Beyond the J Curve

Managing a Portfolio of Venture Capital and Private Equity Funds

By: Thomas Meyer, Pierre-Yves Mathonet

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Product code: 21558
ISBN: 047001198x
224 pages
Format: Hb
Published by: John Wiley & Sons, 2004, 1st edition

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Description of Beyond the J Curve

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 fund'’ 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.

Beyond the J Curve - Chapter headings

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

Authobiography of Thomas Meyer, Pierre-Yves Mathonet

DR THOMAS MEYER studied computer science at the Bundeswehr Universitat 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.

PIERRE-YVES 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.

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.