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 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.

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