Beyond the J Curve Managing a Portfolio of Venture Capital and Private Equity Funds
Produktdetaljer
Om bidragsyterne
About the authors
DR THOMAS MEYER studied computer science at the Bundeswehr Universität in Munich followed by doctoral studies at the University of Trier. He also holds an MBA from the London Business School. After 12 years in the German Air Force he worked for the German insurance group Allianz AG in Corporate Finance and M&A with particular focus on Japan, and as the regional Chief Financial Officer of Allianz Asia Pacific in Singapore.
Over the last years Thomas has been responsible for the creation of the European Investment Fund's risk management function. The focus of his work is the development of valuation and risk management models and investment strategies for venture capital fund-of-funds.
tmeyer.mba33@london.edu
PIERREYVES MATHONET holds a Master of Science cum laude in Finance from London Business School and a Master of Science magna cum laude in Management from Solvay Business School, Brussels. He is also a Certified European Financial Analyst.
He worked as an investment banker in the technology groups of Donaldson, Lufkin & Jenrette (DLJ) and Credit Suisse First Boston, and previously, for the audit and consulting departments of PricewaterhouseCoopers.
He is currently heading the venture capital activities within the Risk Management and Monitoring division of the European Investment Fund.
pmathonet.mifft2000@london.edu
Together, as risk managers, the authors are responsible for a portfolio of nearly two hundred private equity funds with more than €2.5 billion committed and almost €5 billion under management.
"...highlights why limited partners are bad performers and provides guidance for investments..." (<i>Financial Times</i>, 1st August 05) <p>"...an interesting book on a fascinating subject" (<i>Professional Investor</i>, Dec/Jan 05/06)</p>
Beyond the J Curve provides the answers to key questions, including:
- Why 'top-quartile' promises should be taken with a huge pinch of salt and what it takes to select superior fund managers?
- What do limited partners need to consider when designing and managing portfolios?
- How one can determine the funds' economic value to help addressing the questions of 'fair value' under IAS 39 and 'risk' under Basel II or Solvency II?
- Why is monitoring important, and how does a limited partner manage his portfolio?
- How the portfolio's returns can be improved through proper liquidity management and what to consider when over-committing?
- And, why uncertainty rather than risk is an issue and how a limited partner can address and benefit from the fast changing private equity environment?
Beyond the J Curve takes the practitioner's view and offers private equity and venture capital professionals a comprehensive guide making high return targets more realistic and sustainable. This book is a must have for all parties involved in this market, as well as academic and students.
List of Boxes xv
Acknowledgements xvii
Disclaimer xviii
Part I Private Equity Environment 1
1 Introduction 3
1.1 Routes into private equity 3
1.2 The limited partner's viewpoint 4
1.3 The challenge of venture capital fund valuation 4
1.4 Hard figures or gut instinct? 5
1.5 Managing with fuzzy figures 5
1.6 Making the grades 5
1.7 Outline 7
2 Private Equity Market 9
2.1 Funds as intermediaries 10
2.2 The problem of predicting success 15
2.3 Broad segmentation of investment universe 18
2.4 Private equity market dynamics 22
2.5 Conclusion 26
3 Private Equity Fund Structure 27
3.1 Key features 29
3.2 Conflicts of interest 38
3.3 Finding the balance 38
4 Buyout and Venture Capital Fund Differences 41
4.1 Valuation 43
4.2 Business model 44
4.3 Deal structuring 45
4.4 Role of general partners 45
5 Funds-of-funds 47
5.1 Structure 47
5.2 Value added 48
5.3 Costs 51
5.4 Private equity investment programme 52
Part II Investment Process 57
6 Investment Process 59
6.1 Key performance drivers 59
6.2 Process description 61
6.3 Risk management 65
6.4 Tackling uncertainty 68
7 Risk Framework 73
7.1 Market value 75
7.2 Market or credit risk? 77
7.3 Conclusion 78
8 Portfolio Design 81
8.1 Portfolio design framework 81
8.2 Portfolio construction techniques 83
8.3 Risk–return management approaches 88
9 Case Study 95
9.1 Looking for the optimal programme size 95
9.2 Overcoming entry barriers: long-term strategies 104
10 The Management of Liquidity 115
10.1 Liquidity management problem 115
10.2 Liquidity management approaches 123
10.3 Investment strategies for undrawn capital 130
10.4 Cash flow projections 133
10.5 Conclusion 145
Part III Design Tools 151
11 Established Approaches to Fund Valuation 153
11.1 Bottom-up approach to private equity fund valuation 154
11.2 Inconsistency of valuations 157
11.3 NAVs do not tell the full picture 157
11.4 Portfolio companies cannot be valued in isolation 159
11.5 Conclusion 162
12 Benchmarking 165
12.1 Specific issues 165
12.2 Individual funds 166
12.3 Portfolio of funds 170
13 A Prototype Internal Grading System 173
13.1 Grading of private equity funds 173
13.2 The NAV is not enough 174
13.3 Existing approaches 176
13.4 New approach to internal fund-grading system 180
13.5 Summary—NAV- and grading-based valuation 188
13.6 Conclusion 189
14 Fund Manager Selection Process 193
14.1 Relevance of fund manager selection 193
14.2 Why due diligence? 194
14.3 The due diligence process 195
14.4 Fund manager selection process 197
14.5 Decision and commitment 201
15 Qualitative Fund Scoring 219
15.1 Scoring approach 219
15.2 Scoring dimensions 221
16 Grading-based Economic Model 233
16.1 Approach 233
16.2 Internal age adjustment 237
16.3 Private equity fund IRR projections 238
16.4 Expected portfolio returns 239
16.5 Discussion 241
16.6 Conclusion 242
17 Private Equity Fund Discount Rate 253
17.1 The capital asset pricing model 253
17.2 Private equity fund betas 257
17.3 The alternatives to the capital asset pricing model 264
17.4 Summary and conclusion 266
Part IV Management Tools 269
18 Monitoring 271
18.1 Approach to monitoring 272
18.2 The monitoring objectives 273
18.3 Information gathering 276
18.4 Evaluation 282
18.5 Actions 285
19 Case Study: Saving Your Investments—Approaches to Restructuring 287
19.1 The valley of tears 288
19.2 The report to the board 289
19.3 The terms of the restructuring 291
19.4 Epilogue 293
20 Secondary Transactions 297
20.1 Sellers and their motivations 297
20.2 Buyers and their motivations 299
20.3 Secondary market prices 300
20.4 Transactional issues 307
20.5 The fund manager perspective 308
Part V Embracing Uncertainty 311
21 Deviating from Top Funds 313
21.1 Strategic investments 313
21.2 Policy objectives 314
22 Real Options 319
22.1 Real options in private equity 319
22.2 Real option analysis 321
22.3 An expanded strategy and decision framework 322
23 Beyond the J-curve 327
23.1 Some do it better 327
23.2 Deadly sins 327
23.3 Structure instead of "gut instinct" 328
23.4 Patience is a virtue 328
23.5 Turning water into wine 329
Glossary 331
Bibliography 341
Abbreviations 351
Index 353
BEYOND THE J CURVE
Thomas Meyer & Pierre-Yves Mathonet
In recent times, venture capital and private equity funds have become household names, but so far little has been written for the investors in such funds the socalled 'limited partners'. Beyond the J Curve provides an innovative toolset for such limited partners to design and manage portfolios tailored to the dynamics of this market place, going far beyond the typical and often-simplistic recipe to 'go for top quartile funds'.
'The authors of Beyond the J Curve have taken on the ambitious project of analysing the difficult and controversial area of valuing fund portfolios. Their innovative and integrated approach opens up the framework within which these valuations are practised by investors, and offers alternatives. Beyond the J Curve is a thorough and pioneering contribution to the current debate.'
Javier Echarri, Secretary General, European Private Equity & Venture Capital Association (EVCA)
'In this groundbreaking book, Meyer and Mathonet provide both the theoretical underpinnings for, and practical realities of, building a successful portfolio of private equity investments. It is an invaluable resource for any institutional investor who is constructing or managing a portfolio of investments in private equity and/or venture capital.'
Mark D. Wiseman, Chairman, Institutional Limited Partners Association (ILPA)
'Beyond the J Curve is right on target, giving the private equity investment manager much-needed guidance on how to put private equity into a modern diversified investment portfolio. It provides practical, comprehensive advice on traversing the often risky waters of venture and private equity investing and provides a thorough and advanced introduction. It should become a 'musthave' reference.'
Jesse E. Reyes, Managing Director, Reyes Analytics
'This book goes a long way to filling the vacuum of digestible thought and writing about private equity fund investing. It provides structure and rigour to all aspects of the investment process and will be an invaluable reference for the limited partner community. But more than anything else, it provides a platform on which to build greater understanding as the asset class evolves and the role of fund investors becomes more demanding.'
Chris Davison, Associate Director, Almeida Capital
'This is the first work I have seen that comprehensively covers the important subject of valuing, evaluating and measuring the performance of private equity funds. Much has been published on individual aspects of this controversial subject by various segments of the stakeholder universe usually putting forward partisan viewpoints. This is the first time that a holistic, integrated and disciplined framework has been adopted. The approach taken has yielded a rich crop of useful results including an innovative methodology for determining fair value for private equity funds during the course of their long lives; portfolio design and benchmarking methods; a prototype grading and fund scoring system. Essential reading for investors and a useful state-of-the-art reference manual forprivate equity managers.'
Christopher K. B. Brotchie, Formerly Chief Executive of the Baring Private Equity Group and Member of the ING Management Council
'Congratulations to both Thomas Meyer and Pierre-Yves Mathonet for their publication Beyond the J Curve. They should be highly commended for breaking a long-standing taboo investing in private equity can now be modelled. Beyond the J Curve not only reveals a theoretical approach to Fair Value for private equity funds but also proposes a complete approach for investors to build up a comprehensive and effective programme for private equity investments. I am personally convinced that our industry should become more involved with this type of approach in order to best explain the interest of investing in private equity.'
Pierre Hervé, General Secretary of Natexis Private Equity, Chairman of AFIC's Basel II and IFRS working groups, and Member of EFRAG's Venture Capital working group
'Beyond the J Curve is a timely guide for investors in private equity, with an elegant balance of analysis and practical suggestions. Its emphasis on monitoring and active portfolio management should promote more effective stewardship of private equity assets in the future.'
Brenlen Jinkens, Director, Cogent Partners Europe
Produktdetaljer
Om bidragsyterne
About the authors
DR THOMAS MEYER studied computer science at the Bundeswehr Universität in Munich followed by doctoral studies at the University of Trier. He also holds an MBA from the London Business School. After 12 years in the German Air Force he worked for the German insurance group Allianz AG in Corporate Finance and M&A with particular focus on Japan, and as the regional Chief Financial Officer of Allianz Asia Pacific in Singapore.
Over the last years Thomas has been responsible for the creation of the European Investment Fund's risk management function. The focus of his work is the development of valuation and risk management models and investment strategies for venture capital fund-of-funds.
tmeyer.mba33@london.edu
PIERREYVES MATHONET holds a Master of Science cum laude in Finance from London Business School and a Master of Science magna cum laude in Management from Solvay Business School, Brussels. He is also a Certified European Financial Analyst.
He worked as an investment banker in the technology groups of Donaldson, Lufkin & Jenrette (DLJ) and Credit Suisse First Boston, and previously, for the audit and consulting departments of PricewaterhouseCoopers.
He is currently heading the venture capital activities within the Risk Management and Monitoring division of the European Investment Fund.
pmathonet.mifft2000@london.edu
Together, as risk managers, the authors are responsible for a portfolio of nearly two hundred private equity funds with more than €2.5 billion committed and almost €5 billion under management.