Abstract
Asian venture capital funds, modeled after their US counterparts and introduced in the Asian region during a time of high GDP growth, have yielded surprisingly disappointing returns (negative 12.17% in Asia vs positive 25.8% in the US) to their investors during 1980-2000, the period covered by this research. As observed by B. Fagin, Chief Investment Officer of the Ford Foundation (1995), "While Asia was booming, VC/PE investors (LPs – Limited Partners) were losing money. So, why bother with Asian venture capital?" This thesis examines various factors that may account for this unanticipated result.Prior research has focused on post-deal factors and on the harsh influence of Asian emerging markets contextual variables (such as poor contract protection, political unrest and immature financial markets for exit) as causes of the underperformance by these VC/PE funds. This research poses the question: Did the Asian venture capital fund managers (GP, General Partners), use the best practices adopted in the West to make venture type investments? And, if not, did the failure to do so affect fund underperformance in Asia during the period examined? The answer provided by this research to both of the research questions is a resounding: Yes! The answer provided is derived from new data collected by focusing on expert sampling that provided a practitioner perspective, missing from prior research, as to how PE/VC funds were managed and should be managed for failure and for success.
This research is an empirical study of some of the key independent (choice) variables involved in the pre-deal process (deal screening and deal deciding) that are expected to link to performance. The unit of analysis used is the venture capital team General Partner (GP). The research collects and analyses new and important data on the best practices of the pre-deal processes that are available as choices for operating a VC/PE fund by the GP teams. Adopting a methodology that has not been employed by prior research, this thesis uses methods including: a substantial sample size consensus of GP and LP expert practitioners using a Focus Group, long interviews, and in-depth survey. The important details of how the GPs perform their pre-deal activities and who should be on the GP team to improve performance are new findings of this research. Specifically identified were the "5Cs" of important best practices. These are:
1. Consensus democratic focus on information and opinion sharing.
2. The charter of the fund in relation to the contextual variables to be encountered.
3. The composition of the team created to execute the charter.
4. The culture of the team fostered by the GP senior leadership to manage the pre-deal processes with integrity and respect for all team opinions.
5. The commitment of the whole team to long term investing and to the financial success of the investors and of the whole team.
This research shows that many GPs of Asian PE/VC funds were not qualified with knowledge of or intention to use best practices. This was one of the causes of the underperformance as far as all LPs interviewed were concerned. More than 90% of the GPs interviewed believed that poor management of the pre-deal process by GPs of the venture funds from that period was a cause of the underperformance of the funds, both in their own funds and in the funds of other GPs. The use of pre- deal best practices factors to improve funds performance, as detailed in this research, is a clear benefit for future research as this important aspect of investing has been neglected by prior research. All these methods: Focus Group, long interviews and the in-depth survey, used by this research taken together, are new areas of research of investment teams and how they best do their work and who should be on their team for improved results. This best practice data can provide the basis for team evaluation scoring systems, presented here in Chapter 6, that will assist investors to choose successful GPs. The research suggests that these best practices may be most relevant and helpful to emerging market investing which is an annual industry exceeding US$40 billion in size in 2012, according to data from Emerging Markets Private Equity Association (Asian Venture Capital Journal, Feb. 2013).
Note: "Venture Capital" refers to early and growth stage venture capital and private equity throughout the research. "Asia" refers to DAVC – Developing Asian venture centers, i.e. Hong Kong, Singapore and Taiwan.
| Date of Award | 14 Aug 2014 |
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| Original language | English |
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| Supervisor | Christian WAGNER (Supervisor) |