Beyond the J Curve: Managing a Portfolio of Venture Capital and Private Equity Funds(The Wiley Finance Series)

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 so-called limited partners. There is far more to the management of a portfolio of venture capital and private equity funds than usually perceived. Beyond the J Curve describes 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'. 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.

Table of Contents:
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