Transcript Venture Capital

Venture Capital and Private
Equity
Session 2
Professor Sandeep Dahiya
Georgetown University
Course Road Map
• What is Venture Capital - Introduction
• VC Cycle
– Fund raising
– Investing
– Exiting
• Time permitting – Corporate Venture
Capital (CVC)
ONSET What Happened
• Raised 100 million for ONSET III
• Has raised 7 funds to date inclusing a
$200 million fund in 2004!
• Now has over $1 billion in assets
under management (Seed Stage???)
• We will return to TallyUp later in the
course
Quick Overview of Venture
Capital
Limited
Partners
(LP)
Institutional
Investors
(Pension Funds/
Endowments etc)
€
Advice
General
Partner
(GP)
VC Fund
Management
Company
Individual
Investors
Family Offices
Fund of Funds
(FOF)
€
€
VC FUND
(Partnership
Agreement)
Advice
Portfolio Company 1
€
Portfolio Company 2
+
Portfolio Company 3
…
Concerns for LPs
Limited
Partners
(LP)
Institutional
Investors
(Pension Funds/
Endowments etc)
€
•Hand over money for 10
years – No control once
committed!!!
•Hard to get out mid-way
Individual
Investors
Family Offices
Fund of Funds
(FOF)
€
€
VC FUND
(Partnership
Agreement)
•Restrictions on size of fund, size and type of investment, and use of debt
•Restrictions on co-investments with earlier funds
•Pre Agreed “Take Down” Schedule – will give money when “Capital Calls”
are made
•Fund Life restricted to 10 years (may be extended by additional 2 years)
•Compensation Structure of GP!
Compensation of VCs
Management Fee (2% of
Committed Capital)
•How do GPs get
compensated?
Carried Interest (20% of Profits)
•Reputation
•Signal
Advice
General
Partner
(GP)
VC Fund
Management
Company
VC FUND
(Partnership
Agreement)
VC Fund
Management
Company
Exit and Distribution
Limited
Partners
(LP)
Institutional
Investors
(Pension Funds/
Endowments etc)
€
Advice
General
Partner
(GP)
VC Fund
Management
Company
Individual
Investors
Family Offices
Fund of Funds
(FOF)
€
€
VC FUND
(Partnership
Agreement)
€
Advice
€
Portfolio Company 1
€
Portfolio Company 2
+
Portfolio Company 3
…
ONSET Ventures
Fund Name Vintage Year Committed
Capital
ONSET
1984
$5M
IRR
Fund
LP
ONSET I
1989
$30M
26.30%
21.72%
ONSET II
1994
$67M
15.49%
11.69%
ONSET III
1997
$100M
Review of Important Terms
•
•
•
•
•
•
•
•
•
•
VC firm
General partner (GP)
VC fund
Limited partner (LP)
Capital call = drawdown = takedown
Committed capital
Early-stage fund, late-stage fund, multi-stage fund
Vintage year
Management Fees
Carried interest
Some Basics
• How is return of a fund measured?
• Consider a fund that raised 100 million – Drew down 50
million at start of year 1 and Year 2. Distributed 100 million
at the end of year 7 and 80 million at the end of year 10.
0
-50
1
2
3
4
-50
5
6
7
8
100
IRR=7.87%
Multiple 1.8x
• What is distribution?
• What is the IRR when the Fund was 4 years old?
• How does the VC get paid?
9
10
80
What if 100 was
distributed at
the end of Year
5 instead of
Year 7?
Basics of Fund Performance
• Simple calculations have ignored
fees/expenses to be paid
• We shall see a more realistic example
in Key Ventures
Key Ventures
• Size is $250 million, life 10 years
• Management Fee 2% collected at start of
each year. (2%x250 = 5 million each year)
• Lifetime fees = 10x5=50 million
• Investment Capital = 250-10x5= 200
• Assume 4 equal take downs (200/4=50)
• Assume gross return is 25%
• 10% of portfolio value is distributed every
year starting in Year 4 (end of year).
• No carry till the entire 250 million is
returned to investors
Key Ventures
Year
Management Fee
Investment
Estimated Portfolio Value
Distributions
Cumulative Distributions
Distribution to Key
Cumulative Distributions to Key
Distribution to LPs
Cumulative Distributions to LPs
Portfolio value after capital returned
Contributed Capital
Invested Capital
Cash Flow to Key Ventures
NPV for Key Ventures
Cash Flow to LPs
0
5
50.00
50.0
0.0
0.0
0.0
0.0
0.0
0.0
50.0
55.0
50.0
5.0
82
-55.00
1
5
50.00
112.5
0.0
0.0
0.0
0.0
0.0
0.0
112.5
110.0
100.0
5.0
2
5
50.00
190.6
0.0
0.0
0.0
0.0
0.0
0.0
190.6
165.0
150.0
5.0
3
5
50.00
288.3
0.0
0.0
0.0
0.0
0.0
0.0
288.3
220.0
200.0
5.0
4
5
0.0
360.4
36.0
36.0
0.0
0.0
36.0
36.0
324.3
225.0
200.0
5.0
5
5
0.0
405.4
40.5
76.6
0.0
0.0
40.5
76.6
364.9
230.0
200.0
5.0
6
5
0.0
456.1
45.6
122.2
0.0
0.0
45.6
122.2
410.5
235.0
200.0
5.0
9
5
0.0
649.4
64.9
296.1
9.2
9.2
55.7
286.9
584.4
250.0
200.0
14.2
10
0
0.0
730.5
730.5
1026.7
146.1
155.3
584.4
871.3
0.0
250.0
200.0
146.1
-55.00
-55.00
-55.00
31.04
35.54
40.61
50.71
584.43
What effect would having a 25% carry but management fee
only for the first 4 years have?
A Clear Philosophy
Focus on Equities--public or private.
Avoiding market timing.
Focus on inefficient markets.
Pick investment managers rather than
investments.
• Focus on incentives.
•
•
•
•
An Unconventional Mix
Bonds
Public equities:
Domestic
Foreign
Private equity
Real estate
"Absolute return"
Yale Peers All Universities
4%
16%
22%
12%
15%
16%
28%
23%
25%
17%
9%
11%
20%
46%
13%
2%
4%
9%
Strong Track Record
• 15 year return of 14.2%:
–
–
2.7% above S&P 500
4.3% above all universities.
Private Equity is an Important
Element
• Investor since 1973.
• Repeated investments in partnerships
formed by a select group of
organizations.
• Emphasis on value-added strategies.
• Focus on incentives.
Spectacular Success in
Private Equity
• 31% over 29 years--well above
benchmarks.
• Success in venture capital, buyouts,
and oil & gas.
• Prestige investor.
But Worries About Future
• Recent fund influx:
–
–
–
–
Private pension funds in 1980s.
Public pension funds in 1990s.
Private equity pool--from $4B in 1980 to
~$300B in 2004.
“Virtual overhang.”
Private Equity Fundraising
Billions of 2002 $s
150
Source: Venture Economics and Asset Alternatives.
125
100
75
50
25
19
46
19
51
19
56
19
61
19
66
19
71
19
76
19
81
19
86
19
91
19
96
20
01
0
Other
Buyout
Venture
Private Equity Returns
Source: Venture Economics
Venture Capital
125%
100%
75%
Buyouts
50%
25%
0%
1974
-25%
1976 1978
1980 1982
1984
1986 1988
1990
1992 1994
1996 1998
2000
2002
Mixture of Funding Sources
100%
90%
80%
70%
60%
Others
50%
40%
Individuals/families
30%
20%
Endowments/foundations
10%
Banking/insurance
0%
Pension funds
Implications of Fund Influx
• Alteration in incentives.
• Relaxation of covenants.
• Concerns about within-fund
compensation.
• Quality of deals.
But ...
• Good returns during last fund influx.
• Inter-quartile spreads:
–
–
3% in public equities.
12% in private equity.
• Private equity small relative to
potential: $1:$30.
But…. (2)
• Ways to manage risks:
– Top down: Optimizer.
• Drove decision to undertake major hedging
effort in 1999.
– Bottom up: What—in Swensen’s team’s
judgment—are the interesting areas
going forward?
• Swensen: Must use both approaches!
– Need for communication and trust with Investment
Committee.
Challenge of
Internationalization
• 10% of Yale’s private equity, mostly
Europe.
• Poorer returns.
• Organizational worries and difficulties
of assessment.
• Who to back?
Swensen’s Dilemma
• Is private equity still viable for Yale?
– If so, where?
– If not, what other asset classes should
they pursue?
• How far can it go in pursuit of returns?
• How dangerous is it to be different?
Yale Investment Office 2006
•
•
•
•
Domestic Equity 12%, Bonds 4%!!!
Private Equity 17%
Real Assets 27%
Beat S&P500 in every year since 2002
by Wide mragins!! Endowment size
$18 billion