Over the last three decades, the global private equity (PE) industry has experienced an enormous growth. According to the statistics of Thomson Venture Economics new funds raised worldwide by PE firms have grown from USD 1.7 billion in 1976 to USD 192.3 billion in 2005, with a peak of USD 260.6 billion in 2000.1 PE firms are financial intermediaries providing investors with investments in privately owned companies, which offer the potential of extraordinary returns, but whose outcomes are highly uncertain and develop over a long period of time (Chan 1983, Amit, Brander & Zott 1998). Consequently, PE firms need to manage the performance of their funds. In order to do so, they have two complementary options. At the level of a single portfolio company, PE firms have developed various instruments to solve the selection and agency problems they face. Among the most important are: a detailed selection process (Tyebjee & Bruno 1984, Birley, Muzyka & Hay 1999), the staging of capital infusions (Gompers 1995), extensive control rights (Sahlman 1990), and the use of convertible securities (Gompers 1999, Schmidt 2003). In addition, PE firms are active investors who aim to increase the value of their investments (Gorman & Sahlman 1989, Wright, Hoskisson, Busenitz & Dial 2001). By means of these activities, a PE firm tries to optimize the return-risk characteristics of each single portfolio company. Over the last 20 years, these instruments have been analyzed in a large number of theoretical and empirical papers.
KeywordsVenture Capital Private Equity Venture Capital Fund Portfolio Company General Partner
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