Performance differentiation: cutting losses and maximizing profits of private equity and venture capital investments |
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Authors: | Rainer Lauterbach Isabell M Welpe Jan Fertig |
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Institution: | 1.Faculty of Economics and Business Administration,Johann Wolfgang Goethe-University,Frankfurt am Main,Germany;2.Institute for Information, Organization and Management,Ludwig-Maximilians-University,München,Germany |
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Abstract: | Recent research has pointed out the need to differentiate between good versus poor performance of venture capital and private
equity investments and to analyze the factors that determine the ‘winners’ and ‘losers’ of a fund. This study examines the
different contractual and behavioral characteristics and their influence on the positive and negative performances of private
equity investments. Specifically, we analyze how fund managers apply tools and investment behavior to mitigate risks and maximize
returns. The empirical investigation of these questions is based on a merged dataset, which combines the Venture Economics
and CEPRES databases. It includes a total of 1,011 investments made by 137 different funds that belong to 54 private equity
and venture capital firms worldwide over the period from 1979 to 2003. Our results confirm that the reduction of losses and
the maximization of investment profits have different antecedents. Although losses are minimized by the use of convertibles
and by increasing the venture capital firms’ accumulated experience, profits are increased by the potential of the fund’s
management to allocate resources to portfolio companies. Our findings contribute to the understanding of the determinants
of venture capital and private equity returns by differentiating between the mitigation of risks and the maximization of profits.
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Keywords: | Private equity Venture capital Staging Risk Return Performance Profit Losses |
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