, nauere
23, vnwraste 80, wraððe 150, but e in arerde 223, elchen 21. ǣ2 is
æ, æten 251, dæde 197, þræd 218, or e, deden 96, vnimete 254,
but eo in weore 8, weoren 2 (9), neoren 138, and a in mare 223;
before two consonants, þærfore 175, setten 250. ē is e, greten 144,
ueden 190, but heo 73, þæ 63, 231; before two consonants, imetten
18, lette 283, but igrætten 18 (r. w. imetten), iuædde 100. ī is i,
bliðe 24, 116, swiðe 2, fiftene 36, but bluðeliche 282, swuðe 129. ō
is o, com 113, godne 49, most 110, but neoðeles 83. ū is u, bute
176, runen 148, 159, but ronenen 156. ȳ is u, biclused 177, cudðe
98, iscrudde 100, but forþi 48, 66, þa 8, 184.
ea before r + cons. is a, ȝare 224, iȝarked 238, 240, and æ,
hærm 8, 295, kærf 217; the i-umlaut is seen in awariede 81, and,
before a lengthening group, in ferde 85. ea before l + cons. is
regularly a, al 37, and the numerous forms of eall, scat 189, but
hælf 117, helue 129; before lengthening groups, a, alde 28, anwalde

83, athalden 20, halden 150 c., walden 71, but athælde 83,
hælden 13, holden 143, olden 187: the i-umlaut is a before
lengthening groups, aldeste 29, halde 290, iuald 109, but æ in
ælderen 193, ælderne 69. eo before r + cons. is eo, feor 160,
heorte 288, but hærcne 147, werpeð 37; before lengthening groups,
ȝeorne 288: the wur group has u, iwurðe 90, wurðliche 190,
wurðscipe 71. The i-umlaut before lengthening groups is seen in
ȝirnde 206, sturne 120, but deorne 148: wiersa is wurse 81, 291.
eo before l + cons. is eo in seolf 81 c. eo, the å-umlaut of e, is
seen in feole 119, weoli 60; eo, u- and å-umlaut of i, in cleopien 249
and its forms, heore 37 c., seoluer 88, seoððen 96, 97, seoueðe 64,
but hennen 160, iluued 22, and without umlaut, niðer 82. ea after
palatals is a, scal 38, æ, ȝæf 134, e, ȝef 133, 299, and before nasal
o, scome 86. ie after ġ is e, biȝeten 87, ȝeuen 88, and i, biȝite 172,
ȝif 201, ȝiuen 297: after sc, æ in schæren 216. ȝef, conj., is ȝif 10
c. eo after ġ is u, ȝunge 160, ȝungen 187: geond is ȝeond 209.
eo after sc is seen in scolde 241, scolden 45, scullen 24, 39, 68.
heom is heom 9; eom, am 175, æm 24, 263, næm 176.
ēa is usually æ, æc 28, hæne 204, særes 216, slæn 165, but e in
ȝette 242, ȝettest 184, iȝette 206, hehne 102, ileuen 53, 80, a in bad
(influenced by bæd) 239; before two consonants æ, hæfden 87: the
i-umlaut is e, bemen 249, dremden 146, heren 13 and its forms,
ileueð 53, but æ in hæren 19, 68, ihærde 264, ihærd 156, i in hiren
184, biliueð 91, eo in heoreð 58 (if from hīeran), ileoueð 80, 81. ēo
is regularly eo, beon 175 c., biheold 288, feollen 127, freond 273,
leoden 165, þreo 4; the i-umlaut is mostly wanting, deore 68 (4),
freonde, dat. 273, neode 171, 212, but (fif)tene 36, 233. OE. sīen is
seon 27. ēa after a palatal is seen in ȝer 36, ȝere 44, ȝeuen 76, ȝiuen
73 (4), ȝifuen 72, 76. gīet is ȝet 65.
a + g is aȝ, laȝe 69 (6), ofslaȝen 163, but dæȝen 69, ofslæȝen
138. æ + g is mostly æi, dæie 23, fæire 18 (9), fræinede 265, mæi
73, mæidene 290, sæide 152, uæin 263, but ai in dai 130, fain 286,
mai 174, 204, main 290, maide 266, 283, maiden 282, ei in feire
210, feirest 89, seide 240 (3), seið 270, æ in færeste 7, æȝ in dæȝe
193, 194. e + g is generally ei, leide 215, toȝeines 240, þeines 101,
weies 202, but awæi 129, bilæde 220: e + h is seen in hæhte 225,

hæhten 230: i + g in þrien 284, þreoien 277 (influenced by þrēo): i
+ h in dihteð 67, dihte 135, isihðe 103: o + g, h in hohfulle 156,
dohter 181: u + g, h in duȝeðe 141 (6), fluȝen 129, 130, but floȝen
129, fuhten 127. ā + g is aȝ, aȝene 208, 296, aȝere 201; ā + h is
oh, oht 113, ohte 84 (3). ǣ1 + g, h is seen in fæie 127, bitæht 205,
bitæhten 284; ǣ2 + g in maies 182; ē + g in beyne 168, twene 168
(with loss of g); ī + g in fridæi 74; ō + g in droȝen 93, inoȝe 134,
sloȝen 126, ofsloȝen 119, vnnifoȝe 130; ō + h in biþohte 111, 142,
noht 80, rohten, sohten 10, þohten 122, exceptionally afeoh 188. ea
+ h, ht is seen in æhtene 234, isæh 116, mæhti 65, sæh 23,
sæxisce 97, sæxelonde 271, but saxelonde 124, 278, saxisce 114,
sexisc 180; the i-umlaut in mihte 46, mihte 58, nihtes 23. eo + h,
ht is mostly i, cnihtes 17, fihte 115, 172, rihten 20, but feht 120,
126, sexte 39, fæhte 155, sæxte 63, Peohtes 84, 107. ēa + h, is eh,
heh 66, neh 291, æh, hæh 64, 65, hæhliche 16, 190, hæhne 205;
ēa + g gives hæȝe 141, 259: the umlaut is wanting in hæhste
62 (3), hærre 13, ihæȝed 153. ēo + g, h is seen in driȝen 25, 196,
iuaid 175, ræh 291. ā + w appears in nawiht 104; ī + w in tisdæi
76; ēo + w in acneowe 261, bleowen 249, neowe 28, 106, treowe
28, eouwer 24 (4), eoure 54, æoure 53, eou 26: feorðe 61, 72 is
fēorþa.
The prefix æt is at, atstonde 183, atwite 204; on is a in afon 178,
afeoh 188, among 146, but imong 157 is gemang. oþ is a in aþet
229: o is levelled to e in whanene 31, whænnenen 27, wunder 213:
eo is written for e in cusseoð 277; i for e in cristine 294. The glide e
is inserted in æuere 132, nauere 23, læuedi 65, næueden 228; i is
prefixed in iliue 22, probably by anticipation of iluued.
w is lost in þong 219, beside þwong 217, 218; for w, u is written
in Cantuarieburi 15, l is lost in scat 189. m is doubled in icummen 3,
n in hennen 160, iborenne 259, whænnenen 27. n is lost in gome
228, and often in i 137 for in, iþan 126, iþere 72, a 81 for on: in 240
represents inn. f is kept in the combinations fd, fn, hafde 212, læfdi
74, æfne 70, 296, and as a final, hælf 117, initially after a word
ending in a voiceless sound, færeð 43, fain 286, feorr 160, folc 36.
Otherwise it is u, initially, as classified at 365/3-6, uorð 41, ualde

203, uerden 48, uast 132, uæin 263, ueden 190, uiue 105, uul 276,
277, medially, bilæuen 39, biuoren 95, uuele 280, deluen 221, helue
129; it is written fu in hæfuest 50, bilæfuen 24, ȝifuen 72, 76, leofue
54, 79. But exceptions are numerous, fare 176, færen 45, feole 119,
fiue 39, forð 39, fforð 14, fuliwis 225, biforen 17, toforen 144, ifaren
105, vfel 78. of is shortened to o 213. For t, d is written in bed 100,
th in bithecheð 276: in bezste 200 (4), z = ts; t is doubled in bett
100, lost in henges 32, 151, Hænges 55; for tt, ht is written in
hæhte 59 c., if it represents hatte. d is lost in lon 64, selcuðe 2,
35, walden 71. For þ, d appears in cudðe 98, dod 86, falled 38, iuald
109, ladlic 294, luted 54, madmes 134, odere 228, 276, swide 120,
236; whar 28 represents hwæðer. sć is regularly sc, scal 38,
scenden 192, monscipe 153, bruttisc 281, but særes, schæren 216.
The stop c is written k before e, i, also in kærf 217, in other
positions c, castel 173, dronc 283; ah 8 (6) is Anglian ah, WS. ac. č
is ch, ælchen 78, elchen 21, bitechen 191, drenche 272, muchel 42,
richen 154, sechen 49, swulche 23, wulche 53, but alc 51, swulc
218. ic is ich 22, ic 175; cæster, Chastre 226. čč is cch in ræcchen
148; cw is qu, queð 147. Palatal g is written ȝ, ȝare 224, ȝirnde 206,
hærȝieð 108: a parasitic ȝ appears in iȝeten 252. g is lost finally in
weoli 60, moni 93; it exchanges with w in herberwe 131. čǧ is gg in
sugge 52, 167, ligge 174 c. Initial h is lost in lauerd 49, læuedi 65,
loten 37, iloten 252, lust 30, lusten 149, nap 275, ræh 291, and
added in hi[s] 36; also medially in hehne 102 (hēanne), whar 61.
hw is regularly wh, whæt 27 c., whar 28, while 237, but wulche
53. In burhȝe 205, burhȝen 251, the scribe wavers between h and ȝ;
elsewhere he writes burhe, burȝen, burje, buruwe.
(2) O f O . Oral a is a, ac 8, faren 45; a before nasals is regularly
a, fram 203, gan 92, 207, nam 92, wan 183, wane 189, wanene 27,
þanne 204, 282, but drong 283, isomned 36; a before lengthening
groups is o, among 156, londe 19 (16 times), longe 104, but amang
251, answerede 21, 78, lang 217, þwang 217, 218, onderfang 188:
and is and 18, an 133, man, pron., me 276. æ is a, after 186, bar
257, sat 261, 287, spac 195, 262, nas 104, but þes 292. e is
normally e, beste 238, Dence 229, selliche 2 (seollich O 14409);
before lengthening groups e, ende 109, Englene 262, Englisse 226,

felde 203, but Ænglis 34 (comp. 266/15), Œnglisse 281: forbærnan
is forbearne 165, bearneþ 108; ærnan, erneþ 108; mengde,
meynde 292. i is i, amidde 203, ligge 177, wille 196; before
lengthening groups i, children 187, þing 60, but cheldren 159,
þenges 35. The present forms of willan have o, wolle 20, wolleþ
87, wolt 184, a French writing for u, but nelle 191: ġift is ȝeftes 88,
133. o is o, bolle 257, dorste 137; before lengthening groups o,
borde 215, wolde 19: on is a 117, 261, an 53; þane 74 (7) descends
from LWS. þane. u is regularly o, borh 191 (4), come 137 (3),
drongken 251, foliwis 225, gomes 2, loue 69, þos 183, wonie 173,
but þus 48, 77, vp 38; before lengthening groups it is u, funde 298,
grunde 109, hundred 5, 233, but mornede 293, wonder 35. y is u,
Bruttesse 225, cunne 181, custe, clupte 289, dude 117, fulþ 276,
lust 269, nuste 264, vuele 21; for u, o is written in come 118, comes
263, mochel 123 (6), soche 23, 291, woche 53 (hwylc), and before
a lengthening group, goldene 257; but y is i in win 63, winne 188,
kinelonde 192, and as usual in king 50, and e in dedest 162,
wercheþ 68.
ā is regularly o, brod 218, ihote 34, 67, non 258, no 23, 204, (nā),
on 59 c., but a 60, 63, an 64, 65; before two consonants o, loþlich
294, one 214 (ānne), but ane 217, 223, 257, nanne 191, hatte
32 (8), haxede 265: þā is þe 7 c., þās, þeos 18, 69, 215; þām,
þan 1 c.; hwām, wan 38. ǣ1 is e, bilefue 24, 46, erest 262,
heþene 8 (3), sprede 210, but bitak 173, bitake 191, bitakest 205
(confusion with tacan), deal 220, heaþene 295, leore 150, rounded
before r, stonene 222 (*stānen); before two consonants e, arerde
223, ech 185, euere 7, wendesdei 72, but leafdi 65, ladde 259,
wraþþe 150. ǣ2 is e, dedes 87, onimete 254, sete 250, þere 44, 48,
weren 2 (10), but ea in beade 298, reade 110, 171, 298, a in þar
119, þarin 283, þaron 5, þare 37 (4), ware 176, 210, eo in beore 93,
eoten 251 (elsewhere ge-eten, pp., is represented by iheote O
6691, iȝeote O 14952); before two consonants it is a in þarfore 48,
86, adradde O 7575, ea in sealþe O 25574, and e in wepne O 14838.
ē is e, cweme 184, seche 41, wene 175; before two consonants,
cwemde 139, grette 18, 144, lette 221 (4), OE. lēt: aȝen 131,

toȝenes 240 represent ongēn, togēnes; gē, pron., is ȝeo, 27, 53,
79; doþ 292, pr. s., has o from plural. ī is i, bliþe 24, swiþe 2, 51, wif
178 c., written always ii in hii 8 (20), and y in tydinge 1 (3); but
bloþeliche 282 (blȳþe), heredmen 67 (? influenced by heord);
before two consonants i, fifþe 62, wisne 214, but womman 299. ō is
o, com 1, soþ 50; before two consonants, most 110, moste 46. ū is
ou, French writing for u, aboute 220, couþe 214, nou 48, þou 20,
but u in dun 246, vre 35, 64, vs 20, 45, and o in bote 177, 218. ȳ is
regularly u, biclused 177, cuðen 269, hude 202, lutel 206, prude
254, scrude 190: þȳ is þe 8, 184.
ea before r + cons. is regularly a, harm 8, iȝarked 238, ȝarue 224.
The i-umlaut is represented by deorne 148, which points to Anglian
e. ea before l + cons. is regularly a, al 22 c., falleþ 38, halt 275,
halle 99, half 117, salt 189, wal 222; before lengthening groups o,
anwolde 83, atholde 20, 83, biholde 209, 223, holde 143, 150: the i-
umlaut is seen in elder 29, heoldre 187, falleþ 109 (Ang. fællan). eo
before r + cons. is eo in heorte 288, e in hercne 147, werpeð 37, o
in for 203; before a lengthening group eo in ȝeorne 288: words of
the wur group have o, worsipe 26, 68, worþliche 190, iworþe 91;
the i-umlaut is o, forst 26, ȝornde 206: wyr is represented in worse
291, 292. eo before l + cons. is eo in seolue 113, seolf 209. The u-
umlaut of a is wanting in care 123, 176. eo, u- and å-umlaut of i,
gives cleopede 230, soueþe 64, and analogically ileued 22, but
heora is hire 69 c. ea after palatals is a, sal 89, e, ȝef 133 (3),
before nasal, a, same 86. ie after g is e, biȝete 172, ȝeue 88, ȝefue
69, ȝef 201. ȝef, conj., is ȝif 20. eo after g is o, ȝonge 159, 187;
after sc, o, solde 45, 178. eom is ham 24, 175, nam 176; heom,
heom 69 (4).
ēa is divided between ea, dead 175, deaþe 46, slean 165, and e,
bileue 53, 79, gret 63, lefue 92, lesing 50: the i-umlaut is
represented by bilefeþ 53, ihure 149; before two consonants by
ihord 50 (4). ēo is regularly eo, beo 27 c., deor 43; before two
consonants, biheold 246, 288, freond 273, 274; but biful 122, 140,
ful 45: bitwine 167 descends from betwinum: deore 88, 236,
freond, dat., 273, neod 38, 171 are without umlaut. OE. gīet is ȝet
65. ēa after g is e, ȝer 36, ȝere 44.

ȝ ȝ
a + g is aȝ, daȝes 69, ofslaȝe 138 (ofslagen), and aw, lawe 285.
æ + g is mostly ai, dai 23, faire 18 (7), mai 173, saiþ 273, saide
51 (5), or ay, mayde 282, moneday 70, but ei in seide 19, 240, seiþ
270, tisdei 70, wendesdei 72. æ + h occurs in iveiþed 175. e + g is
ei, leide 220, oþerweies 122, or ey, awey 129, but ai in laide 215. e
+ h occurs in hehte 162, 225; i + h in sihte 103; o + h in dohter
181; u + g in floȝe 129. ā + g is ow, owe 201, owene 208. ā + h is
seen in ohte 84; ǣ1 + h in bitahte 284; ī + g in friday 74; ō + g in
sloȝen 126, ofsloȝen 119; ō + h in iþohten 122, noht 41, 218. ea +
h is eh, seh 23; the i-umlaut of ea + ht is i, mihte 210, mihti 60, 65.
eo + ht is i, cnihtes 5, fihte 126, rihte 20, sixte 63, but Peutes 84,
107; the i-umlaut is represented by nihte 23. ēa + g occurs in hehȝe
259; ēa + h in heh 64, neh 291: the i-umlaut in hehest 62. ēo + w
is ou, ȝoure 53 c., ȝou 24, 88, ou 83, but cnouwe 261.
e is added in here 7, ofte 86. on is reduced to an 53, a 117, and
in the prefix of aboute 220, amidde 203; o becomes e in forte 229.
For u, o occurs in onderfang 188, onimete 254. The suffix -ung is
ing in rouning 143, tydinge 147.
Initial f is once v, vare 176, elsewhere f, faren 45, fareþ 48;
between vowels or vowel and liquid it is u, v, delue 221, ived 100,
iveiþed 175, vuele 21, but bilefeþ 53, life 46, and before u f is
retained, biful 122: fu is written in bilefue 24, 46, lefue 92, 207,
leofue 79, 274, lifue 22, lofuieþ 286, wifues 43 (5). For t, d is written
in bed 100; fifþe 62 (fīfta) is an early instance of the modern form.
d is lost in an 133, answerede 21. For þ, th appears in deathe 157;
ð occurs only in louieð 57. sc is regularly s, sal 89, same 86, sende
192, solle 24, worsipe 26, Ænglis 34, but ss in Bruttesse 225, 281,
Englisse 226, Œnglisse 281, and c in Dence 229 (Denisc), which
appears to indicate a pronunciation for sc of [s]. The stop c is
written k before e, i, ilke 34, kinelonde 192, and finally bitak 173,
folk 36; nc is ng, dring 282, dringe 273, 275, dringþ 275, drong 283,
drongken 251. č is ch, childe 43, ech 185, ich 22 (ihc 177), mochel
123, soche 23, 291, speche 266. Palatal g is regularly written ȝ, aȝen
131, ȝarue 224, sloȝen 126: hehȝe 259 represents hēage, meynde
292 mengde. h is added initially in ham 24 c., haxede 265,

heoldre 187, hifulled 258, himakede 240, hin 131. Initial hl is
reduced to l, lotes 37, lust 269, hn to n nap 275, hw to w, wan 38,
wanene 27, ware 176, wat 27, wile 237, woche 53. heo, pron., she,
is regularly ȝeo 67 c., comp. Orm’s ȝho, 112/2.
Accidence: (1) of C. A peculiar feature of these texts is the
occasional addition of n after a final vowel. This ‘nunnation,’ fairly
common in C, rare in O, is marked here by round brackets. Its use
makes it doubtful at times whether a noun or adjective ending in n is
a weak form or a strong form with added n. Strong declension of
masc. and neut. nouns. In the s. n. a. maide 266, 283, 295 has lost
final n. Gen. -es, þunres 73, twines 218: dat. -e, ræde 197, gomene
291, londe 3, vfele 51, crafte(n) 214, cume(n) 24, cunne(n) 188,
inne(n) 112, liue(n) 25, rihte(n) 20, wurðscipe(n) 26; without
inflection are ræd 298, gomen 231, kinelond 56, lond 162, vfel 78,
gome (gamene) 228, lon 64, and the proper name Saturnus 75.
The pl. n. a. of masculines ends in -es, cnihtes 17 (6), madmes 134,
but cnihten 5, 27, ridern 233, sunen 105 are weak forms: neuters
are ȝer 36, þing 50, wif 43, but haefden 87, loten 37, scipen 4 (3)
are weak. Genitives are londe 33, þinge 260, weak forms are
ænglene 262, cnihtene 55, 89, and, before a vowel, cnihten 77, 152,
195: datives have mostly -en, cnihten 155, dæȝen 69, goden 68,
scipen 92, 232, but londes 137, þinge 61. The fem. nouns of the
strong declension have -e in the s. n. a., duȝeðe 170, 252, 272,
hude 202, 210, dæde 197, ferde 85, duȝeðe(n) 166, but sæ 2. Gen.
-e, duȝeðe 141; humbre 117 is an indeclinable form: dat. -e, halle
99, helue 129, honde 257, halle(n) 259, but hælf 117, hond 201. Pl.
n. are laȝe(n) 278, 285, probably weak; d. deden 96, laȝen 163,
leoden 295 (from pl. noun lēode), runen 159, nihtes 23; a. leode(n)
165, 285, rune(n) 148, 156, probably weak. Nouns of the weak
declension have mostly -e in all cases of the singular, but iueren 276,
monen 76, læfdi 74 are dative, læuedi 65 acc.: the plural has -en
throughout, n. gumen 2, ileuen 53, 80; d. iueren 233; a. bemen 249,
nomen 231. The minor declensions are represented by mon s. n. 41,
wimmon 180, monne s. d. 205, mon s. a. 214, wimmon 299, men pl.
n. 7 c., wimmonne(n) pl. g. 270, monnen pl. d. 112 (5),
hiredmonnen 157, scipenmonnen 6 (for scipmonnen), cunnesmen pl.

a. 98; burh s. n. 228, s. a. 173, 191, 223, burhȝe 205 (? confusion
with pl. burga), burhȝe(n) s. d. 251; broðer s. n. 29; dohter s. d.
181; freond s. n., freonde s. d. 273; walden s. n. 71; childe s. d. 43,
child s. a. 44, children pl. d. 187.
Adjectives, which in OE. end in a vowel, have e in all cases, bliðe
116, deore 181, ȝare 224, hende 287, mare 223, sturne 120,
vnimete 254, wilde 43; those in -ig lose g, hali 66, mæhti 65, weoli
60. Of the weak declension are s. n. cristine 294, holde 154, leofue
274, d. bare 158, quicke 25, a. feire 210, hæðene 193, haðene 295.
Strong inflections are s. d. m. richen 154, soðen 26, fæire 211, hæȝe
141, hæðene 205, s. d. neut. uncuðe 40, s. a. m. brædne 209,
hæhne 205 (with burg f.), hehne 102, godne 49, guldene 257,
stenene 222, wisne 214, but long, smal 217 are not inflected, s. a. f.
gode 136, kineliche 173, stronge 85. mycel is s. n. muchel 42, d.
muchele f. 171, a. muchele m. 221 (but dic is usually f. in L), muche
220, muchele f. 223, muchel neut. 201, pl. n. muchele 234: āgen
gives aȝene s. n. neut. wk. 296, aȝere s. d. f. 201, aȝene s. d. neut.
208. The plural of all adjectives ends in -e, except særi pl. n. 103
(sārig), dæde(n) 110, ȝungen d., olden 187. OE. ān is s. n. an 59,
64, 161, a 218, 267, g. anes m. 202, d. ane m. 140, 141, 203, 213,
an neut. 51, a. ænne m. 173, 209, 214, enne (ende) 211, with d.
uelde 211, 217, ane 257, a 153, anne f. 65, ane 173, 212, 223, an
neut. 240, a 215: nān is s. n. na 41, d. nane neut. 47, nan 228, a.
nane f. 191, nan neut. 281: bēgen is beyne 168. Adjectives used as
nouns with inflection are hæne s. n. m. 204, hæhste 62, bezste s. d.
238, fæie pl. n. 127, ælderen pl. g. 193, ælderne 69. Comparatives
end in -e, mære 42, mare 8; the superlative has weak inflection in
aldeste s. n. m. 29, bezste 268, hæhste s. a. f. 69, but strong in
aðelest 33, fæirest 55, 89, 152, 270, hæhst 155, hendest 77, 95,
195; plurals are færeste n. 7, bezste 200, 256, deoreste 244.
The personal pronouns are ich 22, ic 175, me, we, us, þu, þe, ȝe,
eou. The pronoun of the third person is s. n. he m. 16, heo 73, heo
f. 66, hit neut. 5; d. him m. 72, heom 71, hire f. 74, 224; a. hine m.
13, 230 (with burg f.), 275, heo f. 66, 225; pl. n. heo 3 c., d. heom
9, a. 67. Reflexives are þe seoluen 166, hine 111, him seoluen 145:
definitive, seolf 81, 209: possessives, s. mi n. m. 32; mine d. m. 83,

mire f. 181, 199, 201, mine neut. 22 (7) ; mine a. f. 149, 197, mi
neut. 182; pl. a. mine 182; s. þin n. m. 154, þine 170, þine d. m.
154, 197, 263, þire f. 171, þine neut. 183, 186, a. m. 153 (possibly
f., the nouns in -scipe are mostly f. in L), f. 166, þi neut. 108, 165,
þin 196; pl. þine n. 167, d. 155, a. 165; his 10, hire 232; ure 35;
eoure 54, eouwer 24 (4), æoure 53, heore 37. The definite article is
s. þe n. m. 29, 218, þæ 63, 231, þa 15, 39, þe f. 224, þæ 228, þa
238, þat neut. 36, þe 43, þas g. m. 292, þere f. 117, þan d. m. 4, 40
(with leode f.), þa 73 (miswritten for þan), þere f. 3, 72, 217, þene
75 (miswritten for þere), þan neut. 1, 126, 136, 253, 290, þene
a. m. 72 (7), þane 139, þa f. 174, 193, þat neut. 283, (for) þi instr.
48, 66, þa 8, 184, 252; pl. þa n. 7 c., þan d. 6, 137, 187, þa a. 229,
285. Þat is used demonstratively, 8, 277, 283, 266 (with speche f.),
34 (with ænde d. m.); the article is also used pronominally in vppen
þan þe, upon whom 38. The compound demonstrative is s. þes n. m.
162, þis neut. 7, 278, þas d. f. 117, þisse neut. 19, 162, þissen 285,
þis 56, þas a. f. 215, þis neut. 116, 178, 209, 280; pl. þas n. 17, 79,
169, a. 231. The relatives are þe, þat 7, 150 (= that which), þa 58,
68, 96, 105, 172, 174; þer . . . on, on which, 210. Interrogatives are
whæt 27 (3), what 31 (4), wulche pl. n. 53, the correlative is
swulchere s. d. f. 103, swulche s. d. neut. 231, pl. n. 23: ilca is ilke
s. n. m. 237, 275, ilken s. d. m. 34, ilke pl. a. 285. Indefinites are me
276; oðer s. n. m. 29, odere d. neut. 228, oder a. m. 276, oðer a.
neut. 283, oðere pl. n. 164; anoðer s. n. neut. 122; ælches s. g. m.
202, ælche d. m. 203, f. 129, neut. 155, 291, aelchen 78, 185,
alchen 280, elchen 21, alc 51; æueralche s. d. neut. 44; æi s. n. f.
272, a. f. 205; nohtes g. s. 82; moni 93, 153, 286, muni 113, pl.
monie 126, 130; feole 119; al s. n. neut. 37, alle d. f. 244, neut. 22,
al 56, alle a. m. 130, al 109, f. 197, pl. alle n. 99, all 110, alre g.
33 (8), alle d. 61, 68, al 112, alle a. 50, 135.
Four-fifths of the infinitives end in -en; cleopien 249 is the only
infinitive of the second weak conjugation; there are no examples in
-in or -i; those in -e are athælde 83, bilæue 46, cuðe 158, ligge 174,
liðe 39, 92, 207, 243, ræde 171, spræde 210, all at the end of line or
half-line, cume 164, iwurðe 90: contract verbs are afon 178, slæn
165. The dat. inf. is not inflected. Presents are s. 1. habbe 22, libbe

174; 2. ȝettest 184, hæfuest 50; 3. bereð 44, bitecheð 276, dihteð
67, drinkeð 275, fareð 276, falled 38, fordemed 170, exceptionally
gladieð 272; contracted are halt 275, seið 270, sæið 274, sæiðe 273
(miswritten for sæið); pl. 1. biliueð 91, luuieð 57; 2. haldeð 193,
luted 54; 3. ærneð 108, cusseoð 277, liggeð 82, hærȝieð 108, hatieð
157, luuieð 66, spilieð 159, wunieð 160, iuald 109 (gefiellaþ):
subjunctive s. 1. fare 176, habbe 182; 2. biȝite 172, bitache 173,
habbe 205, sugge 52: imperative s. 2. afeoh 188, drinc 282, hærcne
147, lust 30, 269. Past of Strong Verbs: I a. s. 1. sæh 23; 3. bad
241, 297, bed 298, ȝæf 134, ȝef 133, 299, isæh 116, queð 147, sæt
261, sat 287, spæc 195; pl. 3. æten 251, setten 250: I b. s. 3. bar
257, com 113 (4), nom 92, 207, 215; pl. 3. comen 1, 235 (11), come
229; subj. s. 3. come 241: I c. s. 3. bigon 221, dronc 283, funde
298 (weak form), gon 92 (3), ilomp 122, 140, kærf 217; pl. 3.
drunken 146, 251, fuhten 127, gunnen 14, 249: II. pl. 3. driuen 229:
III. s. 3. bad 239; pl. 3. fluȝen 129, 130, floȝen 129: IV. s. 3. scop
224, stod 136 (3); pl. 1. uerden 48 (weak form from fēran); 3.
droȝen 93, sloȝen 126, ofsloȝen 119: V. s. 3. biheold 246, 288,
hæhte 225 (weak form), lette (weak form), 283; passive, s. 1. hatte
32; 3. hatte 64, hæhte (hatte) 59, 60, 61, 62, 63, 161, 162, if it be
not the active form with passive meaning; pl. 3. bleowen 249,
feollen 127, hæhten 230, hetten 250. Participles past: I a. biȝite 212,
iȝeten 252: I. b. iborenne adj. pl. 259, (kine) borne pl. 168, icumen
2 (6), icummen 3, icume 117, ouercumen 128: III. iloten 252: IV.
ifaren 105, ofslæȝen 138, ofslaȝen 163, atstonde 183: V. ihaten 34,
ihate 67, ihalden 102, 279, underfon 241. Past of Weak Verbs: s. 3.
andswerede 21, arerde 223, bilæde 220, fræinede 265
(gefrægnan), ȝette 242, hafde 212 (5), hæfde 233, hehde (for
hefde) 69, bitæhte(n) 284, hæfde(n), 214, næuede(n) 228; pl. 3.
andswerden 11, cleopeden 226, halde 290. Participles past: biclused
177, bitæht 205, ibrusted 256, iȝarked 238, 240, ihæȝed 153
(*hēagian), islit 219, iuaid 175; inflected are iscrudde, iuædde 100.
Minor Groups: nuste pt. s. 264; cuðe pt. s. 214, 281, cuðen pt. pl.
11; dursten pt. pl. 158, durste 137; scat 2 pr. s. 189, scal pr. s. 38,
scullen 1 pr. pl. 68, 2 pr. pl. 24, pr. pl. 39, scolde pt. s. 241, scolden
1 pt. pl. 45; mai 1 pr. s. 174, pr. s. 204, mæi 73, mihte pt. s. 111,

210, mihte we 1 pt. pl. 46; most 2 pr. s. 110; beon inf. 28, am 1 pr.
s. 175, æm 24, 263, næm 176, is pr. s. 32, js 67, us 62, nis 56, beoð
45, 1 pr. pl. 31, 33, 48, 110, seoð 31 (with s for b from sind, sīen),
beoð 2 pr. pl. 79, pr. pl. 35, 271, 278, beo 1 pr. s. subj. 183, pr. s.
subj. 41, beon 2 pr. pl. subj. 27, seon 27 (sīen), wes pt. s. 8 (6),
wæs 78, nes 104, 218, weoren pt. pl. 2 (8), weore 8, neoren 138,
weore(n) pt. s. subj. 266, ibeon pp. 154; wulle 1 pr. s. 25 (7),
wulle(n) 30, 88, 184, nulle 191, wult 2 pr. s. 149, 178, wule pr. s.
202, wulleð 1 pr. pl. 194, 2 pr. pl. 87, pr. pl. 164, wulle pr. s. subj. 90,
wullen 2 pr. pl. subj. 28, wolde pt. s. 20 (4), wolden pt. pl. 19, 192,
walden 12, 42; don inf. 111, to don dat. inf. 298, dod pr. pl. 86, dude
pt. s. 292, duden pt. pl. 71, 117, idon pp. 9, 63, 180; eode pt. s.
144, 253.
Noteworthy are the adverbs forðrihtes 107, at this very moment,
stilledliche 159, probably miswritten for stilliche of the exemplar,
rather than for stilleliche, which is unmetrical wherever it occurs, and
whænnene(n) 27, representing hwanone. OE. nā conj. is once na,
nor 191, but no 23, no . . . no, neither . . . nor 138.
(2) O f O . Strong declension of masc. and neut. nouns. In the
s. n. a. maide 266 (3) has lost final n. Gen. -es, kinges 292: dat. -e,
crafte 214, lifdaȝe 138, ȝere 44, inne 253, londe 19 (9), but dai 23,
and the neuters folk 295, ȝer 36, hin 131, lond 64, 262 are
uninflected; game 285, 291 represents gamene: borde s. a. 215
has added e. The pl. n. d. a. ends in -es, n. m. comes 263, kempes
5, neut. sipes 4, þenges 35, wifues 43, d. m. cnihtes 133, godes 68,
neut. sipes 232, þinges, 61, a. m. cnihtes 23, neut. bordes 250,
godes 93, londes 37, 193, lotes 37: gen. are cnihtes 112, Englene
262 (weak form), þing 260 (miswritten for þinge). The fem. nouns of
the strong declension have -e in the s. n. a., blisse 251, hude 202,
speche 266, tydinge 1, care 123, see 2, but leafdi 65, lesing 50,
rouning 143: dat. -e, halue 221, winne 188, but half 117, hond 201,
257, win 63. Pl. n. are lawe 285, tydinge 104, lawes 278, d.
rouninges 148, wiþerededes 87, a. leode 165, tydinge 147, ȝeftes 88,
133. Nouns of the weak declension have -e in all cases of the
singular, n. wone 271, d. ivere 276, a. bolle 257; pl. n. are bileue 53,
bilefues 79, gomes 2, d. ivere 233, a. rideres 233. The minor

declensions are represented by man s. d. 205, s. a. 214, womman
299, men pl. n. 7, heredmen 67, wommanne pl. g. 270, men pl. d.
193; borh s. n. 224, s. a. 191; nihte s. d. 23; broþer s. n. 29, s. a.
164; dohter s. n. 181; childe s. d. 43, 44, cheldren pl. d. 159,
children 187; freond s. n. 273, s. d. 273.
Adjectives, which in OE. end in a vowel, have -e throughout, bliþe
24, deore 236, deorne 148, ȝarue 224, hende 299, onimete 254,
riche 33, 133, wilde 43; those in -ig lose g, mihti 60, sori 103. Of
the weak declension are s. n. m. cristene 294, leofue 274, but heh
64, 205 is not inflected, s. n. f. faire 287, s. d. f. bare 157 (deathe is
treated as f.), s. a. neut. heaþene 295. Strong inflections are s. d. m.
heþene 205, s. a. m. goldene 257, stonene 222, wisne 214, but lang,
smal 217, strong 222 are uninflected. mycel is moche s. n. neut.
181, mochele s. d. m. 26, f. 171, moche s. a. m. 220, mochel f. 123,
neut. 201: āgen, owe s. d. f. 201, owene s. d. neut. 208. All
adjectives have -e in all cases of the plural, except wonder 35, noun
used as adj., and ȝong 187, miswritten for ȝonge. ān is s. n. an 64,
on 59, 161, a 60, 63, d. one m. 203, on 140, 177, f. 237, one neut.
33, a. ane m. 217, 223, 257, one 173, 214, an f. 65, on neut. 240;
nān is s. n. non 258, a. nanne m. 191, no f. 50. Adjectives used as
nouns with inflection are Bruttesse s. d. neut. 225, 281, beste 238,
Œnglisse 281. Of comparatives heoldre 187 is pl. d.; the superlatives
beste s. n. m. wk. 268 and faireste pl. n. 7 are alone inflected.
The personal pronouns are ich, ihc 177, me, we, vs, þou, þe, ȝe,
ȝeo 27, 53, 79, ȝou, ou 83. The pronoun of the third person is s. n.
he m. 21, ȝeo f. 67 (6), hit neut. 5, d. him m. 19, a. hine m. 18 (5),
hire f. 67, 225, pl. n. hii 8 (21), d. heom 69, a. 188: reflexive is him
seolue 113; definitive, him seolf 209. Possessives are s. n. min m.
32, mi 269, f. 181, neut. 178, d. min m. 83, f. 201, mine neut.
22 (4), a. mine f. 149; s. d. þine f. 171, neut. 186, a. þine m. 196,
þin neut. 108, þi 165, pl. n. þine 167, 263, d. 156, a. 165; his 19,
99, 101; hire 224; vre 35; ȝoure 26; hire 37 (6). The definite article
is s. n. þe m. 29, f. 224, þat neut. 36, 38, 128, g. þes m. 292, d. þan
m. 1 (11), þane 72, 144, þare f. 157 (with deathe, usually m.), þan
103 (m. form with sihte f.), neut. 1, 126, 238, a. þane m. 74 (7), þat
neut. 206, þe instr. 8, 184, pl. n. þe 7 c.: þat is used

demonstratively 8, 45, 283. The compound demonstrative is s. n. þis
neut. 278, d. þis f. 117, þisse neut. 137, þisne 285 (miswritten for
þisse), a. þeos f. 215, þis neut. 178, 280, pl. n. þeos 18, þes 7, g.
þeos 112, d. 68, a. 69. The relatives are þat 7 c., þe 57, þat . . .
he, who, 21, wan s. d., whom 38. Interrogatives are wat 27, 264,
266, 270, woche pl. 53, with correlative soche 23, 291: ilca is ilke
s. n. m. 237, 275, s. d. m. 34, f. 103, neut. 285. Indefinites are me
276; oþer s. n. m. 29, a. neut. 283, pl. n. 164; anoþer 114; eche
s. d. m. 203, neut. 21, 36, 280, ech 185; euereche s. d. f. 129,
euerech 221, euereche neut. 44; eni s. a. f. 205; mani s. n. 114, pl.
n. 286, manie pl. a. 119, 126; al s. n. neut. 89, alle d. m. 78, al
neut. 22, alle a. m. 109, al 196, alle pl. n. 99, alre g. 77 (3), alle
260, alle d. 61, 68, al 270, al a. 93.
Nineteen-twentieths of the infinitives end in e; wonie 173 is the
only infinitive of the second weak conjugation; those in -en are
cuðen 269, faren 45, slean 165, wreken 164; in i-, granti 184, sarui
19, both French. The dat. inf. is not inflected, to biholde 209, 223,
for habbe 293, for to . . . seche 37. Presents are s. 1. habbe 22,
wene 175; 2. bitakest 205, hauest 50; 3. falleþ 38, fareþ 48, takeþ
276, stondeþ 227; contracted, dringþ 275, fulþ 276, halt 275, saiþ
273, 274, seiþ 270; pl. 1. habbeþ, louieð 57, but ȝefue 69 (5); 2.
bilefeþ 53; 3. bearneþ, erneþ 108, falleþ 109, hatieþ 157, louieþ 67,
286, sleaþ 108: subjunctive s. 2. biȝete 172; 3. ȝefue 297:
imperative s. 2. bitak 173, dring 282, ȝef 201, hercne 147, lust 269,
nim 186, onderfang 188, send 186. Past of Strong Verbs: I a. s. 1.
seh 23; 3. bad 239, 297, ȝaf 206, ȝef 133, 299, sat 261, 287, spac
195, 262; pl. 3. eoten 251, sete 250; subj. s. 3. beade 298, speke
266: I b. s. 3. bar 257, com 1 (3), come 144, nam 92 (3), pl. 3.
beore 93, come 7, 104, 285, comen 18, 119; subj. pl. 3. come 113,
245: I c. s. 3. drong 283, funde 298 (weak form), gan 92, 207; pl. 3.
drongken 251, gonne 245: II. pl. 3. driuen 229: III. pl. 3. floȝe 129:
IV. pl. 3. sloȝen 126, ofsloȝen 119; subj. s. 1. bitoke 193: V. s. 3.
biful 122, 140, biheold 246, 288, ful 45, hehte 225 (weak form
active), 162 (in meaning passive), lette (weak form) 221, 250, 254,
283; passive s. 1. hatte 32; 3. 32 (8). Participles past: I b. ibore 259,
icome 2 (4), icomen 27, 107, ouercome 128: IV. atstonde 183,

ofslaȝe 138: V. ihote 34, 67. Past of Weak Verbs: s. 3. answerede 21,
arerde 223, bitahte 284, grette 144, hadde 214, mornede 293
(murnde), swipte 284; pl. 3. cleopede 230, grette 18, hadde 123,
ladde 259, seide 19, sette 230, wende 99, iþohten 122. Participles
past: biclused 177, hifulled 258, iȝarked 238, ihord 50, 156, ileued
22, iscrud 100, isomned 36, ived 100, iveiþed 175, iwoned 121,
himakede 240. Minor Groups: nuste pt. s. 264; couþe pt. s. 214,
281; dorste pt. pl. 137; salt 2 pr. s. 189, sal pr. s. 89, solle 2 pr. pl.
24, solde pt. s. 178, 1 pt. pl. 45; mai 1 pr. s. 173, pr. s. 204, mihte
pt. s. 210, 258; most 2 pr. s. 110, mot pr. s. 38, 41, moste we 1 pt.
pl. 46; beo inf. 175, ham 1 pr. s. 24, 175, nam 176, his pr. s. 34 (9),
beoþ 1 pr. pl. 33 (4), 2 pr. pl. 79, pr. pl. 35 (5), beo pr. s. subj. 41, 2
pr. pl. subj. 27, beon pr. pl. subj. 172, was pt. s. 8 (10), nas 104,
218, weren pt. pl. 2 (5), were 4 (5), nere 138, were pt. s. subj. 218,
266; wolle 1 pr. s. 26 (8), nelle 191, wolt 2 pr. s. 149, 184, wole pr.
s. 202, wolleþ 1 pr. pl. 184, 2 pr. pl. 87, pr. pl. 164, wolle 2 pr. s.
subj. 20, woldes 2 pt. s. 178, wolde pt. s. 143, pt. pl. 19, 192; don
inf. 178 (4), doþ pr. s. 292, pr. pl. 86, dedest 2 pt. s. 162, dude pt.
pl. 117, idon pp. 138; goþ pr. pl. 43, 44.
Dialect: The speech of North Worcestershire, where the Brut was
written, descended from a Saxon patois which was substantially
South-Western, but with an Anglian element derived from the
neighbouring Mercia. Occasional forms in the texts, which are
foreign to this dialect, may be due, as Luhmann thinks, to the poet
himself, who, as he tells us, had travelled ‘wide ȝond þas leode,’ or to
some intermediate copyist, but otherwise the manuscripts present,
on the whole, the natural development of the dialect of the original.
What the professional scribes who copied them contributed to the
divergences from the original text was mainly graphic and in a great
measure due to the clash of native spelling with the French scribal
methods to which they were accustomed.
Vocabulary: Scandinavian words in C O are bule bole, gærsume
garisome, gistninge gystninge, hæil hail, laȝe lawe, swaines sweines,
wæshail wassayl; in C only, ibon, dring, grið, loten, tiðende, utlaȝen;
in O only, sleh, þorisdai: French in C O, castel, latimer; in O only,
granti, pore, sarui.

Metre: (1) O f C . Like the Worcester Fragment, p. 232, and the
Proverbs of Alfred, pp. 292-4, Layamon’s verse presents an
intermediate stage in the transition from the OE. alliterative long line
to the rhyming couplet as exemplified in King Horn (KH p. xlvi). Our
text has i. lines which continue the OE. practice of binding together
the two halves of the line by alliteration only, as Ah héo weore
hǽðene; þat wes hǽrm þa máre, 8; of þat ílken ǽnde; þe ángles is
iháten, 34; these have four stresses separated by light syllables
varying in number: ii. lines which add rhyme as an ornament to
alliteration, as heo cómen into hálle; hǽndeliche álle 99; út of þan
léode; to úncuðe lónde, 40; swiðe monie péohtes; heo slóȝen iþan
féhte, 126, and with similar imperfect rhymes 79, 92, 174, c.; the
rhythm of these also is alliterative: iii. lines like those of the second
class in structure, but already showing in various degrees the
disintegrating effects of rhyme in their wavering rhythm, as þat ouer
sǽ weorẹn icúmen; swíðe | sélcuðe | gúmen, 2, or with a regular
syllabic rhythm, as ne mí|hte wé | bilǽ|uè; for lí|ue né | for dǽ|ðè,
46: iv. lines with rhyme only, as þe féor|ðe hǽh|te Jú|pitér; of ál|le
þín|ge hé | is whár, 61; and ǽf|ter óh|te món|nèn; þa béz|stẹ of
mí|ne cún|nè, 200; these can be scanned as syllabic verse without
assuming any licence which is not to be found in the Poema Morale:
v. lines without alliteration or rhyme, as 67, 242, 286, 297; these
may be regarded as corrupt. The alliteration is varied, rarely 2 + 2,
as 75, 127, 161; 2 + 1, normal in OE., as 17, 29, 32 c.; 1 + 1, by
far the commonest, as 30, 36, 38, 42, c.; 1 + 2, as 2, 13, 33: the
last stress sometimes falls at the end of the second half-line,
contrary to OE. usage, as 17. Crossed alliteration occurs at 31, 39,
40, 91, 124; distinct alliteration in each half-line at 76, 249. Perfect
rhymes like sohten : rohten 10, imetten : igrætten 18 are
comparatively few, imperfect ones frequent, as vnwraste : criste 80,
ænde : grunde 109, dæðe : cuðe 158, monnen : hennen 160, ræde
: neode 171, spræde : hude 210, hude : neode 212, inne : cunne
235, nap : up 275, wīn : ĭn 283; a final consonant is negligible, to :

idon 9, wolde : athalden 20, laȝe : dæȝen 69, peohtes : fehte 126,
fluȝen : vnnifoȝe 130, fæhte : cnihten 155, cumeð : gærsume 189,
monnen : cunne 200, hude : ouerspræden 202, sætte : hæhten 230,
scruden : prude 254, even a final syllable, scenden : lond 192;
assonances are frequent, as driȝen : liuen 25, lond : strong 56, londe
: stronge 85, 124, ligge : libbe 174, faste : castle 177, atwite : riche
204, ende : uelde 211, while : time 237, time : liðe 243; inflectional
rhymes are admissible, as andswerden : cuðen 11, peohtes : londes
137, andswarede : wolde 151, children : olden 187, ihærde : seide
264; partial correspondences of sound suffice, as tiðende : kinge 1,
wenden : kinge 14, leofue : laðe 79, læue : liðe 92, arerde : mare
223 (Bartels, 61), tiðende : londe 271, hende : kinge 287; proper
names have special freedom, as Jupiter : whar 61, appollin : idon
63, Teruagant : lon[d] 64, alemanisce : horse 125, vortigerne : sone
265. The text has suffered much less from a metrical point of view
than the Proverbs of Alfred, the interval of time between the original
and the extant copy being shorter, but the changes are the same in
kind. i. Words altered: for þa king 15 read muri; comp. ‘Swa he uorð
to Cantuare-buri; þer him þuhte swiðe muri,’ L 29519, 20: l. 37, see
note: l. 63, MS. O has possibly preserved the original: l. 85, read
leod-ferde ful stronge: l. 146, for blisse—heom, read dune wes heom
among; comp. ‘Þer wes swiðe muchel dune; þeines þer dremden,’ L
11574, 5: l. 242, for wolde read ȝirnde (Bartels 55); comp. 106/206:
l. 268, for ær read euere: l. 286, for fain read sæl: l. 288, read þe
leuedi he ȝeorne biheold; and comp. ‘He clepede to þere leuedi;
heo wes him on heorten leof,’ L 1190, 1: l. 297, read dringe : ȝunge
(for child). ii. Words omitted: l. 67, read dihteð alswa (Bartels 69): l.
107, read Lauerd king! nu forðrihtes; comp. 94/30, 96/50, 108/263:
l. 131, read Vortigerne þe king; to herberwe wendẹ on hiȝing;
comp. ‘Þa sæide þe king; Nu to scipe an hiȝing,’ L 32040, 1: l. 134,
read hehȝe maðmes inoȝe; comp. ‘þa hæuekes ⁊ þa hundes; ⁊
hehȝe mine maħmes,’ L 22397, 8: l. 148, read runen swiðe deorne;
comp. ‘and Hengest spæc wið Vortigerne; of rune swiðe derne,’ L

14768, 9: l. 209, where two lines have been compressed into one,
read ‘⁊ he seolf wende; wide ȝeond þissen londe | To sechen on
folde; ænne brædne fæld’ ; comp. ‘Ah anan heo wende; toward
þissen londe,’ L 11634, 5; ‘Leir king wende on anne feld; ⁊ reste
hine on folden,’ L 3510, 11: l. 215, read bule hude: l. 224, read
nome þare; comp. ‘Þa andswarede eorles þare; Alle we beoð
ȝarẹwe,’ L 27332, 3. iii. Substitution of forms: read l. 5, cnihtes; l.
110 alle; ll. 149, 178, wule; comp. ‘Ȝif ȝe hit lusten wlle,’ L 919: read
l. 159, stilliche; l. 196, iwille : alle; l. 233, rideren. iv. Words
rearranged mostly in a prose order: read l. 3, icumen weoren to
londe; l. 14, wenden gunne; l. 82, nohtes ne beoþ; l. 83, ich eou
wullẹ; l. 129, ⁊ awæi floȝen swuðe; forð an ælche helue; l. 214,
ænne wisne mon he hæfden; l. 232, hider liðen; l. 250, Bord heo
breden hetten; cnihtes þer to setten (Bartels 35). v. Padding: omit l.
9, and; l. 23, aer; l. 31, we; l. 86, muchele; l. 88, lond; l. 93, heore
scipen; l. 97, heore; l. 113, read mani oht mon: omit l. 121, ofte; l.
128, þa; l. 218, noht; l. 248, mid him; l. 252 þa (wes); l. 285,
þissen; l. 293 read hire for þat mæiden.
Elision takes place under the usual conditions, auerẹ 7, 132,
cnihtenẹ 55, 89, sendẹ 198, bezstẹ 200, hudẹ 217, but hiatus is not
infrequent, þinge 61, swiðe 84, alle 135, fæire 144, fulliche 183,
hafde 212. In trisyllabic words the vowel of the middle syllable
sometimes suffers syncope, as neoðẹles 83, hengẹstes 232, nauẹre
23, læuẹdi 65, naeuẹden 228, similarly answerẹde 21, 29, 55 and
generally bịliue, weorẹn. The added n has small share in the metrical
scheme; of the twenty-six certain instances of its use, three, rihten
20, cumen 24, comen 235, prevent hiatus, to which, however, the
poet seems indifferent; once it makes a rhyme, hallen : men 259;
twice it is in excess cunnen : wunne 188, Rouwenne : wimmonnen
270; once it rhymes with itself, hæfden : craften 214 (as emended
above); four times it completes a rhyme, driȝen : liuen 25, iwiten :
wurðscipen 26, ræden : dæden 110, innen : monnen 112; the
remaining instances are whænnenen 27, wullen 30, 88, 184,
duȝeðen 166, næueden 228, burhȝen 251, weoren 266, bitæhten

284. Doubtful are runen 148, ronen 156, leoden 165, 285, laȝen
278, 285; but they are most probably weak forms, and it may well
be that the use of n spread from such cases to other forms. It is
noteworthy that, out of these twenty-seven instances, the added n
appears sixteen times at the end of line or half-line.
(2) O f O . The author of this recension had little regard for the
metre of his original; ll. 68, 93, 112, 193, 226, 265, 297 are quite
formless. Two lines are compressed into one, mostly unmetrical, at
67, 90, 157, 159, 173. Rhyme is substituted for alliteration at 114,
123, 131, 133, 149, 178, 221, 245; occasionally attempts are made
to improve the rhyme, as at 35, 63, 253. At l. 7 a prose order is
adopted; archaic words and phrases are rejected at 92, 108, 138,
139, 184, 207, 230, 251, 258, 267, 273, 278 c.
Introduction: The priest Layamon, son of Leovenath, served the
church at Ernley (Arley Regis) on the Severn near Radestone, ‘sel
þar him þuhte.’ There it came into his mind that he would tell of the
noble deeds of the English, and journeying wide over the land he
got the noble books, Bede’s History in English, the Latin text of the
same, which he ascribes to S. Austin and S. Albin, and the history
which a French clerk made. Such is the poet’s account of his
authorities, but of the two first he made no use, Wace’s metrical
version of Geoffrey of Monmouth’s Historia Britonum was his main
source. This he greatly amplified out of his legendary store and from
other sources, writing in epic style and a somewhat archaic diction
derived from the older English literature, and investing the whole
with the charm of his imaginative and descriptive powers. But
Imelmann maintains that, apart from some insignificant details,
Wace was his only source, not indeed the text as we have it in Le
Roux de Lincy’s edition, but a later lost redaction enlarged from an
intermediate version which blended the original Wace with the first
part of Gaimar’s Chronicle.
Layamon wrote in the early years of the thirteenth century, and
finished his book before 1205 a.d.
This extract gives ll. 13785-14382 in Madden ii. pp. 152-177: it
corresponds to Wace (W) 6860-7168. The references are to the
older text of L, unless O is prefixed.

1. Vnder ðan, meanwhile; OE. under þām, where the prep.
means among: ‘Entretant,’ W. Comp. ‘Under þis,’ SK 1858; ‘vnder
þat,’ R. of Gloucester 116/11. L has also ‘Vnder þan ilke þinge,’
29849, ‘Wnder þon,’ 6433. tiðende is OWScand. tíðindi: tydinge in
O is OE. tīdung: see Björkman, 167. vortiger is from W: the OE.
form is Wyrtgeorn.
5. Alse hit weoren, to all appearance: usually with swulc in L,
‘heo leopen ut of þan wuden; swulc hit deor weoren,’ 12828, 3070,
11571. For hit comp. 1/10. Kempes, champions, in O is a
characteristic toning down of Kinges in C, but comp. L 25301.
6. wiðuten, not counting. scipen monnen is probably a scribal
mistake for scipmonnen. þer wiðinnen, in the ships.
7. þis: sing. like þet 1/10 note: so too at 110/278, and with Hit,
110/271. færeste: ‘Od biax viaires et biax cors,’ W 6863.
8. ꝥ—mare: a typical comment, comp. ‘hire cheap wes þe wrse,’ L
385; ‘his hap wes þe betere,’ id. 4894, 816, 3857, c.
9. hu—idon: Madden translates, ‘how they were disposed (their
business)’: Mätzner, Sprachproben, says it corresponds exactly to
OHG. wio getân, how conditioned, circumstanced; but his dictionary
does not notice this use, which appears to be without support, for
‘þine ræddes ne beod noht idon,’ L 24956, where Madden translates,
vaguely, ‘good,’ seems to mean, your counsels are not completed,
i.e. ripe, perfect. On the other hand, wel idon occurs in L at least
twenty-three times; with it Madden compares MHG. wol getan,
translating good, excellent, brave; but it means more specifically,
well equipped, (1) mentally, comp. 104/180; ‘þa wifmen wel idone;
and þa betere biwitene,’ L 24677: (2) physically, 96/63; ‘ah he ne
blakede no; for he wes cniht wel idon,’ L 7524; well fitted out,
‘scipen he hæfde sone; monie ⁊ wel idone,’ L 28234; well provided
with money, ‘þe riche burh wel idone,’ L 5923; ‘Ðu ert wel don man,’
OEH ii. 29/15, the latter answering to the colloquial ‘well-to-do.’
Similar expressions are seen in ‘cnihtes wel bihedde,’ L 18010;
‘Jurdan is his bur-cniht; he is swiðe wel idiht,’ id. 18960; ‘twa
hundred scipene; þer weoren wel biwitene,’ id. 20505; ‘wel

bifunden,’ Orm 73/2176. The meaning here is accordingly, how they
were provided for; a polite way of asking what they wanted.
11. cuðen, knew how, were able.
13. heren, obey: comp. 94/19; ‘nulle we him nauere hæren; ne
hælde for ure hærre,’ L 7671, 4887, 8483.
15. Cantuarie: see 1/14.
16. Hæhliche spilede: Madden translates ‘nobly diverted
themselves,’ with the usual meaning of OE. spilian, to play; and his
interpretation is supported by, ‘mid haueken ⁊ mid hunden; hired-
plæie luuien,’ L 14480. Luhmann, p. 91, regards this place as the
only instance of that meaning in Layamon; he points out that
everywhere else (as at 110/266) spilien has, from expressions like
‘spilede mid worden,’ L 17269, ‘plaȝede mid worden,’ L 17335,
developed the meaning, to discourse, proper to OE. spellian. It
seems unnecessary to make an exception here; the explanation,
held high counsel, gives a good sense, and one more suitable for
‘hæhliche’ than the other.
17. folc kinge: comp. 96/47: variants are, ‘biforen þen folke
kinge,’ L 9107; ‘þeos folkes king,’ id. 4872; ‘leod king,’ id. 6797;
‘leode king,’ id. 3691; ‘leodene king,’ id. 5394; ‘leodisc king,’ id. 2144.
As here, O avoids the archaic expression in each case except the
last, where it has, ‘on leodene king.’ Comp. OE. folc-cyning, lēod-
cyning.
18. Sone swa: see 130/51.
20. mid rihten at halden, retain them and treat them fairly.
21. of—war: this phrase, which is repeated after the epic manner
with the king’s name, as 96/51, 98/78 c. appears for the first time
at 13254, ‘of ufele he wes wel iwar,’ where the context requires the
meaning, he was well versed, practised in evil-doing. (OE. wær,
having knowledge of.) His character is bad, ‘Fax fu et faussement
parla,’ W 6796; ‘þat iharde Uortigerne; þe swike wes ful derne,’ L
13603. Less ambiguous is, ‘Æfter Cap Oein; for elchen vuele he wes
fein,’ L 6993. Þat . . . he in O = who.

23. Comp. ‘Ne seah ic el-þeodige | þus manige men mōdiglīcran,’
Beowulf, 336, 247-50. bi nihtes: comp. ‘feorh færde bi nihttes,’ L
4415.
24. for—bliðe: comp. 108/263; ‘Þe king wes gled for his kime,’ L
3962: with of, 128/9, 206/321; ‘forr mani mann | Wass off hiss come
bliþe,’ Orm, 24/795, as in OE., ‘ealle wæron swiðe bliðe his
ongeancymes,’ Ælf. Lives, ii. 208/292.
26. þurh—wurðscipen, by your true worthiness, as truly as you
are honourable. For the position of eouwer comp. 102/154, 104/171.
With for in O comp. 78/66, 119/78.
28. whar: OE. hwæðer. alde c., at all seasons, under all
circumstances: comp. 25/226.
32. hors: so W; in Hist. Britonum, Horsus: comp. such double
forms as Sceaf, Sceafa; Geat, Geata.
34. ænde, quarter: comp. 100/109, 127/344, ‘heofon biþ open on
sumum ende,’ BH 93/1; ‘þe alre leste ende,’ SK 587 (= de remotis
partibus); Minot, ix. 3. angles, Ænglis O: the OE. names are Angel,
Engel, Ongel; the final s here is probably due to Englisc. ‘De Saisone,
dist-il, venon,’ W 6889; but they were Jutes.
35. tiðende, lit. happenings, here, customs, ways: comp.
110/271; ‘In France weore læwen; sulkuðe a þan dawen. | ⁊
selcuðe tidende,’ L 5137, where læwen and tidende are synonymous.
gonde in O is regarded by Madden as a mistake for goude, a
spelling found in C, but not, I think, in O: he translates ‘many good
things’; Mätz. ‘wondrously good things’; but that gives a very
unsuitable sense and spoils a rhyme. In Specimens it is taken for
goinde: O has goinde, 1582, but mostly goinge, which is hard to
parallel at this date in the sense of taking place, progressing.
Brotanek, in Zupitza-Schipper, 339 suggests that gonde is OE.
geondan, yonder; but L otherwise has only ȝeond, ȝond, prep. as at
106/209. Possibly it is a mistake for wonde, accustomed, instead of
the usual iwoned 101/121; ‘To hire weren iwoned; wonder craftie
men,’ O 1153: C has iwunde, wounded, 10420, and the prefix is
occasionally dropped, as somned, 104/167.

36. vmbe is ambiguous: bi eche c., O, means every fifteenth
year: ‘Li prince qui les teres ont | Tos les jenes asamblé font | Qui de
quinze ans sunt et de plus,’ W 6909. hi[s] for is: him MS. cannot be
reflexive here: comp. ‘Þa ferde wes isumned,’ L 1482, and so always
in L. But Kock, Anglia, xxv. 318 takes isomned as isomneð,
assembles, with him as reinforcing dative, like 13/34.
37. iledene is regarded by Mätzner as for ledene, with otiose i
prefixed, as in ‘iliue’ 94/22; it would in that case be pl. g. of leod as
in ‘leodene king,’ L 5394. But ‘folk of the people,’ ‘nation-folk,’
Madden, is a strange expression (though leod-folc is common
enough), and it would be a meaningless repetition; besides e for OE.
ēo is rare in L. Kellner, Archiv cxiv. 164, proposes ileuede
representing OE. gelyfed, advanced in age, and one MS. of W has
‘Tout li viellart et li plus fort’ as a variant of ‘Tot li millor et li plus fort
| Sont mis fors del païs, par sort,’ 6193. But ileuede is not used
elsewhere in L, and would connote decrepitude. Geoffrey of
Monmouth has ‘totius regni iuvenes coram se venire praecipiunt
(principes): deinde sorte proiecta potiores atque fortiores eligunt,’
82/20; something corresponding to ‘iuvenes’ is required here, such
as iwepned; comp. L 9942-6.
38. of: see 80/47.
45. feole is impossible: Mätzner suggests the substitution of lot,
as in O, for beoþ, but that would require feol instead of feole. More
probably the scribe has been influenced by beoð into miswriting
feole for fallen: beoð is singular.
46. for liue c. apparently means, for any consideration, at any
price, like ‘for love or hire.’
47. for þan, because of the, for fear of the.
49. vnder lufte, under heaven: comp. ‘nes þa na man vnder
lufte; þe cuðe betere cræftes,’ L 10104: lufte is Madden’s correction.
50. þurh alle þing, in every respect, qualifying Soð: comp. ‘he
wes god þurh alle þing,’ L 6894: somewhat different is ‘⁊ þar an
hiȝinge; þurh ut alle þinges,’ L 2358.
51 O. wis . . . war: comp. 18/16.

52. sugge: for the subj. comp. ‘geliefeð ðæt he swelc sie swelce
he gehierð,’ Cura Past. 110/11. soðriht, adv. truly; comp. ‘a þilke
time soh riht,’ L 9668, MS. O.
53. þat . . . on, and 54. þe . . . to: see 1/3.
55. cnihtene c.: a recurring phrase, as 98/89, 102/152; ‘cnihten
alre hendest,’ 104/195.
57. mode, feeling: comp. ‘on his heorte he hauede grome; on his
mode muchele scome,’ L 4847, and with O, ‘þe leof hire weis on
mode,’ L 4489. See KH 281 note.
58. hope to: see 178/89 note. heoreð . . . mid mihte,
strenuously exalt; from herian, to glorify: it might be from hīeran,
to obey, but the former meaning is more suitable here; comp.
102/139.
59-68. There is little doubt that Layamon found this strange
jumble of the gods of the Romans, Teutons, and French Romance in
his original, but appollin and teruagant are missing in the printed
Wace. Identification of the Roman gods with those of the Teutons
and Celts proceeded rapidly among the barbarians from the first
century onward, so that the Spanish bishop, Martin of Bracara,
denouncing in the sixth century the pagan practices of his flock, uses
the Roman names of the gods (De Correctione Rusticorum, ed.
Caspari, pp. xci, 7-11), in which he is followed by Ælfric in the
homily De Diis Falsis (Kemble, Solomon and Saturn, 120; Wulfstan,
ed. Napier, 104). L appears not to have known that under this
system Mercurius is Woden; Jupiter, Thunor; Mars, Tiw; Venus, Frea;
and Phoebus, perhaps the Sun, yet Wace says ‘Mercurion | Qui en
nostre langage a non | Woden.’ In L 16790-4, there is a similar list of
the Saxon gods with addition of Didon and Mamilon.
60. weoli, rich, powerful.
62. hæhste: comp. ‘Nu hateð Aganippus; þe is þe heȝest ouer
us,’ L 3648: ‘Deorum maxime Mercurium colunt,’ Tacitus, Germania,
9: see Müllenhoff, Deutsche Alterthumskunde, iv. 212.
63. appollin is the god of Cassivellaunus, L 8081: one of the
three idols of the Saracens in French romance, Mahomet and
Tervagant being the others; ‘Mahummet sert e Apollin recleimet,’

Chanson de Roland, 8; ‘La lei i fut Mahum e Tervagan,’ id. 611. In L,
Tervagant is the god of the Romans, 5353. wel idon: see 94/9 note.
of gret win O, in whom we greatly delight: OE. wynn.
66. hired men, members of a household, courtiers. But Frea had
nothing to do with these; she was the patroness and helper of
lovers. Possibly L has misunderstood cortoier or cortois in his
original.
67. dihteð, guides, directs.
69. Comp. ‘and habben þa ilke læȝen; þe stoden bi heore ældre
dæwen,’ L 5960. hehde is for hefde: comp. ‘what he i Rome hæhde
biwunnen,’ L 10547; ‘enne sune he hehde,’ id. 6958, 30185: for
other instances in L of h substituted for f, see Luhmann, 45: the
expression, to hold the highest law, may well mean, to have the
highest authority, for Layamon’s use of laȝe is very wide and varied.
But Brotanek treats hehde as past of heȝen, OE. hēgan, to put in
force, to establish: this in L is hæhȝede, heȝede: Logeman suggests
hehte (OE. hatan), promised.
71. heom is written for him, and they did worship to him: the
subject heo is not expressed, because it is contained in heore
preceding: see 6/18.
72-76. The Romans adopted the week of seven days, with their
allotment to the heavenly bodies, from the Chaldaeans. They were
already well acquainted with it in the first century a.d., and it was in
regular use in the third. Owing to their many points of contact with
the barbarians, it spread rapidly everywhere among the northern
nations, each of which adapted it by substitution of their own
equivalent deities in the names of the days, Saturn alone proving
intractable (see Grimm, Teutonic Mythology, 1. 122 ff.; Müllenhoff,
iv. 644 ff.). The North German invaders were already in possession
of the system when they settled in England: comp. Byrhtferth’s
Handboc, Anglia, viii. 321/4-17.
72. to wurðscipe, in his honour. wendesdei O, for Wednesdei,
is representative of *Wēdnes-, Wǣdnes-dæg, out of Wōdines.
(Holthausen, Anglia, Beiblatt, iii. 39.)

73. þunres dæi, day of Thunor: þorisdai O is Scandinavian:
ODanish þūr (Björkman, 181): OE. þūres dæg. Comp. 85/99.
74. fridæi: OE. frige-dæg, the day of Freya, identified with
Venus.
75. sætterdæi corresponds to OFrisian saterdei, OE. Sæterdei:
sateresdei O to OE. sæteresdæg. The fullest form is Sæternes
dæg = Sāturni dies (? Sǣ; see Anglia, Beiblatt, xx. 194). þene
should be þere. sonedæi: OE. sunnan-dæg; perhaps OWScand.
sunnudagr has influenced the ME. form.
76. monedæi: OFrisian mōnedei. tisdæi: OWScand. týsdagr: OE.
tīwes-dæg. Tidea is said in the glossary to Specimens to be a
Latinized form of Tiw in the dat. case, without support from any
parallel and without explanation of d: probably it is a mistake for
Tiwe, and as O has Tydea, the mistake would be derived from an
earlier MS. common to both.
81. wurse, the evil one, the devil; comp. 110/291; ‘þat he wið
þene wurse spæc,’ L 2841 where O has ‘feonde.’
82. nohtes, of a worthless kind: a descriptive genitive used
predicatively: comp. ‘eower godas ne synd nahtes,’ Ælf. Lives, i.
182/205; ‘ne beoð ha riht nohtes,’ SJ 22/10: it is in principle the
same as ‘ðæt fleax ðæt bið hwites hiewes,’ Cura Past. 86/19.
83. ‘Mult volanters vous retanrai,’ W 6957.
84. ohte, doughty: OE. āht, shortened from āwiht: so the root
sense is ‘anything, good for anything, worth something.’ Comp. ‘ahte
cniht wes Auelin,’ L 8141.
86. scome . . . grome: see 96/57 note, and for the
corresponding verbs comp. ‘þerfore him ofte scomede; ⁊ his heorte
gromede,’ L 13763.
94. dringches, warriors: OWScand. drengr, young man: the
change of e to i is normal; see Björkman, 292.
95. hændest is taken by the editors generally as, nearest (to
him), but everywhere else in L it means, courteous, or the like:
comp. 98/77: perhaps him should be omitted.
97. him to, to Vortigern, but senden is corrupt; reading, seoððen
siȝen him to, the meaning would be, next the Saxon knights followed

after them; comp. ‘þe eorles heom siȝen to; mid fele heore cnihtes,’
L 9996.
98. aldene cannot be right, its final e does not belong to the dat.
sing.: comp. ‘in alden hire denne,’ L 22027. Read aldrene, of the kin
of his ancestors: comp. 98/69, 104/193; ‘of his eoldrene istreon,’ L
18609.
99. hændeliche is translated by Mätzner, courteously; rather,
making a brave show.
100. iscrudde . . . iuædde: comp. ‘he us haueð wel iued; he us
haueð wel iscrud,’ L 13573; 104/190.
101. hængest is the last word on the page, and the scribe has in
consequence omitted -es: for swaine read swaines.
102. hehne, ‘hæhne,’ L 11378, represents OE. hēanne, acc. of
hēan, mean, humble, and ‘hæne,’ 106/204, its nom. hēane: but
‘hæhne,’ 106/205, represents the acc. of hēah, high (seldom
hēahne, mostly heanne).
104. Comp. ‘Nes hit noh[t] longe; buten ane stunde,’ L 14423.
ne: see 25/241 note. longe is adverbial in form.
108. Comp. ‘ꝥ lond heo þurh arnden; ⁊ herȝeden ⁊ barnden,’ L
12129, 9934.
109. ænde: see 96/34. iuald, they fell; comp. ‘sixti þusende; he
leide to þen gronde,’ L 4751.
111 is formal: see 102/142, L 1035, 3147 c.
117. duden—iwune, behaved as usual: comp. ‘hu Osric Edwines
sune; dude ut-laȝen wune,’ L 31270.
120. Comp. ‘þat fæht wes swuðe strong; ⁊ swuðe stær ⁊ swuðe
longe,’ L 4170.
121. ‘Por ce que vaincre les soloient | Lor costume tenir voloient; |
Mais lor usage i ont perdu,’ W 6991.
122. an oðer, nom. adj. agreeing with hit: the construction is
frequent in L; comp. ‘ah al an oðer hit iwærd; oðer he iwende,’ L
17336: oðer, adj. is also found in the same construction; comp.
203/202; ‘ah al hit iwrað (= iwarð) oðer; þene heo iwenden,’ L

19506, but it is mostly adverbial, as, ‘ah al heo þohten oðer,’ L 5429;
‘al oþer hit schal go,’ OEM 41/140.
123. If hele represents OE. hælo, safety, heom means, to the
Britons, but the transition is abrupt, and Logeman suggests that
hele may mean, thing hidden, secret; its known meanings being,
concealment, hiding-place; it might be better to substitute iheled for
al hele.
127. feondliche, furiously; comp. ‘Dunwal i þan fæhte; wes
feondliche kene,’ L 4168, where O substitutes ‘swiþe.’ feollen þa
fæie: an oft-repeated formula in L.
130. vnnifoȝe: OE. ungefōg, immense; here, countless. Comp.
‘muchel ⁊ unifoh,’ L 8674, ‘monie ⁊ vniuoȝe,’ id. 13187; ‘For noldest
þu nefre [hab]ben inouh, buten þu hefdest unifouh,’ Worcester Frag.
D 39.
132. on uast, close to, fast by him; OE. on + fæst: comp. ‘He
makede an temple onfest þe baðe,’ L 2852: but Luhmann, p. 95,
deduces it from on œfeste, influenced by the prep. fæst bi.
133. The subject of ȝef is he, contained in kinge: see 6/18. ‘Et
Lindesée et bons manoirs,’ W.
134. ‘unc sceal worn fela | māþma gemǣnra,’ Beowulf, 1783, 4.
136. a þan ilke, on the same footing, thus: comp. ‘⁊ þus ane
stonde; hit stod æ ðon ilka,’ L 3117, 3716, 14890 c. ‘Ensi ont
longement esté | Et lor amor a mult dure,’ W 7001.
137. For londes read londe, or for þan, þas.
139 O. hendeliche, cleverly.
141. hæȝe dæie, festival; mostly associated with religious
observance; comp. ‘Hit wes an anne hæhȝe dæie; halȝeden leoden,’
L 10708. ‘Un jor trova le roi haitié | Si l’a à consel afaitié,’ W 7009.
duȝeðe monnen, the men of his nobility, the retainers of his court;
the first element answers to OE. duguðe, s. g. of duguð.
148. ræcchen . . . runen, expound, disclose secret counsels;
comp. ‘summe heo muche runen; ræhten heom bitweonen,’ L
25123; ‘þe sunne reccheð hire rune euch buten reste,’ SM 9/30. (‘Sol

in aspectu annuncians in exitu, vas admirabile opus excelsi,’ Ecclus.
xliii. 2.)
150. halden to wraððe apparently means, consider it a ground
for anger: perhaps wenden should be read for halden.
153. þine monscipe ihæȝed, advanced thy dignity; comp. ‘⁊
mine monscipe hæien,’ 5451; ‘þurh þe haueð Morgan mi mæi; is
monscipe afallet,’ id. 3838.
154. þine: see 92/26.
157. ‘Ai jo assés aparçéu | . . . | Que tu n’en as baron qui t’aint; |
Cascuns te het, cascuns te plaint,’ W 7017.
158. bare, actual, absolute; comp. ‘his leode hine hateden | in to
þan bare dæðe,’ L 7034; ‘bi þine bare life,’ id. 25800. þare O is a
scribal error.
159. stilleliche, secretly; so too stille 104/170; comp. ‘mid
stilliche runen,’ L 355; ‘mid heore stil rune,’ id. 3249: with spilieð
comp. 110/266; ‘Þus speken þeos swiken; and spileden mid worde,’
L 3816.
161. ambrosie: Aurelius Ambrosius: O has the former name.
163. laȝen, ways, practices, a sense developed out of that of
custom, but Mätzner translates, in a treasonable manner. His death
was compassed by Vortigern, as O says.
169. androeinnes: L has elsewhere only Androgeus, and
Androgeum as in W, with once Androchies gen. 8194. The present
form corresponds to Androgen, Andragen, Andragenus of the prose
Brut, ed. Brie, p. 33.
173. kineliche, royal, and therefore in the king’s gift.
175. Comp. ‘Þin hired þe hateð for me | ⁊ ich æm iuæid for þe,’ L
14458. iuaid is pp. of ȝefeogen, OE. *gefēogan: see NED v. 525,
s.v. ivee. iveiþed is pp. of a derivative verb from OE. fæhð, feud: it
occurs four times in O. uor þe, because of your unpopularity. ic
wene c., I expect to be killed.
176. fare c.: see 34/86.
177. biclused: comp. ‘⁊ hæuede Valentin wel uaste | biclused in
ane castle,’ L 12191: elsewhere O substitutes ‘bituned.’ ‘Si ai por toi

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