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Venture Capital

Fund Certification, Performance Prediction and Learnings from the Past

Series:

Armin Höll-Steiner

This book contains three studies. The first study investigates the relationship between private equity investors and fund managers and how intermediaries can mitigate their agency problems. The incentive structure of three intermediary types and their behavior in signaling fund qualities to investors are studied theoretically. A recommendation which intermediary to consult is given. The second study presents a new statistical method to predict the performance distribution of venture capital direct investments. The accuracy of this method is investigated and compared to existing approaches. The third study is about the European venture capital market’s historic development before and after the internet bubble and reasons for the bad development especially after the bubble.

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Table of Contents

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List of Figures XIII List of Tables XVII Acronyms XIX Nomenclature XXI 1 Introduction 1 1.1 Markets for Risky Assets . . . . . . . . . . . . . . . . . . . . 1 1.2 Structure of This Work . . . . . . . . . . . . . . . . . . . . . 2 2 Study 1: External Certification in the Fundraising of First- Time Private Equity Funds 9 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.2 Problems and Mitigation Options in Private Equity Fundraising 11 2.2.1 Screening . . . . . . . . . . . . . . . . . . . . . . . . 13 2.2.2 Self-selection and signaling . . . . . . . . . . . . . . . 14 2.3 Intermediaries Supporting Fundraising of First-Time PE Funds 17 2.3.1 The Role of Intermediaries . . . . . . . . . . . . . . . 17 2.3.2 Rating Agencies . . . . . . . . . . . . . . . . . . . . . 18 2.3.3 Placement Agents . . . . . . . . . . . . . . . . . . . . 21 2.3.4 Lead Investors . . . . . . . . . . . . . . . . . . . . . . 25 2.3.5 Interim Summary . . . . . . . . . . . . . . . . . . . . 27 2.4 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 2.4.1 Analysis of a Certifier’s Behavior in a Market with Unlimited Capital Supply . . . . . . . . . . . . . . . 28 X Table of Contents 2.4.2 Comparison of Different Types of Certifiers in a Mar- ket with Capital Supply Limitations . . . . . . . . . 44 2.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 3 Study 2: A New Approach to Predict the Performance of Venture Capital Direct Investments 79 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 3.2 Related Studies . . . . . . . . . . . . . . . . . . . . . . . . . 82 3.3 Methodological Considerations For a New Prediction Approach 87 3.3.1 Data Completeness and Representativeness . . . . . . 88 3.3.2 Performance Measurement . . . . . . . . . . . . . . . 89 3.3.3 Methodology Choice . . . . . . . . . . . . . . . . . . 93 3.3.4 Parameters and Indicators of Investment Performance 104 3.4 Empirical Analysis and Test of the Prediction Methodology . 109 3.4.1 Data Description . . . . . . . . . . . . . . . . . . . . 109 3.4.2 Parameters of Investment Performance . . . . . . . . 120 3.4.3 Power of the Prediction of the Direct Investment Re- turn Distribution Pattern . . . . . . . . . . . . . . . 138 3.5 Extensions of the Model to Funds and Funds-of-Funds . . . 142 3.5.1 Approach Using the Mean IRR of a Fund’s Direct Investments . . . . . . . . . . . . . . . . . . . . . . . 142 3.5.2...

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