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Venture Capital

Fund Certification, Performance Prediction and Learnings from the Past


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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2 Study 1: External Certification in the Fundraising of First-Time Private Equity Funds 9


2 Study 1: External Certification in the Fundraising of First-Time Private Equity Funds 2.1 Introduction The private equity (PE) industry has mastered ways to overcome huge information asymmetries originating in the market structure. The relation- ship between investors seeking PE investment opportunities, private equity funds (PEFs) and portfolio companies can be characterized as a two-step principal-agent relationship: In the first step, investors (the principals) pro- vide capital to a PEF (the agent) while it is largely unclear whether the fund managers have the right skills and ambition level to successfully invest the capital. In the second step, the fund manager (now acting as a principal) cannot be sure about the quality of the portfolio companies he invests in and the quality of the portfolio company management (the agents). There are three main approaches the PE industry has developed to over- come information asymmetries. First, contracts between investors, fund managers and portfolio company management are designed to align their incentives and motivate them to work on the same goals, i.e., to realize a high return for the principal investors. Second, these contracts contain clauses that allow the respective principals to control and penalize their 10 2 External Certification in the Fundraising of First-Time PE Funds agents if they do not act as intended. Third, reputation plays a major role in decisions on every level. A PEF with a strong reputation has a big advantage when trying to find investors for their follow-on funds. On the contrary, a major barrier...

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