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Exposed to the J-Curve: Understanding and Managing Private Equity Fund Investments

Ulrich Grabenwarter and Tom Weidig, European Investment Fund


Abstract

How can institutional and private investors safely invest into private equity funds?

We review our discussions on private equity fund investments from our book "Exposed to the J-curve: Understanding and Managing Private Equity Fund Investments" (published by Euromoney Investors Plc). This is the first book to discuss the relationship between the limited partners and the general partner and we aim to provide an undisguised and independent look behind the scenes, and explain the core aspects of this industry.

We start with a review of the private equity fund industry and move to a description of all the relevant management issues of fund investments, from an individual investment to a risk and portfolio management perspective. We also deal with indirect investment vehicles like funds of funds and securitised notes.

Our goal was to write a useful reference book for institutional practitioners, private equity fund managers and private equity lawyers, as well as students and academics who seek to understand the dynamics of the complex world of private equity funds. And, to provide the reader with food for thought and a starting point for interesting discussions on private equity.

Contact authors at: u.grabenwarter@eif.org or tom.weidig@physics.org

Biographies

Ulrich Grabenwarter is Head of Division for Venture Capital Operations at the European Investment Fund, and responsible for a portfolio of nearly hundred private equity funds and 1 billion Euro under management. Prior to EIF, he had worked for five years at European Investment Bank in the Directorate for Financing Operations in Germany and Austria, executing structured finance operations in the corporate and financial sector and private equity fund-of-fund investments. He was the personal advisor of the Austrian Management Board Member at EIB, and started his career with Price Waterhouse Coopers in the Audit and later Finance Consulting Department specialising in derivatives for investment and risk management purposes.

Dr. Tom Weidig is the author of several works on private equity funds, funds-of-funds, and the impact of Basel II. His study "The Risk Profile of Private Equity" has been publicised and endorsed by the European Venture Capital Association, and translated into German and French. He holds a Master of Science in Theoretical Physics from Imperial College London, and a PhD from the University of Durham. He was a postdoctoral researcher at the University of Manchester, and a visiting researcher at Trinity College, University of Cambridge. Leaving physics behind, he then worked as a risk analyst in derivatives for the US investment bank Bear Stearns in London. He is currently an independent consultant, and also worked for the European Investment Fund researching and modelling private equity funds. He has his own consultancy company: www.quantexperts.com.

Copyright

All copyrights are reserved to Ulrich Grabenwarter and Tom Weidig.

Part of this article is taken directly from their book "Exposed to the J-Curve: Understanding and Managing Private Equity Fund Investments" published by Euromoney Institutional Investor Plc in February 2005. A description of the book is available at www.euromoneybooks.com by searching for the authors.

The bibliography is provided by QuantExperts: www.quantexperts.com. Anyone interested in getting access to the extensive database and summaries on private equity/venture capital/buyout (fund) research should contact u.grabenwarter@eif.org or tom.weidig@physics.org.

Understanding and Managing Private Equity Fund Investments

Private equity funds act as intermediary between institutional investors and high net worth individuals on one side and privately held companies seeking capital for financing crucial stages of their corporate activity on the other. They are collective investment schemes gathering the capital of a number of investors in order to invest into between 10 to 30 companies. A management team, typically called the general partner, deploys the capital provided by the investors, also called limited partners, according to a predefined investment strategy. Investors do not typically take part in the day-to-day management of the fund, and their liability to the financial exposure of the fund is limited to their capital commitment made to the fund.

Types and risk profiles of private equity investments

Private equity funds are only one way to gain exposure to private equity. Risk profiles available for investors in this asset class range from direct investments in a privately held company to fund investments, fund-of-funds investments and structured products such as securitisation instruments and hedge funds.

The risk profile of these types of investment in private equity varies greatly with individual direct investments in privately held companies being the riskiest, while structured products such as hedge funds or securitisation notes allow for tailoring risk profiles to specific investors' needs.

Funds are a good way to diversify risks associated with investments in privately held companies and diversification benefits increase with the number of fund investments held by an investor. Fund-of-funds investments have a risk profile comparable to holding a diversified portfolio of fund investments individually.

Reasons to invest in private equity

Private equity is an asset class that promises high returns for taking high risks. Private equity might even outperform other asset classes on a purely risk-adjusted basis as inefficiencies of private equity markets allow the investors to benefit from information asymmetry, legally obtained insider information and superior investment skills of individual managers. These elements are typically not relevant for public markets investments where information is generally shared, reflected in market prices and residual minor market inefficiencies are difficult to exploit through arbitrage due to the transaction costs.

However, the higher return opportunities in private equity come at a price. Next to relatively high management cost, investors in this asset class need to accept low liquidity for their investment and long holding periods before returns may materialise. Investments in individual companies typically have a holding period of between 3 to 5 years, fund investments have a lifetime of 8 to 12 years and fund-of-funds investments can last up to 15 years before being divested. Also, investors in private equity, no matter at what level, need superior selection skills of their investment managers as the quality of fund managers varies greatly and natural selection of successful teams through investment performance is slow.

Subsegments of private equity

Private Equity funds can target a wide range of sub-segments of private equity. Typical segments include seed financing in the creation stage of companies, start-up capital for companies developing prototypes of a marketable product, expansion capital for market penetration, buy-out capital and replacement capital for dealing with changing ownership structures in companies and succession issues, pre-IPO financing to prepare companies for public listing, turn-around capital to support distressed companies in the restructuring of their business activities, or mezzanine capital as an instrument to leverage equity investments in buy-out or development financing.

Risk profiles of these sub-segments differ and so does the skill-set required from managers investing in the various sub-segments. Whilst the investment assessment in early stage technology companies requires a high understanding of the technology risk and the market potential of the respective product, the market risks and product risks are typically less pronounced in late stage companies or buy-out situations. Here, it is often the superior financial structuring and organizational development skills of the fund manager that make the difference for a successful investment.

Measuring performance in private equity

Claims of a higher risk adjusted performance of private equity compared with other asset classes face a major challenge: the measurement of performance in private equity and its comparability to performance measures in the public markets.

In private equity the most common measures are the multiple and the internal rate of return (IRR). The multiple is the simplest measure and expresses how many times the invested (or drawn down) money has been returned. The IRR is the value of the discount rate that makes the net present value (NPV) of all cash flows between a fund investor and the fund zero. Whilst the multiple indicates the absolute value increase an investment has generated, the IRR gives a measure for how efficiently money has been invested by introducing a time component in determining a fund's performance.

However, none of them is comparable to the most commonly used performance measure in public markets, the time-weighted return (TWR). Essentially, the TWR computes the annual return for each year. This is not really possible for a private equity fund due to a lack of market prices of its underlying assets. Various concepts have been developed to make the performance measures comparable, such as the public market equivalent (PME) which mirrors the cash flows of an investment in a private equity fund with equivalent investments in a public market index. This concept has been further developed to deal with issues like how to reflect the distribution of proceeds of a private equity investment in the PME.

Asset allocation private equity

Measuring risk-adjusted returns and make them comparable to the performance of other asset classes is important to determine the size of the allocation to private equity within an alternative investment strategy. Empirical data from the US market, where fund investors allocate between 5% to 15% of total assets to private equity, seem to suggest that investments in private equity do indeed improve the risk-adjusted return. This is why in the US also absolute return driven institutional investors are regular and long-term strategic investors in this asset class. In Europe the case is less clear.

Here, historical performance of private equity did not convincingly outperform lower risk asset classes in the past. This may largely be due to less mature markets in Europe than the US and the fact that private equity is also dependent on a socio-political environment fostering private equity investments, an environment that is only now emerging in Europe.

Generally, an allocation of up to 15% of assets to private equity appears useful for investors with a long-term investment strategy, adequate investment selection skills for this asset class and provided they have sufficient resources to implement a sufficiently diversified portfolio in terms of industrial sectors, investment stages, geographic area and not least vintage years to cater for the cyclicality of private equity returns over time.

Identifying an investment opportunity

At least as important as to whether private equity has benefits for an overall portfolio strategy is the skill-set required for the investor to select fund managers that can deliver superior returns. This is no easy task in an opaque market with many inefficiencies and particularly important considering the long holding periods of fund investments and low liquidity in trading such assets, which makes it difficult to correct mistakes made in the investment process.

In making an investment decision, the identification of an investment opportunity on a macroeconomic level is the first step. The development stage of an economy, the sophistication of capital markets, presence of research and innovation are all factors that directly reflect the degree of sophistication of private equity instruments in a given market. Generally, the more mature an economy the more specialised private equity instruments become available.

Identifying a successful fund manager

However, the best market opportunity is of little value without a skilled fund manager that can exploit such opportunity with a pertinent investment strategy. Evaluating such teams requires sizeable resources, experience and a risk-sensitive approach.

How should the potential fund investor select the right team to exploit this opportunity? How to find the teams that go after such opportunities? How to compare different teams? How to assess their relative past performance? How to assess an investment strategy? How to distinguish lucky winners from teams with superior skills? How to assess the stability of a team? How to assess a team's deal flow potential? How to evaluate first-time teams?

These are key questions limited partners need to deal with in the due diligence process of a private equity fund investment. Unfortunately there is no ready-made checklist that works as a one-fits-it-all solution. Professional fund investors cater for substantial in-house resources to build up due diligence competence for their investments. These resources are an important cost factor for them, but are essential to their investment success.

Downside protection for private equity fund investments

Unfortunately no investor can get it right all the time and at times investments go off track. Limited partners face the situation that once an investment is made they virtually have no means to influence the upside potential of their investment. The only significant means they have to influence the performance of their portfolio of fund investments is the management of downside risk. For this purpose, protective measures in the legal documentation of a fund are key to take corrective measures when problems arise. The legal documentation defines the rules of the game in the relationship between the general partner and the limited partners. Defining the rights and obligations of the parties involved, commercial terms such as management fees and other operating expense charged to the fund, the split and the distribution of a fund's profit between the limited partners and the general partner, the sequence of events in the case if instability in the general partners management team and similar questions are examples. A prominent feature in this context is also the definition of the governance structure of a fund. It should carefully segregate the spheres of influence between investors, fund managers and sponsors of a fund to avoid conflict of interest. Poorly managed conflict of interest situations are one of the most frequent reasons for badly performing fund investments.

In cases, where irremediable issues arise, the removal of the fund manager remains as measure of last resort. This is the most uncomfortable situation that can arise for limited partners and a general partner alike and it is therefore of utmost importance to define related contractual clauses carefully. The objective is to strike the right balance between the interest of limited partners and the general partner. For this purpose it is crucial that both parties understand each other on their concerns and on the protection they seek to avoid abuse by the other party. Defining the so called divorce clause between a general partner and limited partners is not a power game between the two parties but merely an attempt to define an unambiguous, simple and fair procedure to part if things irremediably have gone off track. Limited partners should be aware of the key importance of the rights defined in their legal documentation and in defining them they should seek the help of professional advice.

Monitoring a private equity fund investment and managing crises

Managing down-side risk means also to become aware of potential risks as early as possible in order to take timely action. Regular monitoring of investments is therefore essential. Investors need to look out for early warning signs which can be manifold. The important thing is to interpret them correctly and to draw the right conclusions. Again, no one-fits-it-all recipes are available, but there are factors to watch: investment pace, stability of the team, loss rates on portfolio companies, commitment of co-investors, reliability of valuations reported by the GP are a few of them.

Investors need to recognise, that, if they are not aware of anything to worry about, it will not mean that there is nothing to worry about. Private equity is an opaque asset class. Information travels slowly and gets biased on its way. How to segregate facts from fake and myths from reality? This is a key question to success in this industry. It takes skills, experience and an intuitive insight to draw the right conclusions from monitoring relevant parameters. Extensive networks in the industry, especially with fellow limited partners, help. Good cooperation among LPs can also overcome the information asymmetry between LPs and the GP and becomes vital when the relationship between LPs and the GP has irremediably broken down. Then, the LPs' biggest challenge is to speak with one voice to avoid being caught in bilateral agreements with the GP, where they base their judgement on incomplete or incorrect information on the position of their fellow investors.

Managing a portfolio of fund investments

Selecting successful individual fund investments is crucial to achieve an above-average aggregated portfolio return, but the individual investments must fit into an overall portfolio strategy to effectively reduce the risks. Only a well-diversified portfolio reduces considerably the risks taken at the level of individual fund or company investments.

Successful investment in alternative assets depends on a risk-return driven asset allocation, efficient use of resources, minimisation of diversifiable risks and management of undiversifiable risks. This requires a dedicated risk management that looks after issues of information collection, establishes meaningful benchmarks to measure investment performance, monitors diversification measures, steers liquidity and overcommitment strategies, projects future portfolio performance and recommends portfolio re-balancing measures.

Information gathering in private equity

Efficient portfolio risk management greatly depends on the collection of reliable information. Information gathered by investment managers from their own portfolio and their network to fellow limited partners are a valuable starting point, but other sources are necessary to get the full picture. Industry research and increasingly information databases are important resources.

Especially the databases have gained in importance over recent years for performance benchmarking and modelling. The most important databases are VentureXpert and Cambridge Associates. All academic research in the field of private equity uses VentureXpert or a much smaller sample of a fund of funds. A potential bias due to their data collection, especially for the pre-Nineties data, can certainly not be excluded, and this has never been conclusively checked. Nevertheless, they are the best available data sources that market players can get access to in private equity.

Large institutional investors have the benefit of being able to cross-check this information against the data of their own portfolio to reduce the risk of systematic data bias. It is generally good advice in this industry to use several information sources and to cross check information. Virtually any information in an opaque market like private equity is biased one way or another. Combining the data obtained from various sources reduces the risk of unreliable input data.

Diversifiable risks

Diversifiable risks include stage risk, manager risk, sector risk, geographic risk and vintage year risk. Managing diversifiable risk means getting an understanding on the dynamics of these risk components, their correlation behaviour to other risk types and draw conclusion on how widely investments should be spread to minimise these risks. Empirical studies exist to analyse how many fund investments are needed to efficiently reduce diversifiable risks and where the cut-off point is, where benefits from further diversification becomes marginal or costs increase more than linearly.

Undiversifiable risks

Liquidity risk and valuation risk are risks that are inherent to the asset class and undiversifiable. Unfortunately they have a great impact on the overall risk profile of this asset class. Liquidity risk refers to the risk that investments in this asset class can not be easily traded and if so this will frequently result in a sizeable discount. Valuation risk refers to the uncertainty on the value of underlying assets in private equity investments. There is no efficient market for privately held companies and hence valuation is highly arbitrary. This is a major challenge for the assessment of risk, interim performance and the definition of appropriate portfolio steering measures.

Cash flow forecasting for liquidity planning and overcommitment strategies

Efforts have been undertaken to overcome the uncertainties arising from these constraints at least partly by applying quantitative risk management techniques to private equity.

These efforts aim at quantifying time and amount of future net cashflows from private equity investments to facilitate liquidity planning and forecasting of portfolio returns. Progress in this area is hindered by constraints on access to unbiased historical data, little transparency on modelling work carried out so far and difficulties to test the reliability of models, given the long lifetime of the underlying assets.

Nevertheless, there are a series of serious efforts that have been made public recently, with various degrees of sophistication and include probabilistic and non-probabilistic models. The simpler models are not necessarily the least useful approaches. They may have the benefit of being easily understandable and their shortcomings may be easier to quantify. More sophisticated models attempt to derive typical behaviour of fund investments from historical data and establish typical patterns that can be used for the prediction of future cash flows. In any case, the goal is to have a reliable probabilistic model that link various scenarios to a degree of likelihood. This makes it possible to derive possible actions to proactively manage underlying risks.

Nevertheless, in terms of modeling, private equity is challenging. Absence of market prices, artificial valuation methods with an overly conservative assessment of the net asset value of funds and difficult access to reliable historical data remain major constraints.

Alternative investment vehicles and future trends

Private equity is a dynamic and fast growing industry. Despite a major setback after the collapse of the technology markets in the years 2000 to 2003, the industry continues to attract investors from many sectors. Investors will continue to seek access to this asset class as a means to improve risk-adjusted returns on their overall investment activity.

This growing interest will push the boundaries of private equity and make it an industry that is increasingly interlinked with public markets. Trends have already emerged that smoothen the major constraints of private equity as an asset class, including:

Intermediaries for unskilled investors

Intermediaries in the form of funds-of-funds have emerged in great number over the last decades and continue to grow in number and size. Competition amongst them leads to increasingly attractive conditions for unskilled investors to access the asset class private equity and also makes private equity accessible for investors that do not have sufficient resources to build up an adequately diversified portfolio of fund investments.

Secondaries and securitisation to increase liquidity

Secondary transactions and securitisation deals have emerged to minimize a major drawback of private equity investments: the lack of liquidity. Whilst secondaries have been a predominantly buyers' market driven instrument in the past, increased competition in this segment has led to a fairer pricing of assets making it an increasingly interesting instrument for investors to exit private equity fund investments and to use it as portfolio steering instrument. Securitisation deals have started to extend into private equity and are beginning to position themselves as alternative instrument in making private equity risk tradable.

Structured deals and hedge fund provide tailor-made risk profiles

In order to attract new types of investors, alternative instruments of hedge funds and structured instruments have emerged, providing investors with a risk profile that is tailored to their risk appetite.

Publicly quoted private equity instruments

Efforts of the past to make private equity risk publicly tradable will continue and the combination with structured instruments will facilitate the pricing of tradable instruments, providing for a more transparent and liquid market.

Industry standards

Industry standards will converge and remove some of the opaqueness of the industry, make information gathering and evaluation more accessible to a broad audience and lead to generally recognized professional standards that provide adequate protection also for novice investors. This will open up this asset class to an even wider group of investors and foster this industry's further growth.

Conclusion

The challenges for investors in private equity are manifold. This article lists a series of major challenges investors face when investing in private equity funds. The authors' book "Exposed to the J-curve - Understanding and managing private equity fund investments" discusses these and other challenges in detail and provides hand-on guidance for investors, academics, lawyers and consultants interested in this asset class. For general partners, the views exposed may be valuable input to understanding the views and requirements of their investors and their approach to evaluating investment opportunities, and see the challenges of their industry from the other side of the table.

Generally, the authors' book has the objective to make the discussion between the general partner and the limited partner more transparent for the benefit of both sides in improving the attractiveness of this asset class.

Summary content of the book

"Exposed to the J-curve Understanding and managing private equity fund investments"
by Ulrich Grabenwarter and Tom Weidig

Part I: Private equity fund investments: an alternative asset class

The private equity fund as the intermediary in an expert market
The different ways to invest into private equity funds
The different risk levels of private equity investments

Why invest into private equity funds?
Who should invest into private equity funds?
Private equity is part of an alternative investments strategy
Reasons to invest into private equity funds
Investing into private equity - a critical look

The private equity fund industry
Origin of the private equity fund industry
The main markets
The main private equity players

The investment focus of private equity funds
The sub-segments of private equity - an overview
Characteristics and risk of venture capital
Characteristics and risk of late-stage private equity segments

Performance of private equity funds
Sources of return for private equity funds
Performance measurement in private equity
Finding a meaningful performance measure for private equity funds
Why public market performance measures fail
The risk (or uncertainty in returns) of private equity funds
Empirical studies of risk-return of private equity funds

Asset allocation to and within private equity
Correlation between private equity and other asset classes
Asset allocation to private equity
Correlation between private equity funds of different investment foci
Asset allocation within private equity

Part II Being a private equity fund investor

The parties in a fund structure and evaluation
The set-up of a private equity fund
Evaluating an investment opportunity from a limited partner perspective
Evaluating the market opportunity
Evaluating the quality of a private equity fund's management team
First-time teams versus experienced teams

Assessing terms and conditions - what to watch out for
Management fee structures
Other partnership expenses
Investment periods and fund duration
Equalisation premia
Hurdle return - does it matter?

Alignment of interest and the sharing of profits
Carry distribution based on repayment of full-contributed capital
Carry distribution based on repayment of full-committed capital

The legal documentation - how to protect your investment
The legal structure
Protective clauses

Avoiding or managing conflict of interest
Conflicts of interest within the scope of a general partner
Conflicts of interest involving limited partners
Best market practice corporate governance

Portfolio monitoring and crisis management
Warning signs in monitoring a fund investment
What if everything goes wrong? - How to react in a crisis

Part III Managing a portfolio of private equity fund investments

The challenges of portfolio management in private equity
Goals and tasks of portfolio management in private equity
Identifying and reducing the risks of private equity fund investments
Quantitative risk management in private equity
Applying risk management techniques to private equity

Information for risk and portfolio management
The information deficiency in private equity
Overcoming the information deficiency
Private equity databases

Monitoring a portfolio
Portfolio measures
Monitoring diversification
Monitoring the value of the portfolio
Monitoring performance using a benchmark

Forecasting the future portfolio
Forecasting the distribution of future cash flows
Monitoring risk numbers
Forecasting the performance of the portfolio

Steering the portfolio
General issues
Liquidity reserves
Overcommitment Strategies
Diversification

Advanced cash flow modelling
Cash flow modelling
Cash flow patterns as a guide to fund investors
Different types of cash flow models
Models of a fund as a portfolio of direct investments
Non-probabilistic models
Probabilistic models

Part IV Alternative private equity investment vehicles: outsourcing and exiting

Helping institutional investors to access private equity
The role of alternative investments
Outsourcing
Exiting private equity

Funds of funds
Advantages
Disadvantages
Selecting a fund of funds management team
Investment strategies as differentiating factor
Other selection criteria
The risk profile of a fund of funds

Secondary transactions
Motivation and considerations on the sell-side
Motivation and considerations on the buy-side

Securitisation and structured instruments in private equity
Securitisation of private equity funds
Benefits
Structured instruments and hedge funds
Other products: publicly traded private equity

Conclusion and future trends

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Allan, D. (2001), 'Private equity investing in uncertain times', http://www.wilshire.com.

Atkins, B. and M. Giannini (2004), 'Risk Management for private equity funds of funds', Chapter 15 of The New Generation of Risk Management for Hedge Funds and Private Equity Investments, Institutional Investor Books.

Bance, Alex (2004), 'Why and How to Invest in Private Equity', EVCA Investor Relations Committee.

Diem, Gregor (2002), 'The Information Deficiency Problem of Private Equity Fund-of-Funds: A Risk and Monitoring Management Perspective', University of Birmingham.

Dowd, K. (1998), 'Beyond value at risk: the new science of risk management', Wiley series in Frontiers in Finance

EVCA Research Paper (2004), 'Performance Measurement and Asset Allocation for European Private Equity Funds'.

Flag Venture Management (2001), 'The right kind of diversification', Venture Insight Special Report.

Ford Washington (2002), 'Investing in Private Equity through a Fund-of-Funds', Fort Washington Capital Partners.

Frei, A. and M. Studer (2000), 'Quantitative private equity risk management', Chapter 14 of The New Generation of Risk Management for Hedge Funds and Private Equity Investments, Institutional Investor Books.

Kaserer, C.; N. Wagner and A.-K. Achleitner (2003), 'Managing Investment Risks of Institutional PE Investors', Working Paper No. 2003-01, Center for Entrepreneurial and Financial Studies, Technical University of Munich, December.

Kogelman, S. (1999), 'The Importance of Asset Allocation in Managing Private Equity Commitments', Goldman, Sachs & Co.

McIntire, G.; A. Conner and D. Nevins (2004), 'A Portfolio Management Approach to Determining Private Equity Commitments', Journal of Alternative Investments, Volume 6, Number 4, pp. 32-46.

Middleton, G. , 'Strategies for reducing investment risk', Venture Economics talk.

Raschle, B. (2001), 'Diversification', http:\www.adveq.com.

Sweney G.; J. Taylor; L. Edgar and R. Eu (2001), 'Private Equity Sub-Allocation: Part One Sub Classes', WR Hambrecht.

Sweney G.; J. Taylor J.; L. Edgar and R. Eu (2001), 'Private Equity Sub-Allocation: Part Two Market Timing', WR Hambrecht.

Sweney G.; J. Taylor; L. Edgar and R. Eu (2001), 'Private Equity Sub-Allocation: Part Three Portfolio Construction', WR Hambrecht.

Swensen, D. (2000), 'Pioneering Portfolio Management - An unconventional approach to instituional investment'.

Testa, Hurwitz & Thibeault (2004), 'Valuations, Transparency and Today's Fundraising Environment', Super Return Conference, Munich.

Weidig, T. and P. Mathonet (2004), 'The Risk Profile of Private Equity', http://ssrn.com/abstract=495482

Wender, J. (2002), 'Managing a Pension Plan That Is Over-Allocated

to Private Equity', Institute of Fiduciary Eduction.

Valuation Issues

Blaydon, C. and M. Horvath (2001), 'GPs Say Valuation Standard Is Important, But Can't Agree on One', Venture Capital Journal

Burgel, O. (1999), 'UK Venture Capital and Private Equity as an Asset Class for Institutional Investors', Research Report commissioned by BVCA.

BVCA (2003), 'Reporting and Valuation Guidelines', http://www.bvca.co.uk.

Dittmann, I.; E. G. Maug and J. Kemper (2002), 'How Fundamental are Fundamental Values? Valuation Methods and Their Impact on the Performance of German Venture Capitalists', http://ssrn.com/abstract=307562, November.

EVCA (2001), 'EVCA Guidelines, EVCA Code of Conducts', http://www.evca.com/pdf/EVCA%20Guidelines/Guidelines_valuations.pdf.

Foster Center for private equity (2002), 'Valuation Survey Results', Talk, Tuck School of Business at Darmouth.

GIPS - Global Investment Performance Standards (2002), 'Venture Capital and Private Equity Provisions and Guidance to GIPS'.

Gompers, P. A. and J. Lerner (1998), 'Money Chasing Deals?: The Impact of Fund Inflows on Private Equity Valuations', http://ssrn.com/abstract=57964, January.

Hand, J.R.M. (2003), 'The Value Relevance of Financial Statements in Private Equity Markets', http://ssrn.com/abstract=484382, December.

Huelsboemer, A. (2001), 'Net? Asset? Value?', FINANCE - Transaktion & Finanzierung, October.

Kaneyuki M. (2003), 'Creative Valuation Techniques for Venture Capital Fund Reporting', Finanzbetrieb, No. 7-8, July 2003, pp. 506 - 511

Maxwell, R. (2002), 'Lies, Damn Lies, and Statistics'.

Venture Economics (2002), 'Valuation Standards', Talk, Munich.

Cashflow Studies and Modelling

Cheung, L.; V, Kapoor V. and C. Howley (2003a), 'Equity Securitization: Risk and Value', Special Report, Structured Finance CDO Research.

Cheung, L.; V. Kapoor and C. Howley (2003b), 'Rating Private Equity CFOs:Stochastic Market Cash Flows', S&P CDO Research.

Cochrane J. (2003), 'Risk and Return of VC'.

Diller, C. and C. Kaserer (2004), 'European Private Equity Funds - A Cash Flow Based Performance Analysis', Working Paper No. 2004-01, Center for Entrepreneurial and Financial Studies, Technical University of Munich, May.

EVCA Research Paper (2004), 'Performance Measurement and Asset Allocation for European Private Equity Funds'.

Fitch Ratings (2002), 'Going Public with Private Equity CFOs'.

Ljungqvist A. and M. Richardson (2003a), "The Cash Flow, Return and Risk Characteristics of Private Equity", NYU, Finance Working Paper No. 03-001. http://ssrn.com/abstract=369600 .

Ljungqvist, A. and M. Richardson (2003b) , "The Investment Behavior of Private Equity Fund Managers", http://ssrn.com/abstract=478061

de Malherbe, E. (2003), 'A model for private equity funds', Rabobank International.

de Malherbe, E. (2003), 'Modelling Private Equity Funds and Private Equity Collateralised Fund Obligations', Rabobank.

Nowak, E.: A. Knigge and D. Schmidt (2004), 'On the Performance of Private Equity Investments: Does Market Timing Matter?', EFMA 2004 Basel Meetings Paper, http://ssrn.com/abstract=492982, March.

Romer M.; M. Moise and R. Hrvatin (2004), 'Hedge fund and private equity securitisation', Chapter 24 of The New Generation of Risk Management for Hedge Funds and Private Equity Investments, Institutional Investor Books.

Takahashi, D. and Alexander, S. (2001), 'Illiquid Alternative Asset Fund Modelling', The Journal for Portfolio Management, Winter 2002, Volume 28, No. 2, pp. 90 - 100.

Weidig, T. (2003b), 'Modeling Venture Capital Funds', Risk Magazine, Volume 16, October, pp. 89 - 92 (or http://ssrn.com/abstract=459542)

Weidig, T. (2002), "Towards a Risk Model for Venture Capital Funds: Liquidity and Performance Forecasting", http://ssrn.com/abstract=353562.

Weidig, T. (2003a), 'Risk Model For Venture Capital Funds', http://ssrn.com/abstract=365881.

Other relevant and interesting articles

BVCA (2003), 'Reporting and Valuation Guidelines', http:\www.bvca.co.uk.

Burgel, O. and G. C. Murray ( ), 'The Impact of Fund Size and Investment Preferences on Venture Capitalists' Returns', London Business School.

Born B. (2004), "The risk profile of funds-of-funds", Diploma Thesis, University of Frankfurt.

Chen, Baierl and Kaplan (2002), 'VC and its role in strategic asset allocation', The Journal Of Portfolio Management, Winter, p. 83-89.

Funds-of-Funds

AltAssets (2003), 'AltAssest Funds of Funds Forum Paper', www.AltAssets.net.

AltAssets Reasearch (2003), 'The Fund of Funds Market: A Global Review'.

AssetAlternativesInc. (2000), 'Private Equity Funds-of-Funds: State of the Market', research report.

Breban, S. (2002), 'European Private Equity Funds of Funds - Alternative Strategies for Getting Exposure to Private Equity', Watson Wyat.

Diem, Gregor (2002), 'The Information Deficiency Problem of Private Equity Fund-of-Funds: A Risk and Monitoring Management Perspective', University of Birmingham.

Financial Times (2002), 'Fund of Funds and Secondaries: New entry point for investors and Private equity secondaries market set to grow to $20bn', 18. Feb. 2002.

Ford Washington (2002), 'Investing in Private Equity through a Fund-of-Funds', Fort Washington Capital Partners.

Goldman, Sachs & Co. and Frank Russell Company (2002), 'Alternative Investing by Tax-Exempt Organizations 2001 - A survey of organizations in North America, Europe, Australia and Japan'.

Herzog (2002 ), 'Fund Size & Fee Level: Do Fund-of-Funds need to adapt to the new environment, too?', VCM talk.

Laib, P. (2002), 'Examining the development of specialist fund of funds: adapting to the specific needs and demands of investors', Adveq.

Maxwell, R. (2000), 'Fund-of-Funds Role in PE'.

Otterlei J. and S. Barrington (2003), 'Alternative Assets - Private Equity Fund of Funds', Piper Jaffray Report, www.piperjaffray.com/fundoffunds.

Smith, M. (2000), 'Private Equity Funds-of-Funds: Getting What You Pay For', presented at Asset Alternatives' Fund-of-Funds Summit.

Soulignac C. (2002), 'Why primary and secondary funds of funds are still of key interest', Alt Assets.

Swensen, D. (2000), 'Pioneering Portfolio Management - An unconventional approach to instituional investment'.

Keyhaven Capital (2004), 'The Future of Fund of Funds: Differentiating Your Brand', Super Return Conference, Munich.

Magnani, P. (2003), 'Fund-of-Funds Investment Strategy', internal study of European Investment Fund.

European Venture Capital Journal (2004), 'Review of 2003', European Venture Capital Journal, Issue 109, February - review of funds-of-funds by Jesse Reyes.

Weidig, T., A. Kemmerer and B. Born (2004), "The Risk Profile of Private Equity Fund-of-Funds" (March 2004). http://ssrn.com/abstract=540524

Publicly Traded Private Equity

Cumming, D. J. (2003), 'The Structure, Governance and Performance of UK Venture Capital Trusts', Journal of Corporate Law Studies, Vol. 3, No. 2, pp. 191-217, http://ssrn.com/abstract=394581.

Cumming, D. J. and J. G. Macintosh (2003), 'Mutual Funds that Invest in Private Equity? An Analysis of Labour Sponsored Investment Funds', University of Alberta and University of Toronto Working Paper, http://ssrn.com/abstract=418280, June.

Zimmermann, H. , S. Bilo; H. Christophers and M. Degosciu (2004), 'The Risk and Return of Publicly Traded Private Equity', WWZ/Department of Finance, Working Paper No. 6/04, University of Basel.

Bauer, M. and H. Zimmermann (2001), 'Publicly Traded Private Equity: An Empirical Investigation', Working Paper Nr. 5/01, University of Basel.

Weidig, T. and P. Mathonet (2004), '"The Risk Profile of Private Equity", http://ssrn.com/abstract=495482.

Structured Products and Securitisation

Cooke H. (2002 ), 'Insurance/Securitisation: Application to Private Equity', Talk November 2002, Marsh & MC Lennan Companies.

Cheung, L.; V. Kapoor and C. Howley (2003), 'Rating Private Equity CFOs: Stochastic Market Cash Flows', Standard & Poors CDO Research.

Erkan E.; L. Cheung and W. Fong (2001), 'Private Equity Fund of Funds: Overview and Rating Criteria', Standard & Poors.

European Venture Capital Journal (2004), 'Review of 2003', European Venture Capital Journal, Issue 109, February - review on securitisation by Angela Sormani.

Fitch Ratings (2002), 'Going Public with Private Equity CFOs'.

Fitch Ratings (2003), 'Silver Leaf CFO 1 SCA'.

Forrester, J. P. et. al. (2002), 'Leading Edge - Collateralised debt obligations in private equity', www.mayerbrown.com.

Kubr (2002), 'Liquidity Alternatives - The Securitization Option', Talk, Capital Dynamics.

de Malherbe, E. (2003), 'Modelling Private Equity Funds and Private Equity Collateralised Fund Obligations'.

Monga, V. (2003), 'Four Private Equity Fund Securitizations in Works', appeared in Corporate Financing Week, March 2003.

Nickerson, K. (2003), 'Funding the Future', Credit July/August Edition.

Partners Group, 'Examining The Growing Private Equity Securitisation Market', talk.

Wietlisbach (2001), 'Examining The Latest Developments & Potential Of The Securitisation Of Private Equity Portfolios', Partners Group.

Primack, D. (2003), 'Securitization's Heartbeat still Slow, But Growing Louder', Buyouts January.

Romer M.; M. Moise and R. Hrvatin (2004), 'Hedge fund and private equity securitisation', Chapter 24 of The New Generation of Risk Management for Hedge Funds and Private Equity Investments.

Snow, D. (2003), 'Private Equity - The Good, The Bad and the Illiquid', appeared in Private Equity Central.

Secondary Transactions

AltAssets (2002), 'The Advent Liquidity - Private Equity Secondaries'.

Borel (2002), 'Bullish buyers, shy sellers'.

Buyouts (2002), 'Secondaries Pros Discuss Market's Evolution', Buyouts Newsletter, Venture Economics, Vol. 15, No. 24.

Columbia Strategy (2002), 'Venture and Secondary Market Trends: Issues For Corporate Funds', http://www.columbiastrategy.com.

Columbia Strategy (2003), 'Summary of Columbia Strategy Report on Secondaries'.

Cowley, L. (2003), 'Secondary Investing: the PE Industry's silver lining', European Venture Capital Journal, January, p. 40-49.

European Venture Capital Journal (2004), 'Review of 2003', European Venture Capital Journal, Issue 109, February - review of secondaries by Lisa Bushrod.

Financial Times (2002), 'Fund of Funds and Secondaries: New entry point for investors and Private equity secondaries market set to grow to $20bn', 18. Feb. 2002.

Groen M. (2002), 'Examining Successful Liquidity Alternatives In The Private Equity & Venture Capital Market', Talk at Superinvestor Conference.

Isnard H. (2002), 'Examining the increasing sophistication of secondary transactions: what does the future hold?', Super Investor Novemberv Conference.

Lichter R. (2002), 'Segmentation of the Secondary Market', Institute for Fiduciary Education.

Maynard, F. C. (2002), 'Analysing the Role of Secondaries in the Global Private Equity Portfolio', HarbourVest Partners.

Probitas (2003), 'Primary Secondaries: The Emergence of Liquidity for Institutional Private Equity Investors', Probitas Liquidity Management.

Vaughn, H. and R. Barrat (2003), 'Secondary Private Equity Funds:

The Perfect Storm, An Opportunity in Adversity'.

Fund management team

Chavkin, A. (2002), 'Surviving and thriving during the next ten years: What characteristics will "winning" fund need to have?', JP Morgan.

Hershey, J. D. and J. Earle (2000), 'Venture Capital Scorecard'.

KPMG (2002), 'Insight into portfolio management - Private equity research programme'.

Kaplan, S. and A. Schoar (2003), 'Private Equity Performance Returns Persistence and Capital', NBER Working Paper 9807.

Lerner, J. (2000), 'Venture Capital & Private Equity - A Casebook', John Wiley & Sons, case studies on topic.

Ljungqvist A. and M. Richardson (2003), 'Investment Behaviour of PE Managers'.

Louis, R. and D. Pearce (2000), 'Utilizing Private Equity in your Portfolio', Presentation to TMAC.

Manyem, S. and S. Kaplan (2002), 'Effect of Investment Focus and Manager Selection in Private Equity Returns', Graduate School of Business, University of Chicago, October.

Pastuszenski B. and C. Chung (1997), 'Supreme Court Expands Insider Trading Liability Implications for Private Equity Funds and their Managers'.

Peninon D. (2002), 'A Changing Relationship Between LPs & GPs', Talk at Super Investor Conference.

Peninon D. (2003), 'The GP-LP relationship: at the heart of private equity'.

Robbie K.; M. Wright and B. Chiplin (1998), 'The Monitoring of VC firms, Baylor University.

Welsh, J. and R. Kilroy R. (2003), 'Breaking up is hard to do: Dealing with a departing general partner', Testa, Hurwiz & Thibeault Report, appeared at Alt Assets.

Legal, structuring, and terms and conditions

Abrams, C. (2002), 'Marketing private equity funds in the UK'.

AltAssets Reasearch (2003), 'The Limited Partner Perspective', Alt Assets Research, September.

Barger, T. ( 2002), 'Issues in Private Equity Funds', Talk, International Finance Corporation.

Blake J. and G. Pinkham (2002), 'Successfully Structuring Pan European Private Equity Funds', Talk at 2nd Annual Private Equity, Venture Capital and Institutional Investor Summit, Paris.

Blake, J. (1999), 'Structuring venture capital funds for investment: the legal dimension', third chapter of The Venture Capital Handbook.

Evanich, K. R. and S. E. Perl (2003), 'Structuring Private Equity Funds', Krikland & Ellis.

EVCA (2003), 'Benchmarking European Tax & Legal Environments'.

Finkelman, D. (2002), 'Aftermath Of The Bubble:' on defaulting investors, Spring 2002.

Helman, R. B. and N. E. Katz (2002), 'The Evolution of Partnership Terms - Aligning GP and LP Interests', Institute for Fiduciary Education.

Hughes, J. (2002), 'Venture capital funds: structure and risk exposures', Alt Assets Article.

Keyhaven Capital (2004), 'The evolution of Due Diligence: More thorough? Better? Who benefits?', Super Return Conference, Munich .

Lerner, J. (2000), 'Raising and Structuring Private Equity Funds', Module 1 of Venture Capital & Private Equity - A Casebook, John Wiley & Sons.

PricewaterhouseCoopers (2003), 'Private Investment Funds: Industry Insights and Issues', PWC Presentation.

Post J. (2001), 'Overview US Venture Capital Funds'.

Zini & Associates (2003), 'U.S. Private Equity Funds: Selected Regulatory and Tax Issues', www.ziniandassociates.com.