Value Creation in Venture Capital and Private Equity

This thesis examines the drivers of value-creation and value-destruction in venture capital (VC) and private equity (PE) funds. VC/PE funds have become an increasingly important financial intermediary. They are a key source of capital for young companies who might otherwise have difficulty raising funds from stock-markets or from lenders. VC/PE funds can also help larger companies to restructure and re-direct operations. However, not all VC/PE funds earn super-normal returns or succeed in fostering innovation and value-creation. Subsequently, this thesis examines the drivers of value-creation in VC/PE funds. This thesis highlights the skewness that is present in VC/PE funds’ returns. The thesis then examines the role of fund-level characteristics in determining VC/PE performance. The thesis focuses on the role of a fund’s size and diversification. The thesis also examines typical incentive contracts between VC/PE funds and their investors, and shows that the traditional incentive schemes can lead to sub-optimal performance. The thesis then uses this background to examine the structure of Australia’s Innovation Investment Fund scheme, which is designed to support VC funds’ in their investments in start-up companies. The main contributions of this thesis are to highlight the drivers of VC/PE fund performance and to propose ways to incentivize and select value-creating funds.