3.4 VC Role in Portfolio Flashcards
Risk/Return profile of VC direct investments
▪ VC direct investments are being … with around 30% being …, e.g., a 0 multiple
▪ VC direct investments are … and should only be performed if …
highly skewed; a total loss
very risky
the investors believe the added value is a “sure bet”
Risk/return profile of VC funds
▪ VC fund investments have a … distribution with less fat tails
▪ Significant … in comparison to direct investments
relatively symmetric
diversification effects
Risk/return profile of Fund of Funds
▪ … and no total losses
▪ Probability to receive a multiple of 2 is… than in VC Fund investments
Symmetric distribution with low fat tails
higher
4 Aspects while assessing performance of VC Funds
Survivorship bias, performance persistence, access, limited data availability
Survivorship bias
▪ Performance of VC funds reflect investments which …
▪ Funds are merged into another fund in order to … while poor performance is deleted from most hard copy (ASK IN CLASS WHY ITS THE CASE)?
have been successful without regarding those that have gone bust
continue earning fees of the investors capital
Persistence of Performance
▪ Usually considers performance persistence across …
▪ Different speed when…
▪ … by raising follow-on funds
successive funds of a particular general partner
funds enter and liquidate investments
Overlapping structure of successive funds
Access
… make access for investors increasingly difficult
Existence of few top performing VC Funds
Limited data availability
▪ Limited data availability on …
▪ Gaps in fund sequences complicate…
each fund of a particular manager
temporal comparison of performance
Harris/Jenkinson/Kaplan/Stucke (2018)
▪ FOFs provide a … to potentially provide specialized investment skills, … and access into otherwise …
▪ Higher diversification benefits must be weighed against …
▪ Research question: How do FOFs perform compared to investments in public equity and direct fund investing?
second level of intermediation
diversification
unattainable investments.
extra layer of fees.
Harris/Jenkinson/Kaplan/Stucke (2018)
Summary of main findings:
▪ FOFs (buyout and VC) generated higher returns in comparison to …
▪ FOFs have … than direct funds, especially in the buyout segment, whereas FOFs in the VC segment perform on a par with portfolios of …
▪ FOFs in VC outperform …handicapped by limitations such as … and/or …
▪ VC FOFs managers are more likely to … than buyout FOFs.
investing in public equities
lower returns; direct funds
direct investments ; fund access; manager selection skills
overcome the additional layer of fees
Strengths and Weaknesses of VC
Strengths: multiple …. and multiple ….; additional investors rights to …
Weaknesses: cost of …; multiple layers of…; biased performance; in early stage; limited …
rounds of financing, layers of value creation, compensate for additional risks
mgt is significant; principle-agent risks; mgt intensity; historical data
Opportunities and Threats of VC
Opportunities: x/s …, …, Increasing … across all segments (healthcare, education, financial services,…)
Threats: strong …, overstating …, high…
returns if unicorn is discovered, disruptive innovations, demand in technology
investment selection skills required, business valuations, barriers to entry
