Venture capital secondary funds—the third exit option

This article highlights some of the challenges associated with investing in private equity and, specifically, venture capital, as well as the opportunities presented by the availability of secondary market solutions. Today, the secondary market allows venture capital investors to align liquidity solutions with investment objectives similar to those used in other established markets like real estate and lending. Over the last ten years, it has become clear that exit opportunities for venture‐backed portfolio companies correlate strongly with the state of the economy and its ability to support merger‐and‐acquisition (M&A) and initial public offering (IPO) market activity. Due to their experience and specialization, secondary funds know how to assess quickly potential investments and offer tailored investment solutions. Moreover, these funds offer an attractive exit option that is compelling not only in down economic cycles but also during periods of economic expansion. © 2009 Wiley Periodicals, Inc.     

Factors that determine the reputation of private equity managers in developing markets

This paper analyzes the relationship between investors and private equity managers in order to identify the factors that affect the latter's reputation. Since there are no individual references about their past returns in developing private equity markets, the reputation of such players is thought to be linked to their capacity for obtaining new funds. Results provide evidence of the volume of investments recorded in the past, the ratio of portfolio companies to investment manager, the percentage of divestments carried out through initial public offerings and trade sales, the membership of the national private equity association and the size of funds under management as characteristics of the highest importance in raising funds.     

Private equity secondaries: Opening the liquidity tap

Private equity is an illiquid asset class. The extended holding period for private equity—averaging four to five years—attracts investors, as fund managers are able to avoid the volatility that negatively affects the public equities. However, the secondary market has emerged as a tool that enables limited partners in private equity funds to manage a private equity portfolio flexibly despite its intrinsic illiquidity. This article discusses in great detail the scope of secondary transactions, discussing how the subsegment has evolved over time from the straightforward purchase of limited partnership interest to the more elaborate transactions involving structural creativity and complex problem solving for sellers. It is concluded that the growth in secondaries brings liquidity to the asset class and thus makes private equity a more compelling investment proposition. As such, the secondary market will continue to be a key driver for growth of the private equity industry. © 2009 Wiley Periodicals, Inc.     

私人股权基金投资业绩研究

私人股权投资已经成为近几年资本市场上最具争议的投资明星,然而在本轮东亚地区尤其是中国的私人股权投资的热潮中,并非所有的私人股权基金都取得了满意的业绩。利用来自Private Equity Intelligence的基金业绩数据,对目前投资于中国及周边地区的私人股权基金的表现进行实证分析,研究影响私人股权基金业绩的主要因素,并对其中的因素之——投资期和退出期的划分情况进行确定。     

Government policy towards entrepreneurial finance: Innovation investment funds

This paper analyses 280 Australian venture capital and private equity funds and their investments in 845 entrepreneurial firms over the period 1982–2005. I focus the analysis on the Innovation Investment Fund (IIF) governmental program, first introduced in 1997. In order to highlight the unique aspects of the IIF, I compare the properties of the Australian IIF program with government venture capital programs in Canada, the UK and the US. The IIF program is unique with a focus on partnering between government–private sector partnerships, as described herein. I analyse the performance of the IIF funds along several dimensions: the propensity to take on risk by investing in early stage and high-tech investments; the propensity to monitor and add value to investees through staging, syndication, and portfolio size per fund manager; and the exit success. For each of these evaluation criteria, I assess the performance of the IIF funds relative to other types of private equity and venture capital funds in Australia. The data analysed show – in both a statistically and economically significant way – that the IIF program has facilitated investment in start-up, early stage and high tech firms as well as the provision of monitoring and value-added advice to investees. Overall, therefore, the data are strongly consistent with the view that the IIF program is fostering the development of the Australian venture capital industry. However, the vast majority of investments have not yet been exited, and the exit performance of IIFs to date has not been statistically different than that of other private funds. Further evaluation of IIF performance and outcomes is warranted when subsequent years of data become available.     

Introduction: Navigating the global private equity frontier: Tumultuous and opportunistic times

At the Fifth Annual Global Private Equity Investing Conference on Thunderbird's campus in Glendale, Arizona, held in late March 2009, it was made clear the economic crisis not only has shown the world that economic globalization has come, but it also brings with it many new and surprising opportunities. For private equity in particular, globalization is imperative. This issue of the Thunderbird International Business Review offers an in‐depth look into several key topics for private equity in these tumultuous times, including how to structure a successful private equity portfolio, tools for reaching liquidity, and opportunities in the secondary and distressed debt markets. Katharina Lichtner of Capital Dynamics, Hans Swildens of Industry Ventures, Roger Wittlin of Silver Lake, and Sebastien Burdel of Coller Capital explore these timely topics in the following pages. © 2009 Wiley Periodicals, Inc.     

The informal venture capital market: Aspects of scale and market efficiency

Risk capital is a resource essential to the formation and growth of entrepreneurial ventures. In a society that is increasingly dependent upon innovation and entrepreneurship for its economic vitality, the performance of the venture capital markets is a matter of fundamental concern to entrepreneurs, venture investors and to public officials. This article deals with the informal venture capital market, the market in which entrepreneurs raise equity-type financing from private investors, (business angels). The informal venture capital market is virtually invisible and often misunderstood. It is composed of a diverse and diffuse population of individuals of means; many of whom have created their own successful ventures. There are no directories of individual venture investors and no public records of their investment transactions. Consequently, the informal venture capital market poses many unanswered questions.The author discusses two aspects of the informal venture capital market: questions of scale and market efficiency. The discussion draws upon existing research to extract and synthesize data that provide a reasonable basis for inferences about scale and efficiency.Private venture investors tend to be self-made individuals with substantial business and financial experience and with a net worth of $1 million or more. The author estimates that the number of private venture investors in the United States is at least 250,000, of whom about 100,000 are active in any given year. By providing seed capital for ventures that subsequently raise funds from professional venture investors or in the public equity markets and equity financing for privately-held firms that are growing faster than internal cash flow can support, private investors fill gaps in the institutional equity markets.The author estimates that private investors manage a portfolio of venture investments aggregating in the neighborhood of $50 billion, about twice the capital managed by professional venture investors. By participating in smaller transactions, private investors finance over five times as many entrepreneurs as professional venture investors; 20,000 or more firms per year compared to two or three thousand. The typical angel-backed venture raises about $250,000 from three or more private investors.Despite the apparent scale of the informal venture capital market, the author cites evidence that the market is relatively inefficient. It is a market characterized by limited information about investors and investment opportunities. Furthermore, many entrepreneurs and private investors are unfamiliar with the techniques of successful venture financing. The author's scale and efficiency inferences, coupled with evidence documenting gaps between private and social returns from innovation, prompt questions about public as well as private initiatives to enhance the efficiency of the informal venture capital market.The article concludes with a discussion of Venture Capital Network, Inc. (VCN), an experimental effort to enhance the efficiency of the informal venture capital market. VCN's procedures and performance are described, followed by a discussion of the lessons learned during the first two years of the experiment.     

Risk management in Indian venture capital and private equity firms: A comparative study

Venture capitalists and private equity funds are often considered experts at investing in high‐risk projects and firms. To be successful investors, venture capitalists and private equity funds must therefore manage the many aspects of risk associated with investing in unlisted small and medium‐sized enterprises. This study examines how Indian venture capital and private equity firms manage several dimensions of risk. We analyze risk management preferences in Indian venture capital and private equity firms. A comparison between Indian and U.K. funds is presented. The results are discussed in detail. © 2005 Wiley Periodicals, Inc.     

Portfolios as developmental assessment tools

Portfolios can be valuable tools for development and are in this respect informative evaluation devices for gaining under‐standing about individual accomplishments. The portfolio's strongest benefit is probably the insight it provides into performance as well as the way it helps track progress in learning. This study investigates how the portfolio's attribute to proliferate can show acquired competence in a concrete, visible and tangible way. Differences between three types of portfolio were studied. These are the reflective portfolio, the dossier, and the course learning portfolio. It was hypothesised that a developmental use of portfolio would support the portfolio collector best through the functional feedback it provides. The results of the study indicate that the reflective portfolio is an especially effective assessment tool for bringing about performance and learning‐related change. The reflective portfolio is particularly suitable for focusing directly on self‐determined levels of performance as well as showing recommendations from feedback provided by the portfolio instrument.     

Institutional Ownership and Future Stock Returns: An International Perspective

We investigate the risk‐adjusted performance of the aggregate equity holdings and trades of 13,807 active mutual funds located in 16 countries between 2001 and 2014. Using portfolio sorts, we find weak evidence that institutional holdings exhibit positive subsequent risk‐adjusted returns. However, any outperformance is unlikely to stem from short‐term informational advantage: stocks bought do not outperform stocks sold in the subsequent quarter. This finding is robust to regressions of subsequent stock returns on changes in institutional ownership and holds for different measurements of institutional trading.     

MUTUAL FUND PORTFOLIO CHOICE IN THE PRESENCE OF DYNAMIC FLOWS

We analyze the implications of dynamic flows on a mutual fund's portfolio decisions. In our model, myopic investors dynamically allocate capital between a riskless asset and an actively managed fund which charges fraction‐of‐fund fees. The presence of dynamic flows induces “flow hedging” portfolio distortions on the part of the fund, even though investors are myopic. Our model predicts a positive relationship between a fund's proportional fee rate and its volatility. This is a consequence of higher‐fee funds holding more extreme equity positions. Although both the fund portfolio and investors' trading strategies depend on the proportional fee rate, the equilibrium value functions do not. Finally, we show that our results hold even if investors are allowed to directly trade some of the risky securities.     

The Value Added by Trading Based on Valuation Criteria

We investigate the value added by active mutual fund management by examining a comprehensive database of monthly trades of equity mutual funds because understanding how managers add value for their clients is important in the current context of a growing fraction of individual investors delegating their portfolio management to professional managers. We find that the value added by trading based on valuation criteria outperform trading decisions motivated by other reasons such as liquidity and taxes. This finding is obtained using both the measures previously proposed by financial literature as well as some refinements proposed here to evaluate the role of mutual funds' cash level as well as the interdependence between buying and selling decisions. In addition, mutual funds that trade based on valuation criteria more frequently outperform funds that follow this type of trading occasionally. The results are consistent with the notion that active mutual funds on average fail to outperform passive benchmarks and only a subset of funds have skilled managers.     

Does it Really Hurt to be Responsible?

Prior literature on socially responsible investment has contended that excluding “sin stocks” from a portfolio (negative screening) will reduce performance and increase risk. Further, incorporating stocks of firms with positive social responsibility scores (positive screening) will improve performance and reduce risk. We simulate portfolios designed to mimic typical equity mutual funds’ holdings and investigate these propositions. We remove the potentially confounding influences of differences in manager skill, transaction costs and fees, and conduct a clean experiment on the effect of positive and negative portfolio screening. We find no difference in the return or risk of screened and unscreened portfolios. We conclude that a typical socially responsible fund will neither gain nor lose from screening its portfolio.     

THE INCENTIVES OF HEDGE FUND FEES AND HIGH‐WATER MARKS

Hedge fund managers receive a large fraction of their funds' profits, paid when funds exceed their high‐water marks. We study the incentives of such performance fees. A manager with long‐horizon, constant investment opportunities and relative risk aversion, chooses a constant Merton portfolio. However, the effective risk aversion shrinks toward one in proportion to performance fees. Risk shifting implications are ambiguous and depend on the manager's own risk aversion. Managers with equal investment opportunities but different performance fees and risk aversions may coexist in a competitive equilibrium. The resulting leverage increases with performance fees—a prediction that we confirm empirically.     

Socially Responsible Institutional Investment in Private Equity

This article studies institutional investor allocations to the socially responsible asset class. We propose two elements influence socially responsible institutional investment in private equity: internal organizational structure, and internationalization. We study socially responsible investments from Dutch institutional investments into private equity funds, and compare socially responsible investment across different asset classes and different types of institutional investors (banks, insurance companies, and pension funds). The data indicate socially responsible investment in private equity is 40–50% more common when the decision to implement such an investment plan is centralised with a single chief investment officer. Socially responsible investment in private equity is also more common among institutional investors with a greater international investment focus, and less common among fund-of-fund private equity investments.     

How to Design Public Venture Capital Funds: Empirical Evidence from South Korea

This study examines the effects of several features of government‐managed, sponsored venture capital (VC), and private VC funds on overall VC investments in new technology‐based firms (NTBFs) during two developmental stages (i.e., growth and restructuring) in South Korean VC market and suggests hints for designing effective government VC programs. Our results from data on 463 funds in the period 1995–2005 indicate the factors bearing a positive effect on VC investments targeted to NTBFs. Such factors are the fund specialization focusing on certain industrial sectors, performance‐sensitive compensation for venture capitalists in private and government VC funds.     

浅谈有限合伙型私募股权投资基金税务筹划

本文首先从我国现阶段私募基金占资管业务总规模的比重说明私募基金在我国资本市场的重要性,由此介绍有限合伙型私募股权基金定义和运作环节,通过详细阐述私募股权基金各环节的涉税业务及税收优惠政策,深入分析私募股权基金的税务筹划现状,并提出优化有限合伙型私募股权基金税务筹划策略,以期促进私募股权基金的长远发展。     

Are environmental social governance equity indices a better choice for investors? An Asian perspective

This article examines the risk and return profiles of stock indices composed of companies meeting environmental, social and governance (ESG) screening criteria [such as the Dow Jones Sustainability Indices (DJSI)] and conventional composite indices of eight Asian countries from 2002 to 2014. The results indicate that there are no significant differences in the returns or risk‐adjusted returns between the ESG indices and the composite indices within countries. The results do reveal that the market volatility of the ESG indices is higher than the market volatility of the conventional indices. Market betas of DJSI and ESG equity indices are significantly lower than betas of the composite equity indices. The overall results indicate that the performance of ESG equity indices of many Asian countries is similar to the performance of conventional indices, suggesting that investors can pursue socially responsible investing objectives without a material difference in portfolio performance from conventional investing.     

Financial Reporting Quality in Private Equity Backed Companies: The Impact of Ownership Concentration

We empirically show on a sample of 270 unquoted, private equity backed companies that the shareholder structure of private companies impacts the quality of their publicly available accounting information. More precisely, companies in which private equity (PE) investors have a high equity stake produce lower quality accounting information than companies in which PE investors have a low equity stake, after controlling for factors like company size and age. We explain our findings by arguing that PE investors with low equity stakes have a higher need for high quality accounting information whereas PE investors with high equity stakes have other means to closely monitor their portfolio companies. This paper has benefited form discussions with workshop participants at the Max Planck Institute. We specifically want to thank Lorraine Uhlaner and Mike Wright (guest editors), two anonymous referees as well as ignace De Beelde, Wouter De Maeseneire, Marc Deloof, Miguel Meuleman and Lloyd Steier for helpful suggestions. Part of this research was completed when Christof Beuselinck was an FWO Scholar at Ghent University. Financial support from the Fonds of Wetenschappelijk Onderzoek (Grant G.0012.02) is kindly appreciated. The usual disclaimer applies.     

INVESTING WITH LIQUID AND ILLIQUID ASSETS

We find optimal trading policies for long‐term investors with constant relative risk aversion and constant investment opportunities, which include one safe asset, liquid risky assets, and an illiquid risky asset trading with proportional costs. Access to liquid assets creates a diversification motive, which reduces illiquid trading, and a hedging motive, which both reduces illiquid trading and increases liquid trading. A further tempering effect depresses the liquid asset's weight when the illiquid asset's weight is close to ideal, to keep it near that level by reducing its volatility. Multiple liquid assets lead to portfolio separation in four funds: the safe asset, the myopic portfolio, the illiquid asset, and its hedging portfolio.