Do Venture Capital Fund Managers' Inability to Identify and/or Write-Up Their Top Performers Lead to Conservative NAVs?
18 Pages Posted: 12 Dec 2006
Date Written: November 2006
The limited partners of a private equity (venture capital and buyout) fund need to rely on the fund manager's valuation of the company investments until the company is exited. We investigate how fund managers have valued their investments with respect to fund year and whether the fund managers are reporting the right value (the net asset value) by comparing the last value to the exit price. We rely on data from a large fund-of-fund in Europe with more than two thousand indirect company investments and fifteen thousand valuations. Overall, fund managers seem to follow the valuation guidelines. They value at cost in the first two years, and then switch to a true valuation. We also show that the valuation declines with maturity of the fund, most likely due to early write-off of underperforming investments and the inability to identify and write-up exceptionally well performing company investments. Then, we show that fund managers value very conservatively, and on average do not over-value their portfolio companies. Again, we explain this effect with the inability to indentify and/or write-up their top performers. Finally, we are unable to confirm previous research results that link experience of the fund manager, market segment or fund size to valuation behaviour.
Keywords: venture capital, private equity, valuation, valuation guidelines
JEL Classification: G12, G24
Suggested Citation: Suggested Citation