Funding Long Shots
49 Pages Posted: 25 Oct 2017 Last revised: 19 Nov 2017
Date Written: October 25, 2017
Abstract
We define long shots as investment projects with four features: (1) low probabilities of success; (2) long gestation lags before any cash flows are realized; (3) large required up-front investments; and (4) very large payoffs (relative to initial investment) in the unlikely event of success. Funding long shots is becoming increasingly difficult—even for high-risk investment vehicles like hedge funds and venture funds—despite the fact that some of society’s biggest challenges such as cancer, Alzheimer’s disease, global warming, and fossil-fuel depletion depend critically on the ability to undertake such investments. We investigate the possibility of improving financing for long shots by pooling them into a single portfolio that can be financed via securitized debt, and examine the conditions under which such funding mechanisms are likely to be effective.
Keywords: Capital Budgeting; Impact Investing; Venture Capital; Private Equity; Megafund; Securitization; Portfolio Theory; Research-Backed Obligation
JEL Classification: G31, G32, G24, G11
Suggested Citation: Suggested Citation
John C. Hull
University of Toronto - Rotman School of Management ( email )
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Canada
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Andrew W. Lo (Contact Author)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
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HOME PAGE: http://web.mit.edu/alo/www
Roger Stein
Sloan School of Management, MIT ( email )
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Cambridge, MA 02142
United States
HOME PAGE: http://www.rogermstein.com
