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 Curveprovides 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 Curveprovides the answers to key questions, including:
- Why should ‘top-quartile’ promises be taken with a huge pinch of salt and what does it takes to select superior fund managers?
- What do limited partners need to consider when designing and managing portfolios?
- How can one determine the funds’ economic value to help address 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 their portfolio?
- How can the portfolio’s returns be improved through proper liquidity management and what should be considered when over-committing?
- Why is uncertainty rather than risk an issue and how can a limited partner address and benefit from the fast changing private equity environment?
Beyond the J Curvetakes 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.
"This is the first work that I have seen that comprehensively covers the important subject of valuing, evaluating and measuring the performance of private equity funds. Much has been published in journals and papers 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 for private equity managers". Christopher K. B. Brotchie,Formerly Chief Executive of the Baring Private Equity Group and Member of the ING Management Council
"The transactions, size and stories of private equity and venture capital investment activity are the focus of many news publications today. It is not quite the same situation in the area of academic and technical publications, where much remains to be researched and published. 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 aims at opening up the framework within which these valuations are practised by investors, and offers alternatives. This is a welcome angle to the current debate among investors, private equity and venture capital practitioners. The subject is likely to spur substantial discussions and additional technical publications. Beyond the J-Curve is certainly a thorough and pioneering contribution to that debate" Javier Echarri, Secretary General, European Private Equity & Venture Capital Association
"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
"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, in possession of the facts, a comprehensive and effective programme for private equity investments. I am personally convinced that our industry should become more involved into 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???Managing a Portfolio of Venture Capital and Private Equity Funds provides financial professionals with the strategies and risk management tools necessary to establish successful venture capital and private equity investment programs. It presents seasoned investors with the tools to benchmark their approach, and newcomers with guidance on how to set up a program and avoid the most common pitfalls. Filled with in-depth insight and practical advice, this book provides an innovative toolset for investors to design and manage portfolios tailored to the dynamics of this marketplace, going far beyond the typical and often simplistic recipe to ???go for top quartile funds.'
'List of Boxes.
Acknowledgements.
Disclaimer.
PART I: PRIVATE EQUITY ENVIRONMENT.
1. Introduction.
1.1 Routes into private equity.
1.2 The limited partner’s viewpoint.
1.3 The challenge of venture capital fund valuation.
1.4 Hard figures or gut instinct?
1.5 Managing with fuzzy figures.
1.6 Making the grades.
1.7 Outline.
2. Private Equity Market.
2.1 Funds as intermediaries.
2.2 The problem of predicting success.
2.3 Broad segmentation of investment universe.
2.4 Private equity market dynamics.
2.5 Conclusion.
3. Private Equity Fund Structure.
3.1 Key features.
3.2 Conflicts of interest.
3.3 Finding the balance.
4. Buyout and Venture Capital Fund Differences.
4.1 Differences between venture capital and buyouts.
5. Funds-of-funds.
5.1 Structure.
5.2 Value added.
5.3 Costs.
5.4 Private equity investment programme.
Appendix.
5A.1 Payout schedules.
PART II: INVESTMENT PROCESS.
6. Investment Process.
6.1 Key performance drivers.
6.2 Process description.
6.3 Risk management.
6.4 Tackling uncertainty.
7 Risk Framework.
7.1 Market value.
7.2 Market or credit risk?
7.3 Conclusion.
8. Portfolio Design.
8.1 Portfolio design framework.
8.2 Portfolio construction techniques.
8.3 Risk–return management approaches.
9. Case Study.
9.1 Looking for the optimal programme size.
9.2 Overcoming entry barriers: long-term strategies.
10. The Management of Liquidity.
10.1 Liquidity management problem.
10.2 Liquidity management approaches.
10.3 Investment strategies for undrawn capital.
10.4 Cash flow projections.
10.5 Conclusion.
PART III: DESIGN TOOLS.
11. Established Approaches to Fund Valuation.
11.1 Bottom-up approach to private equity fund valuation.
11.2 Inconsistency of valuations.
11.3 NAVs do not tell the full picture.
11.4 Portfolio companies cannot be valued in isolation.
11.5 Conclusion.
12. Benchmarking.
12.1 Specific issues.
12.2 Individual funds.
12.3 Portfolio of funds.
13. A Prototype Internal Grading System.
13.1 Grading of private equity funds.
13.2 The NAV is not enough.
13.3 Existing approaches.
13.4 New approach to internal fund-grading system.
13.5 Summary—NAV- and grading-based valuation.
13.6 Discussion.
13.7 Conclusion.
Appendix 13A.
14. Fund Manager Selection Process.
14.1 Relevance of fund manager selection.
14.2 Why due diligence?
14.3 The due diligence process.
14.4 Fund manager selection process.
14.5 Decision and commitment.
15. Qualitative Fund Scoring.
15.1 Scoring approach.
15.2 Scoring dimensions.
16. Grading-based Economic Model.
16.1 Approach.
16.2 Internal age adjustment.
16.3 Private equity fund IRR projections.
16.4 Expected portfolio returns.
16.5 Discussion.
16.6 Conclusion.
17. Private Equity Fund Discount Rate.
17.1 The capital asset pricing model.
17.2 Private equity fund betas.
17.3 The alternatives to the capital asset pricing model.
17.4 Summary.
PART IV: MANAGEMENT TOOLS.
18. Monitoring.
18.1 Approach to monitoring.
18.2 The monitoring objectives.
18.3 Information gathering.
18.4 Evaluation.
18.5 Actions.
19. Case Study: Saving Your Investments—Approaches to Restructuring.
19.1 The valley of tears.
19.2 The report to the board.
19.3 The terms of the restructuring.
19.4 Epilogue.
20. Secondary Transactions.
20.1 Sellers and their motivations.
20.2 Buyers and their motivations.
20.3 Secondary market prices.
20.4 Transactional issues.
20.5 The fund manager perspective.
PART V: EMBRACING UNCERTAINTY.
21. Deviating from Top funds.
21.1 Strategic investments.
21.2 Policy objectives.
22. Real Options.
22.1 Real options in private equity.
22.2 Real option analysis.
22.3 An expanded strategy and decision framework.
23. Beyond the J-curve.
23.1 Some do it better.
23.2 Deadly sins.
23.3 Structure instead of “gut instinct”.
23.4 Patience is a virtue.
23.5 Turning water into wine.
Glossary.
Bibliography.
Abbreviations.
Index.
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