Venture Capital and Other Private Equity: a Survey

Abstract

Abstract. We review the theory and evidence on venture capital (VC) and other private equity: why professional private equity exists, what private equity managers do with their portfolio companies, what returns they earn, who earns more and why, what determines the design of contracts signed between (i) private equity managers and their portfolio companies and (ii) private equity managers and their investors (limited partners), and how/whether these contractual designs affect outcomes. Findings highlight the importance of private ownership, and information asymmetry and illiquidity associated with it, as a key explanatory factor of what makes private equity different from other asset classes.

From Governing to Managing: Exploring Modes of Control in Private Equity Relationships

“…4 PE firms can also be differentiated from angel investors and venture capitalists. Angel investors are typically individual investors who use their own money to fund small startups or entrepreneurial ventures, whereas PE firms use investor's capital to make investments in a portfolio of companies (Metrick & Yasuda, 2011). Venture capitalists are often considered as a subset of PE, however, they can be distinguished by their focus on early-stage or emerging firms, with higher growth and associated risk, and typically do not take majority control (Kaplan & Strömberg, 2009).…”

“…Contracts commonly specify the roles and responsibilities of each party, monitoring procedures, performance expectations, and the potential sanctions for noncompliance. Particularly important in PE relationships are the allocation of contractual rights that enable direct intervention in the operations of an invested firm, such as veto rights over major strategic decisions, access to additional capital, changes to managerial personnel, and determining compensation structures (Fenn et al, 1997;Metrick & Yasuda, 2011). Specifically, PE contracts typically include the allocation of three classes of rights (Kaplan & Strömberg, 2003).…”

“…Behaviour controls regulate firm activities by specifying how tasks are to be performed or through placing constraints on the behaviours of invested firm managers, including planning processes, codified rules and operating procedures, authority structures, and approval procedures (Dekker, 2004;Merchant & Van der Stede, 2017). While there are few first-hand accounts of the types of behaviour controls implemented by PE firms, some insights are provided by the venture capital literature (Denis, 2004;Metrick & Yasuda, 2011). Research shows that venture capitalists are active participants on boards of directors, with significant influence over the financial and strategic decisions of the firm (Bruining & Wright, 2002).…”

The strategy of attracting venture capital and private equity in Serbian market environment

“…Finansiranja putem privatnog i rizičnog kapitala u razvijenim zemljama Evrope, kao i na američkom kontinentu, su na daleko višem nivou razvoja u poređenju sa regionom Centralne i Istočne Evrope, uključujući u analizu i zapadni Balkan. O tome svedoče mnoga istraživanja autora, među kojima su Megginson (Megginson, 2004), Metrick i Yasuda (Metrick & Yasuda, 2011), Wright i Robbie (Wright & Robbie, 1998). Razlog nedovoljne razvijenosti ovog oblika finansiranja jeste zakasneli izlazak iz socijalističkog društvenog uređenja, a samim tim i kasniji razvoj tržišta privatnog kapitala.…”

Managerial Factors and Management Conflict in Venture Capital Financing in Malaysia

“…In addition, where informational asymmetries are significant among them, the investee firms are tempted to defect from the financial contracts because it is quite easy to manipulate strategic information to the venture capitalists about their venture businesses to their short-term ends Miller & Wesley, 2010). cooperation exists largely during the post investment stage mainly due to the failure of the investee firms in fulfilling their obligations (Andrieu, 2013;Metrick & Yasuda, 2010) in particular, by having full information disclosure, even though the requirement for this is clearly specified in the contractual agreement. The presumption that the conflict in venture capital cooperation originated from the investee firms behaviour is confirmed by many venture capital literatures and this is quite hard to be denied (Andrieu, 2013;Gimmon et al, 2011;Metrick & Yasuda, 2011;Yitshaki, 2008;Sohaimi, 2004).…”