Venture capital in Europe

with Andrea Mina

Abstract:Venture capital has been identified as a key enabler of growth in modern knowledge-based economies and has figured prominently in the European innovation policy debate. Its challenges remain, however, substantial. Firstly, private equity markets are still very unevenly developed across the European region. Secondly, they are differentiated markets with highly heterogeneous distributions of investments not only by country, but also by sector and investment stage, resulting in rather different innovation-financing architectures. Thirdly, the profitability and sustainability of private equity – and venture capital in particular – are being severely tested by the current financial crisis. In this paper we use transaction-level panel data on investments and exits by private equity funds to analyse the composition and evolution of European VC and buyout markets between 1990 and 2010. We explore their long-run geographical, sectoral, investment stage and divestment/exit trends. We then evaluate the short-run reaction of the sector to the current crisis and conclude by reflecting on its future prospects from a financial and innovation policy perspective.

Available on the FINNOV website.

Latest version: November 2011

Net Asset Value Discounts in Listed Private Equity Funds

with Christoph Kaserer

Abstract: This paper investigates determinants and consequences of net asset value discounts in listed private equity funds. Listed private equity funds share characteristics of closed-end mutual funds and traditional unlisted private equity funds and can therefore offer insights into both. Our results have particular relevance to the pricing of unlisted private equity funds where no market prices are observable. We find that funds start at a zero initial premium and adapt to the long-term average of -26 % after two years. Premia can be explained by liquidity and by investor sentiment, but not by the fund’s investment degree. A decrease in premia over the first few quarters after the fund’s IPO remains unexplained, which partially supports the management ability hypothesis. Private equity fund premia also depend on systematic risk, which suggests that some information about the fund’s portfolio is not reflected in net asset values. Premia predict future stock returns, which also display seasonalities that are related to the calendar year as well as to the fund’s fiscal year.

Available at SSRN.

Latest version: July 2010

The Time-Varying Risk of Listed Private Equity

Journal of Financial Transformation, Vol. 28, pp. 87-93, 2010

with Christoph Kaserer, Valentin Liebhart, Alfred Mettler

Abstract: Structure and stability of private equity market risk are still nearly unknown, since market prices are mostly unobservable for this asset class. This paper aims to fill this gap by analyzing market risks of listed private equity vehicles. We show that aggregate market risk varies strongly over time and is positively correlated with the market return variance. Cross-sections of market risk are highly unstable, whereas ranks of individual vehicles within yearly subsamples change slightly less over time. Individual CAPM betas are predictable only up to two to three years into the future and quickly converge to a stationary distribution when measured in risk classes in an empirical Markov transition matrix. We suspect that market risk of private equity is affected by factors unique to this sector: acquisitions and divestments that constantly rebalance portfolios, scarcity of information about portfolio companies, and rapid changes within portfolio companies. Unstable market risk seems to be a fundamental characteristic of private equity assets, which must be incorporated into valuation and portfolio allocation processes by long-term private equity investors. Large increases in systematic risk in recent years cast doubt on diversification benefits of private equity in times of crisis.

Available at SSRN.

Latest version: April 2010

Organizational Forms and Risk in Listed Private Equity

The Journal of Private Equity, Vol. 13, 89-99, Winter 2009

with Florian Herschke

Abstract: This paper investigates the stock performance of listed private equity vehicles which are grouped into subsamples according to their organizational structure. We identify 274 liquid listed private equity entities in the period from 1986 to 2008. Listed private equity shows an aggregate Dimson beta of 1.7 without any significant excess return on a value-weighted basis in an international CAPM context. Entities differ strongly dependent on their organizational form. Market risk is high in internally managed vehicles but low in externally managed ones. We conclude that different sources of cash flow such as management fees and carried interest can account for these risk characteristics. Precautions must therefore be taken when using listed private equity as a proxy for traditional private equity funds.

Available at SSRN.

latest version: March 2009

Uncertain Private Benefits and the Decision to Go Public

with Olaf Ehrhardt

Abstract: This paper focuses on the decision to go public when both seller and potential buyers have private benefits of control. The basic model by Zingales (1995) is extended to account for uncertainty of private benefits. This leads to new implications for the sales process, ownership structure, measurement of private benefits and the efficiency of takeover regimes. The optimal way to sell the company differs from the model with perfect information in that the incumbent always choses to go public instead of selling directly to a potential rival whenever the rival is expected to increase cash flow but not necessarily total firm value. IPO price and volume are lower than under perfect information which induces a socially non-optimal solution in takeover transactions. Imperfect information also explains post-IPO underperformance of firms which are not subject to control transfers. To compensate shareholders for potential losses during the sales process, the offering price has to be lower than under perfect information. This provides the basis for a differential stock price performance depending on the buyer taking over or not. Furthermore, an overestimation bias exists in prior estimates of control premiums, because some firms going public are never sold but nevertheless provide private benefits. Finally, mandatory tender offers in the form of a fair price rule and an equal opportunity rule are discussed, which indicate that the social superiority of either rule is strongly dependent on the empirical distribution characteristics of private benefits.

Available at SSRN.

Latest version: March 2008