How much is venture capital worth? - Comparative analyses of the returns of venture capital

Abstract

AIM OF THE PAPER

This article focuses on the return characteristics of venture capital. The main question is w'hether venture capital investments are able to generate higher profits than publicly traded securities. The study discusses the differences of the traditional venture capital funds providing funds for young and innovative enterprises and buyout funds focusing on the financing of later stages, with regards to differences of European and US funds. Despite of the limited information the authors also attempt to evaluate the returns of Hungarian investments.

METHODOLOGY

Despite of the limited data provision, according to the available seconder information we processed the public international databases in international comparison. Based on our primer database collected about Hungarian investments we interpreted the state of the Hungarian market based on the small amount of exits.

MOST IMPORTANT FINDINGS

The finding of this article is that buyout funds outperformed the public market in average, while venture capital funds underperformed it. This better performance can be a reason behind the increasing role of buyout investments within private equity industry. However the distribution of venture capital funds' returns is highly skewed to the left through the best performing funds the multiple of public market returns can be gained. Furthermore between the returns and the volume of the fund invested a negative correlation can be observed that shows that the capital absorption ability of the industry is limited, especially in case of venture capital.

PRACTICAL RECOMMENDATIONS

Venture capital by its nature provides deficient information for the market, but the improved transparency of the industry would foster its development, through increasing the knowledge of potential investors and enterprises, especially in case of the developing markets. It would be an important step in this direction to create an international database ready for the authentic examination of the returns of venture capital and private equity market.