Performance Differentiation: Cutting Losses and Maximizing Profits of Private Equity and Venture Capital Investments

Financial Markets and Portfolio Management, Vol. 21, No. 1, pp. 45-67, 2007

38 Pages Posted: 5 Jan 2007

See all articles by Rainer Lauterbach

Rainer Lauterbach

University of Pennsylvania; Goethe University Frankfurt - Department of Finance

Isabell M. Welpe

Technische Universität München (TUM) - School of Management

Jan Fertig

Goethe University Frankfurt

Abstract

Recent research has pointed out the need to differentiate between good versus poor performance of venture capital and private equity investments and to analyze the factors that determine the "winners" and "losers" of a fund. This study examines the different contractual and behavioral characteristics and their influence on the positive and negative performance of private equity investments. Specifically, we analyze how fund managers apply tools and investment behavior to mitigate risks and maximize returns. The empirical investigation of these questions is based on a merged dataset, which combines the Venture Economics and CEPRES databases. It includes a total of 1011 investments made by 137 different funds that belong to 54 private equity and venture capital firms worldwide over the period from 1979 to 2003. Our results confirm that the reduction of losses and the maximization of investment profits have different antecedents. Whereas losses are minimized by the use of convertibles and by increasing the venture capital firms' accumulated experience, profits are increased by the potential of the fund's management to allocate resources to portfolio companies. Our findings contribute to the understanding of the determinants of venture capital and private equity returns by differentiating between the mitigation of risks and the maximization of profits.

Keywords: Private Equity, Venture Capital, Staging, Risk, Return, Performance, Profit, Losses

JEL Classification: G24, E51

Suggested Citation

Lauterbach, Rainer and Welpe, Isabell M. and Fertig, Jan, Performance Differentiation: Cutting Losses and Maximizing Profits of Private Equity and Venture Capital Investments. Financial Markets and Portfolio Management, Vol. 21, No. 1, pp. 45-67, 2007 . Available at SSRN: https://ssrn.com/abstract=954109

Rainer Lauterbach (Contact Author)

University of Pennsylvania ( email )

Philadelphia, PA 19104-6370
United States

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Grueneburgplatz 1
Frankfurt am Main, Hessen 60323
Germany

Isabell M. Welpe

Technische Universität München (TUM) - School of Management ( email )

Leopoldstrasse 139
Munich, 80804
Germany
++49/89/289-24800 (Phone)
++49/89/289-24805 (Fax)

HOME PAGE: http://www.strategie.wi.tum.de

Jan Fertig

Goethe University Frankfurt ( email )

Department of Economics
Frankfurt am Main
Germany

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