The Price of Diversifiable Risk in Venture Capital and Private Equity

Ewens, Michael; Jones, Charles M.; Rhodes‐Kropf, Matthew

doi:10.2139/ssrn.342841

Cited by 145 publications

(77 citation statements)

References 37 publications

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“…Kaplan and Schoar (2005) find evidence of performance persistence in VC funds raised by the same GP and document a positive and concave relation between performance and future fund-raising. Jones and Rhodes-Kropf (2003) provide empirical evidence in support of the hypothesis that VCs need to be compensated through higher expected returns for bearing idiosyncratic risk. Ljungqvist and Richardson (2003) analyze the cash flow, return, and risk characteristics of private equity funds.…”

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confidence: 70%

Informational Hold-Up and Performance Persistence in Venture Capital

2010

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We propose and test a theory of learning and informational hold-up in the venture capital market. The model predicts that higher returns on the current fund increase the probability that a VC will raise a follow-on fund, the size of the follow-on fund, and the performance fee investors are charged in the follow-on fund. If learning is asymmetric, such that incumbent investors learn more about fund manager skill than potential new investors, the model also predicts persistence in returns, poor performance among first-time funds, persistence in investors from fund to fund, and over-subscription in follow-on funds raised by successful fund managers. Our empirical evidence is consistent with these predictions. The model provides a unified framework for understanding a series of empirical facts about the venture capital industry.

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confidence: 70%

Informational Hold-Up and Performance Persistence in Venture Capital

2010

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“…2 These assumptions come from the existing literature. Jones and Rhodes-Kropf (2004) assume that venture capitalists can manage only a small number of investments and therefore hold significant idiosyncratic risk. Amihud and Lev (1981), among others, assume that managers are risk averse.…”

Section: Introductionmentioning

confidence: 99%

The underpricing of private targets

Cooney

Moeller

Stegemoller

2009

Journal of Financial Economics

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“…Our paper also relates to an emerging literature analyzing private equity fund structures. 3 Jones and Rhodes-Kropf (2003) and Kandel, Leshchinskii, and Yuklea (2006) also argue that fund structures can lead GPs to make inefficient investments in risky projects. Unlike our paper, however, these papers take fund structures as given and do not derive investment incentives resulting from an optimal contract.…”

Section: Introductionmentioning

confidence: 99%

Why are Buyouts Levered: The Financial Structure of Private Equity Funds

Axelson¹,

Strömberg²,

Weisbach³

2007

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This paper presents a model of the financial structure of private equity firms. In the model, the general partner of the firm encounters a sequence of deals over time where the exact quality of each deal cannot be credibly communicated to investors. We show that the optimal financing arrangement is consistent with a number of characteristics of the private equity industry. First, the firm should be financed by a combination of fund capital raised before deals are encountered, and capital that is raised to finance a specific deal. Second, the fund investors' claim on fund cash flow is a combination of debt and levered equity, while the general partner receives a claim similar to the carry contracts received by real-world practitioners. Third, the fund will be set up in a manner similar to that observed in practice, with investments pooled within a fund, decision rights over investments held by the general partner, and limits set in partnership agreements on the size of particular investments. Fourth, the model suggests that incentives will lead to overinvestment in good states of the world and underinvestment in bad states, so that the natural industry cycles will be multiplied. Fifth, investments made in recessions will on average outperform investments made in booms.

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The Price of Diversifiable Risk in Venture Capital and Private Equity

Cited by 145 publications

References 37 publications

Informational Hold-Up and Performance Persistence in Venture Capital

Informational Hold-Up and Performance Persistence in Venture Capital

The underpricing of private targets

Why are Buyouts Levered: The Financial Structure of Private Equity Funds

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