venture capital and private equity session 2 professor sandeep dahiya georgetown university
Post on 21-Dec-2015
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TRANSCRIPT
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
Institutional Investors (Pension Funds/ Endowments etc)
Fund of Funds (FOF)
Individual Investors Family Offices
Limited Partner
s(LP)
Limited Partner
s(LP)
General Partner
(GP)
General Partner
(GP)
VC Fund Management Company
VC FUND(Partnership Agreement) Portfolio Company 1
Portfolio Company 2
Portfolio Company 3
…
€ € €
Advice
€+
Advice
Concerns for LPsInstitutional Investors (Pension Funds/ Endowments etc)
Fund of Funds (FOF)
Individual Investors Family Offices
Limited Partner
s(LP)
Limited Partner
s(LP)
VC FUND(Partnership Agreement)
€ € €
•Hand over money for 10 years – No control once committed!!!•Hard to get out mid-way
•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!
•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
General Partner
(GP)
General Partner
(GP)
VC Fund Management Company
VC FUND(Partnership Agreement)
Advice
•How do GPs get compensated?
VC Fund Management Company
Carried Interest (20% of Profits)•Reputation•Signal
Management Fee (2% of Committed Capital)
Exit and DistributionInstitutional Investors (Pension Funds/ Endowments etc)
Fund of Funds (FOF)
Individual Investors Family Offices
Limited Partner
s(LP)
Limited Partner
s(LP)
General Partner
(GP)
General Partner
(GP)
VC Fund Management Company
VC FUND(Partnership Agreement) Portfolio Company 1
Portfolio Company 2
Portfolio Company 3
…
€ € €
Advice
€+
Advice
€
€
ONSET Ventures
Fund Name Vintage Year Committed IRR Capital Fund LP
ONSET 1984 $5M
ONSET I1989 $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.
-50
0 1 2 3 4 5 6 7 8 9 10
-50 100 80
IRR=7.87%
• What is distribution?• What is the IRR when the Fund was 4 years old?• How does the VC get paid?
Multiple 1.8x 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
Year 0 1 2 3 4 5Management Fee 5 5 5 5 5 5Investment 50.00 50.00 50.00 50.00 0.0Estimated Portfolio Value 50.0 112.5 190.6 288.3
0.0360.4 405.4
Distributions 0.0 0.0 0.0 0.0 36.0 40.5Cumulative Distributions 76.6Distribution to Key
Cumulative Distributions to Key
36.00.00.0
0.00.0
Distribution to LPs 40.5Cumulative Distributions to LPs
0.0 0.0 0.0 0.00.0 0.0 0.0 0.00.0 0.0 0.0 0.00.0 0.0 0.0 0.00.0 0.0 0.0 0.0
36.036.0 76.6
Portfolio value after capital returned 50.0 112.5 190.6 324.3 364.9Contributed Capital 55.0 110.0 165.0
288.3220.0 225.0 230.0
Invested Capital 50.0 100.0 150.0 200.0 200.0 200.0Cash Flow to Key Ventures
NPV for Key Ventures 82Cash Flow to LPs
5.0 5.0 5.0 5.0 5.0
-55.00 -55.00 -55.00 -55.00
5.0
31.04 35.54
100
95
0.0649.464.9
296.19.29.2
55.7286.9584.4250.0200.0
14.2
50.71
0.0730.5730.5
1026.7146.1155.3584.4871.3
0.0250.0200.0
146.1
584.43
65
0.0456.1
45.6122.2
0.00.0
45.6122.2410.5235.0200.0
5.0
40.61
What effect would having a 25% carry but management fee only for the first 4 years have?
Key Ventures
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
Yale Peers All UniversitiesBonds 4% 16% 22%Public equities: Domestic 12% 25% 46% Foreign 15% 17% 13%Private equity 16% 9% 2%Real estate 28% 11% 4%"Absolute return" 23% 20% 9%
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
0
25
50
75
100
125
150
OtherBuyoutVenture
Billions of 2002 $s Source: Venture Economics and Asset Alternatives.
Private Equity Returns
-25%
0%
25%
50%
75%
100%
125%
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Source: Venture Economics
Venture Capital
Buyouts
Mixture of Funding Sources
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Others
Individuals/families
Endowments/foundations
Banking/insurance
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?