book

Venture Capital and Private Equity Contracting, 2nd Edition

by Douglas J. Cumming, Sofia A. Johan

August 2013

Intermediate to advanced

780 pages

23h 24m

English

Elsevier

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Cover image
Title page
Table of Contents
Copyright
Dedication
Preface
A Brief Note on Organization and Data
Part One: Introduction
1. Introduction and Overview
1.1 What is Venture Capital and Private Equity?1.2 How Does Venture Capital and Private Equity Differ from Alternative Sources of Capital?1.3 How Large Is the Market for Venture Capital and Private Equity?1.4 State of the Venture Capital Market Pre- and Postfinancial Crisis1.5 What Issues Are Relevant to the Study of Venture Capital and Private Equity?Key TermsDiscussion Questions
2. Overview of Agency Theory, Empirical Methods, and Institutional Contexts
2.1 Introduction and Learning Objectives2.2 Forms of Finance2.3 Agency Problems2.4 Does Mitigating Agency Problems Enhance Firm Value?2.5 Summary and Steps Forward in Remaining ChaptersKey TermsDiscussion Questions
3. Overview of Institutional Contexts and Empirical Methods
3.1 Introduction and Learning Objectives3.2 An Overview of the International Institutional and Legal Context3.3 Statistics and Econometrics Used in This Book3.4 SummaryKey TermsKey Statistical and Econometric Terms

Part Two: Fund Structure and Governance
4. Fundraising and Regulation
4.1 Introduction and Learning Objectives4.2 Institutional Investor Objectives from Investment in Private Equity4.3 Regulation of Institutional Investors and Fund Managers4.4 Legal and Institutional Details and Testable Hypotheses4.5 Data4.6 Multivariate Analyses4.7 Extensions and Future Research4.8 ConclusionsKey TermsDiscussion Questions
5. Limited Partnership Agreements
5.1 Introduction and Learning Objectives5.2 Types of Restrictive Covenants5.3 What Affects the Frequency of Use of Limited Partnership Covenants?5.4 Survey of Private Equity Funds5.5 Econometric Tests5.6 Limitations, Alternate Explanations, and Future Research5.7 Conclusion5.8 Key TermsDiscussion Questions
6. Compensation Contracts
6.1 Introduction and Learning Objectives6.2 Compensation Contracts in Limited Partnerships6.3 What Affects the Design of Limited Partnership Compensation Contracts?6.4 Data6.5 Econometric Tests6.6 Limitations, Alternate Explanations, and Future Research6.7 ConclusionKey TermsDiscussion Questions
7. Style Drift
7.1 Introduction and Learning Objectives7.2 A Theory of Style Drift in Private Equity7.3 Data and Descriptive Statistics7.4 Regression Analysis7.5 Limitations and Future Research7.6 ConclusionKey TermsDiscussion QuestionsAppendix
8. Institutional Investment in Listed Private Equity
8.1 Introduction and Learning Objectives8.2 Literature and Hypotheses8.3 Data and Summary Statistics8.4 Multivariate Analyses8.5 ConclusionsKey TermsDiscussion Questions
9. The Role of Government and Alternative Policy Options
9.1 Introduction and Learning Objectives9.2 Taxation9.3 Securities Laws9.4 Regulation Pertaining to the Demand for Entrepreneurial Capital9.5 Regulations Pertaining to the Supply of Entrepreneurial Capital9.6 Direct Government Investment Programs9.7 SummaryKey TermsDiscussion Questions
Part Three: Financial Contracting between Funds and Entrepreneurs
10. The Investment Process
10.1 Introduction and Learning Objectives10.2 Due Diligence10.3 Stage of Development and Industry10.4 Staging10.5 Fund Flows and Valuations10.6 Syndication10.7 Board Seats10.8 Contract Terms10.9 SummaryKey TermsDiscussion Questions
11. Security Design
11.1 Introduction and Learning Objectives11.2 Theory and Hypotheses11.3 Data11.4 Empirical Tests11.5 Limitations, Alternative Explanations, and Future Research11.6 ConclusionsAppendixKey WordsDiscussion Questions
12. Preplanned Exits and Contract Design
12.1 Introduction and Learning Objectives12.2 Hypotheses12.3 Data12.4 Multivariate Tests12.5 Limitations and Future Research12.6 ConclusionsKey TermsDiscussion Questions
13. Legal Conditions and Venture Capital Governance
13.1 Introduction13.2 Legality and Venture Governance13.3 Data and Summary Statistics13.4 Regression Analyses13.5 Limitations and Future Research13.6 ConclusionKey TermsDiscussion Questions
Part Four: Investor Effort
14. Investor Value Added
14.1 Introduction and Learning Objectives14.2 Innovation and Efficiency14.3 Do Contract Terms Facilitate Investor Effort?14.4 Location14.5 Portfolio Size and Fund Size14.6 Investment Duration14.7 SummaryKey TermsDiscussion Questions
15. Contracts and Effort
15.1 Introduction and Learning Objectives15.2 Hypotheses15.3 Methodology15.4 The Dataset15.5 Econometric Analysis15.6 Limitations, Alternative explanations, and Future Research15.7 ConclusionsKeywordsDiscussion Questions
16. Local Bias
16.1 Introduction16.2 Hypotheses16.3 Data and Summary Statistics16.4 Testing Local Bias16.5 Factors Contributing to the Local Bias in VC Investments16.6 Are Local Ventures More Likely to Be Successful?16.7 Conclusions, Implications, and Future ResearchKey TermsDiscussion QuestionsAppendix
17. Portfolio Size
17.1 Introduction and Learning Objectives17.2 Comparative Statics and Hypotheses17.3 Data17.4 Empirical Evidence17.5 ConclusionAppendixKey TermsDiscussion Questions
18. Fund Size
18.1 Introduction18.2 Theoretical Considerations18.3 The Data Set and Summary Statistics18.4 Fund Size, Limited Attention, and Valuation18.5 Fund Size, Limited Attention, and Venture Performance18.6 ConclusionAppendix
Part Five: Divestment
19. The Divestment Process
19.1 Introduction and Learning Objectives19.2 The Economics of Initial Public Offerings19.3 The Mode of Exit19.4 International Exit Statistics19.5 SummaryKey TermsDiscussion Questions
20. Investment Duration
20.1 Introduction20.2 Venture Capital Investment Duration20.3 Institutional Factors Influencing Investment Duration in Canada Versus the United States20.4 Data and Summary Statistics20.5 Regression Analyses of Time to Exit20.6 Discussion and ConclusionsKey TermsDiscussion Questions
21. Contracts and Exits
21.1 Introduction and Learning Objectives21.2 Hypotheses21.3 Variables in the Econometric Specifications21.4 Data21.5 Multivariate Regressions21.6 ConclusionKey TermsDiscussion Questions
22. Returns, Valuation, and Disclosure
22.1 Introduction and Learning Objectives22.2 Reporting Biases with Unrealized Investments: Institutional Background and Hypotheses22.3 Data22.4 Deriving a Benchmark: The Analysis of Realized Returns22.5 Analysis of Reporting Biases in Unrealized Investments22.6 ConclusionKey TermsDiscussion QuestionsAppendix Venture Capital Valuation Method
Part Six: Conclusion and Appendices
23. Summary and Concluding Remarks
Bibliography

Content preview from Venture Capital and Private Equity Contracting, 2nd Edition

Contracts and Exits

Using a sample of European venture capital investments, this chapter studies the relation between venture capital contracts and exits. The data indicate that ex ante, stronger venture capital control rights increase the likelihood that an entrepreneurial firm will exit by an acquisition rather than through a write-off or an IPO. The findings are robust to controls for a variety of factors, including endogeneity and cases in which the VC preplans the exit at the time of contract choice. The findings are consistent with control-based theories of financial contracting, such as Aghion and Bolton (1992).

Keywords

Venture capital contracts; cash flow and control rights; exit; IPO; acquisition; liquidation; write-off

21.1 Introduction ...

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Venture Capital and Private Equity Contracting, 2nd Edition

by Douglas J. Cumming, Sofia A. Johan