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Description of 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 provides 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 should 'top-quartile' promises be taken with a huge pinch of salt and what does it takes to select superior fund managers?
- What do limited partners need to consider when designing and managing portfolios?
- How can one determine the funds' economic value to help address 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 their portfolio?
- How can the portfolio's returns be improved through proper liquidity management and what should be considered when over-committing?
- Why is uncertainty rather than risk an issue and how can a limited partner 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.

"This is the first work that I have seen that comprehensively covers the important subject of valuing, evaluating and measuring the performance of private equity funds. Much has been published in journals and papers on individual aspects of this controversial subject by various segments of the stakeholder universe - usually putting forward partisan viewpoints. This is the first time that a holistic, integrated and disciplined framework has been adopted. The approach taken has yielded a rich crop of useful results including an innovative methodology for determining fair value for private equity funds during the course of their long lives; portfolio design and benchmarking methods; a prototype grading and fund scoring system. Essential reading for investors and a useful state-of-the-art reference manual for private equity managers"
- Christopher K. B. Brotchie, Formerly Chief Executive of the Baring Private Equity Group and Member of the ING Management Council

"The transactions, size and stories of private equity and venture capital investment activity are the focus of many news publications today. It is not quite the same situation in the area of academic and technical publications, where much remains to be researched and published. The authors of Beyond the J-Curve have taken on the ambitious project of analysing the difficult and controversial area of valuing fund portfolios. Their innovative and integrated approach aims at opening up the framework within which these valuations are practised by investors, and offers alternatives. This is a welcome angle to the current debate among investors, private equity and venture capital practitioners. The subject is likely to spur substantial discussions and additional technical publications. Beyond the J-Curve is certainly a thorough and pioneering contribution to that debate"
- Javier Echarri, Secretary General, European Private Equity & Venture Capital Association

"Beyond the J Curve is a timely guide for investors in private equity, with an elegant balance of analysis and practical suggestions. Its emphasis on monitoring and active portfolio management should promote more effective stewardship of private equity assets in the future"
- Brenlen Jinkens, Director, Cogent Partners Europe

"Congratulations to both Thomas Meyer and Pierre-Yves Mathonet for their publication Beyond the J-Curve. They should be highly commended for breaking a long-standing taboo - investing in private equity can now be modelled. Beyond the J-Curve not only reveals a theoretical approach to Fair Value for private equity funds but also proposes a complete approach for investors to build up, in possession of the facts, a comprehensive and effective programme for private equity investments. I am personally convinced that our industry should become more involved into this type of approach in order to best explain the interest of investing in private equity."
- Pierre Hervé, General Secretary of Natexis private Equity, Chairman of AFIC's Basel II and IFRS working groups, and Member of EFRAG's Venture Capital working group

Title Information

ISBN:

9780470011980

Pages:

384 pages

Format:

Hardback

Product Code:

21558

Publisher:

John Wiley & Sons Ltd

Published:

01/07/2005

Edition:

1st Edition

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About Thomas Meyer and Pierre– and Yves Mathonet

DR THOMAS MEYER studied computer science at the Bundeswehr Universitat in Munich followed by doctoral studies at the University of Trier. He also holds an MBA from the London Business School. After 12 years in the German Air Force he worked for the German insurance group Allianz AG in Corporate Finance and M&A with particular focus on Japan, and as the regional Chief Financial Officer of Allianz Asia Pacific in Singapore. Over the last years Thomas has been responsible for the creation of the European Investment Fund's risk management function. The focus of his work is the development of valuation and risk management models and investment strategies for venture capital fund-of-funds.

PIERRE-YVES MATHONET holds a Master of Science cum laude in Finance from London Business School and a Master of Science magna cum laude in Management from Solvay Business School, Brussels. He is also a Certified European Financial Analyst. He worked as an investment banker in the technology groups of Donaldson, Lufkin & Jenrette (DLJ) and Credit Suisse First Boston, and previously, for the audit and consulting departments of PricewaterhouseCoopers. He is currently heading the venture capital activities within the Risk Management and Monitoring division of the European Investment Fund. Together, as risk managers, the authors are responsible for a portfolio of nearly two hundred private equity funds with more than 2.5 billion committed and almost 5 billion under management.

Contents of Beyond the J Curve

List of Boxes
Acknowledgements
Disclaimer

PART I: PRIVATE EQUITY ENVIRONMENT

1. Introduction
1.1 Routes into private equity
1.2 The limited partner's viewpoint
1.3 The challenge of venture capital fund valuation
1.4 Hard figures or gut instinct?
1.5 Managing with fuzzy figures
1.6 Making the grades
1.7 Outline

2. Private Equity Market
2.1 Funds as intermediaries
2.2 The problem of predicting success
2.3 Broad segmentation of investment universe
2.4 Private equity market dynamics
2.5 Conclusion

3. Private Equity Fund Structure
3.1 Key features
3.2 Conflicts of interest
3.3 Finding the balance

4. Buyout and Venture Capital Fund Differences
4.1 Differences between venture capital and buyouts

5. Funds-of-funds
5.1 Structure
5.2 Value added
5.3 Costs
5.4 Private equity investment programme

Appendix

5A.1 Payout schedules


PART II: INVESTMENT PROCESS

6. Investment Process
6.1 Key performance drivers
6.2 Process description
6.3 Risk management
6.4 Tackling uncertainty

7 Risk Framework
7.1 Market value
7.2 Market or credit risk?
7.3 Conclusion

8. Portfolio Design
8.1 Portfolio design framework
8.2 Portfolio construction techniques
8.3 Risk-return management approaches

9. Case Study
9.1 Looking for the optimal programme size
9.2 Overcoming entry barriers: long-term strategies

10. The Management of Liquidity
10.1 Liquidity management problem
10.2 Liquidity management approaches
10.3 Investment strategies for undrawn capital
10.4 Cash flow projections
10.5 Conclusion


PART III: DESIGN TOOLS

11. Established Approaches to Fund Valuation
11.1 Bottom-up approach to private equity fund valuation
11.2 Inconsistency of valuations
11.3 NAVs do not tell the full picture
11.4 Portfolio companies cannot be valued in isolation
11.5 Conclusion

12. Benchmarking
12.1 Specific issues
12.2 Individual funds
12.3 Portfolio of funds

13. A Prototype Internal Grading System
13.1 Grading of private equity funds
13.2 The NAV is not enough
13.3 Existing approaches
13.4 New approach to internal fund-grading system
13.5 Summary - NAV- and grading-based valuation
13.6 Discussion
13.7 Conclusion

Appendix 13A

14. Fund Manager Selection Process
14.1 Relevance of fund manager selection
14.2 Why due diligence?
14.3 The due diligence process
14.4 Fund manager selection process
14.5 Decision and commitment

15. Qualitative Fund Scoring
15.1 Scoring approach
15.2 Scoring dimensions
16. Grading-based Economic Model

16.1 Approach
16.2 Internal age adjustment
16.3 Private equity fund IRR projections
16.4 Expected portfolio returns
16.5 Discussion
16.6 Conclusion

17. Private Equity Fund Discount Rate
17.1 The capital asset pricing model
17.2 Private equity fund betas
17.3 The alternatives to the capital asset pricing model
17.4 Summary


PART IV: MANAGEMENT TOOLS

18. Monitoring
18.1 Approach to monitoring
18.2 The monitoring objectives
18.3 Information gathering
18.4 Evaluation
18.5 Actions

19. Case Study: Saving Your Investments - Approaches to Restructuring
19.1 The valley of tears
19.2 The report to the board
19.3 The terms of the restructuring
19.4 Epilogue

20. Secondary Transactions
20.1 Sellers and their motivations
20.2 Buyers and their motivations
20.3 Secondary market prices
20.4 Transactional issues
20.5 The fund manager perspective


PART V: EMBRACING UNCERTAINTY

21. Deviating from Top funds
21.1 Strategic investments
21.2 Policy objectives
22. Real Options
22.1 Real options in private equity
22.2 Real option analysis
22.3 An expanded strategy and decision framework

23. Beyond the J-curve
23.1 Some do it better
23.2 Deadly sins
23.3 Structure instead of "gut instinct"
23.4 Patience is a virtue
23.5 Turning water into wine

Glossary
Bibliography
Abbreviations
Index