Exam Flashcards
PE vs VC?
PE invest in assets in place with capital and intellectual assets (i.e. Ideas).
CV invest in intellectual assets with capital.
What happened with buyouts during 2022? (Bain Global report 2023)
Global buyout value dropped by more than a third in 2022 as banks veered away from large
transactions over the summer.
What about exits during 2022? (Bain Global report 2023)
Exits fell sharply in 2022 across channels, especially in the market for initial public offerings.
Some of the slowdown in 2022 can probably be attributed to GPs pulling exits forward into 2021 to
take advantage of surging deal activity and multiples. But faced with less-than-favorable market
conditions in 2022, many GPs were simply unwilling to part with promising assets that were coming
under short-term pressure.
What says the CB Insight report?
Investments in start-ups have decreased a lot in 2022 compared to 2021. Much due to higher interest rates, inflation etc. VC is still the biggest funder (compared to angel investors etc).
What is the purpose of Denis (2004) article?
The purpose of this article is to provide an overview of the important issues and
questions in entrepreneurial finance, and to partially survey the nascent literature on this
topic.
This article provides an overview of four areas of inquiry within the entrepreneurial
finance literature: (i) alternative sources of capital, (ii) financial contracting issues, (iii)
public policy issues, and (iv) risk and return in private equity investments.
Explain the four areas in Denis (2004) article
Alternative sources of capital: VC funds, angel investors and corporate investors. Venture capitalists: hands-on investing providing mentoring, strategic advice, assist in recruitment of top managers. Monitoring, professionalization, certification
Financial contracting issues: Type of security (convertible preferred stock), covenants (financing party maintain control, maximize incentives from the entrepreneur. This is done in staged financing, rights of first refusal, i.e. gives the right to invest in subsequent rounds, anti-dilution clauses, liquidation rights, board rights, automatic conversion, non-compete clauses.
Public policy: Underinvestment in R&D stems from underinvestment and the fact that innovation produce knowledge that is perceived as private information, innovators cannot fully appropriate the returns. Create policies; decrease taxes on capital gains for VCs, regulatory restrictions on investment. VC is strongly linked to the stock market because IPOs are important for entrepreneurs and venture capitalists. Public financing of entrepreneurial ventures.
Dynamics of private equity returns: High risk high return, investors demand higher returns given the illiquidity. Hard to examine the IRR due to cash flows or riskprofile of portfolio companies.
Conclusion in Denis (2004)?
Descriptive evidence indicates a substantial segmentation in the provision
of capital from angel and venture capital investors to start-up enterprises.
Central of the Jensen article?
Michael C. Jensen argues that the publicly held corporation is no longer useful in many sectors of the economy and that new organizations are emerging. He explains how takeovers, leveraged buyouts, and other going-private transactions are manifestations of this change. Jensen also discusses the central source of waste in the public corporation and how the conflict between owners and managers over free cash flow helps explain the prominent role of debt in the new organizations. Finally, he explains how the new organizations can motivate people and manage resources more effectively than public corporations.
Four takeaways from Jensen (1989)?
Changing ownership structure: Jensen pointed out that the ownership of public corporations was becoming more dispersed, with individual shareholders holding smaller stakes. This dispersion made it difficult for shareholders to effectively monitor and influence the management of these corporations.
Agency problems: Public corporations often face agency problems, where managers may pursue their own interests instead of maximizing shareholder value. Jensen emphasized the need for effective corporate governance mechanisms to align the interests of managers and shareholders.
Lack of market discipline: Jensen argued that market forces were not exerting sufficient discipline on public corporations. He suggested that hostile takeovers, which act as a market discipline mechanism, were becoming less common due to regulatory changes and defensive strategies adopted by target firms.
Rise of alternative forms of organization: Jensen observed the emergence of alternative organizational forms, such as leveraged buyouts, joint ventures, and private equity, which were seen as more efficient and effective than public corporations in certain contexts.
What is the paper from Kahle & Stulz about?
Criticism towards Jensen’s article. The US firms that remain public are survivors. Revenues and profits are more concentrated to a fewer public companies. US firms pay out more to shareholders now than at any time since 1975 is not consistent with the view of agencies problems. However, Jensen’s prediction of the rise of private equity has proven to be correct. Institutional ownership is higher and payout policies are higher, compared to Jensen.
What are some of the key factors that contribute to value creation in the private equity and venture capital industry? (Kaiser and Western 2010)
There are several ways in which private equity and venture capital firms can create value in their investment activities. These include: improving operational efficiency, implementing strategic changes, providing access to new markets or customers, leveraging technology or intellectual property, and optimizing capital structure.
How do VC and PE differ in their approach to value creation?
Private equity firms tend to focus on improving the operational efficiency of existing companies, while venture capital firms often invest in early-stage companies with high growth potential and provide support for product development, market entry, and other strategic initiatives.
Monitoring: board of directors, incentivized-enhanced contracts, aligned interests through employee options
Active involvement: build up internal organization, professionalize the organization HR policiesn marketing and sales staff.
Costs: VC backed companies are underpricing in IPO to encourage investors to buy the IPO.
What factors have contributed to the decline in the number of public corporations in the US over the last few decades? (Kahle and Stulz)?
- Increased regulation, which has made it more expensive and time-consuming for companies to go public.
- The rise of private equity, which has provided an alternative source of financing for companies.
- The growth of institutional investors, who have become more influential in corporate governance and may prefer private investments.
- The increased availability of information technology, which has made it easier for companies to stay private and still access capital markets.
- The pressure from activist investors, who may push for changes that are easier to implement in a private company than a public one.
Kaplan and Schoar (2005) - what is the article about?
Kaplan and Schoar find that average fund return is equal to the S&P 500.
They use a comprehensive dataset of private equity funds to conduct their analysis.
Key points covered in the article include:
Returns: The authors investigate the average returns generated by private equity funds compared to public market benchmarks. They find that, on average, private equity funds outperform the public markets over the long term.
Persistence: The article examines the persistence of performance among private equity funds. Kaplan and Schoar find evidence of some persistence, meaning that funds with higher past performance are more likely to continue to perform well in the future.
Fund size and performance: The authors explore the relationship between the size of a private equity fund and its performance. They find that smaller funds tend to outperform larger funds, suggesting that fund size can impact performance.
Capital flows: The article analyzes the impact of capital flows on private equity performance. Kaplan and Schoar find that periods of high fundraising in the private equity industry tend to be followed by lower performance. This suggests that excessive capital flows can lead to lower returns, i.e. a Boom and bust cycle
Merton (2005) article?
Merton explores the design and functioning of financial systems, focusing on the interplay between their function and structure. The article emphasizes the importance of aligning the objectives and functions of financial systems with their underlying structure to achieve efficiency and stability.
