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Performance Differentiation : Cutting Losses and Maximizing Profits of Private Equity and Venture Capital Investments
Journal
Financial Markets and Portfolio Management
ISSN
1934-4554
Type
journal article
Date Issued
2007-03
Author(s)
Lauterbach, Rainer
Welpe, Isabell M.
Fertig, Jan
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.
Language
English
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Springer
Publisher place
Heidelberg [u.a.]
Volume
21
Number
1
Start page
45
End page
67
Pages
23
Subject(s)
Division(s)
Eprints ID
72368