The Size of Venture Capital and Private Equity Fund Portfolios
Singapore Management University - Lee Kong Chian School of Business
Douglas J. Cumming
York University - Schulich School of Business
Boston University; Interdisciplinary Center (IDC) Herzliyah
Journal of Corporate Finance, Vol. 13, pp. 564-590, 2007
We propose a model that examines the optimal size of venture capital and private equity fund portfolios. The relationship between a VC and entrepreneurs is characterized by double-sided moral hazard, which causes the VC to trade off larger portfolios against lower values of portfolio companies. We analyze the structural relations between the VC's optimal portfolio structure and entrepreneurs' and VC's productivities, their disutilities of effort, the value of a successful project, and the required initial investment in a venture. We also test the model's predictions using a small proprietary dataset collected through a survey targeted to VC and private equity funds worldwide.
Number of Pages in PDF File: 55
Date posted: November 22, 2006 ; Last revised: November 12, 2013
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