Ken Robbie

Determinants of required return in venture capital investments: a five-country study

Using two complementary theoretical perspectives, we develop hypotheses regarding the determinants of the return required by venture capitalists and test them on a sample of over 200 venture capital companies (VCCs) located in five countries. Consistent with resource based theory, we find that early stage specialists require a significantly higher return than other VCCs when investing in later stage ventures. Consistent with financial theory, we find that acquisition /buyout specialists require a significantly lower return than other VCCs when investing in expansion companies. Furthermore, in comparison to specialists, highly stage-diversified VCCs require a significantly higher return for early stage investments. Independent VCCs require a higher rate of return than captive or public VCCs. In general, higher required returns are associated with VCCs providing more intensity of involvement, having shorter expected hold-ing period of the investment, and being located in the US or UK (in comparison to those in France, Belgium, and the Netherlands).

Venture capital and management-led, leveraged buy-outs: A European perspective

Abstract Management and leveraged buy-outs became phenomena of the 1980s. From beginnings in the U.S., they quickly traversed the Atlantic, spreading first to the U.K. and then throughout Europe. The venture capital industry has played a crucial role in the development of buy-outs in Europe, particularly in smaller deals in the U.K., the Netherlands, and France. This paper examines three aspects of the market for venture and development capital funded management led buy-outs in Europe. It provides a framework for analysis of the different levels of development of each countrys market, it examines performance of U.K. buy-outs and addresses the extent and nature of exits. Throughout the paper use is made of the extensive database of European buy-outs developed by the authors. The main conclusions to emerge are as follows. European experience can not be compared to that in the U.S. as a single economy. There are important differences between European countries in respect of the level of buy-out activity and the extent to which conditions are or will be favourable for the development of such transactions. Conceptually, a buy-out market may be considered as requiring three main factors to be present if it is to develop: the generation of buy-out opportunities; the infrastructure to complete a transaction; and opportunities for the investors in a buy-out to realise their gains. These broad groups may be further sub-divided. The generation of opportunities will be heavily influenced by attitudes to entrepreneurial risk and hence willingness of managers to buy, the ownership structure of industry and hence the generation of entities which are for sale and the state of development of mergers and acquisition markets. The infrastructure to complete transactions includes sources of funding both in respect of venture capital availability and the ability of banks to fund transactions, the nature of legal and taxation regimes and the existence of intermediaries and advisors who can both identify and negotiate buy-outs. The existence of suitable exit routes comprises stock market flotation, sale to another group and recapitalisation possibly through a secondary buy-out. Many of these factors are similar to the conditions necessary for venture capital deals to develop. The generation of entities for sale may take various forms with succession issues in family firms, divestment of unwanted divisions, privatization of public sector activities and going privates of companies quoted on a stock market being the most important. This framework was used to analyze European buy-out markets through a combination of interview and desk research. The evidence shows that the most highly developed buy-out markets and those with the greatest short-term potential are not necessarily to be found in the largest economies. U.S. investors, who turn towards Europe to develop their markets at a time when the U.S. buy-out market is experiencing a downturn, and European investors, seeking to broaden their activities, need to be aware of these differences. As in comparable studies in the U.S., U.K. LBOs on the evidence from our survey of 182 buyouts on average produce-performance improvements. U.K. LBOs appear to undertake a greater level of new product development and asset purchase after buy-out than do their counterparts in the U.S. and have placed less emphasis on asset disposals than U.S. LBOs. Managers buying-out frequently tightened up their control of working capital. The results of our survey indicate support for both the entrepreneurial and agency cost-reduction perspectives about buy-outs, with the former perhaps being somewhat more in evidence. Exit routes are an important aspect of the buy-out market, but evidence presented here indicates that buy-outs are unlikely to exit in the way in which they originally envisaged. In particular, buy-outs that initially were aiming for flotation on a secondary tier stock market have almost invariably been sold to third parties.

Venture capitalists' appraisal of investment projects: an empirical European study

The Investment appraisal and valuation process of venture capitalists includes Information gathering, the assessment of risk and required return, and the choice of a valuation method. This process is empirically studied in the United Kingdom, the Netherlands, Belgium, and France. The Importance of different information sources is equal in the four countries, except that the French venture capitalists Place more emphasis on personal references and the track record of the entrepreneur. The required return is lowest in the Netherlands and Belgium for every development stage of a company, and highest in the UK. The most widely used valuation method in the UK is the multiplication of past or future earnings with some price-earnings ratio. In the Netherlands and Belgium it is the discounting of future cash flows, and in France it is the book value of the net worth.

The Monitoring of Venture Capital Firms

This paper analyzes the monitoring of venture capital firms by their funds providers, which has been hitherto generally neglected by academic researchers. The changing nature of competition in a mature market has introduced increased pressures for the enhanced monitoring of venture capital firms, especially in relation to target returns and reporting requirements. The paper provides evidence on the nature and extent of these monitoring arrangements derived from interviews and a questionnaire survey of leading players in the UK market.

Loan Covenants and Relationship Banking in MBOs

Abstract This paper examines the role of accounting-based covenants and other sources of information in signalling financial distress in UK MBOs. Using an in-depth questionnaire and follow-up interviews to investigate the perceptions of senior UK MBO lenders, we find that: MBO loan agreements contain more covenants than general corporate lending agreements; monthly management accounts and telephone communication are more frequent first indicators of distress than are accounting-based covenant breaches; lenders with specialist MBO lending units are more likely to waive covenant breaches and less likely to recall loans in default than those without such units; syndicate members find both information flows prior to breach and subsequent action taken to be less effective than do syndicate leaders or sole lenders; and the presence of a specialist MBO lending unit provides the skills and reputation needed to establish a high degree of trust between the banks on the one hand and the MBOs and the equity houses on...

The Development of an Organisational Innovation: Management Buy-Outs in the UK, 1980-97

This paper analyses the development of management buy-outs and similar transactions as an organisational innovation in the UK. Their development is situated in the context of the historical development of organisations which has previously emphasised shifts from family capitalism sto managerial capitalism and in the context of deregulation and its implications. The paper identifies five periods of development, pre-1980, 1980–84, 1985–89, 1990–94 and 1995 onwards, and shows how the prevalent forms of buy-out have changed and adapted across these periods. The paper analyses the economic impact of buy-out type organisations in terms of financial and ecomomic performance, impact on employment, and the longevity of buy-outs as on ownership form. Two particular continuing problem areas are identified: pricing of transactions and the role of debt.

An analysis of management buy-out failure

Management but-outs are an important aspect of corporate restructuring. In order to understand their longer-term impact there is a need to examine their effects in recessionary conditions. In this context, the paper analyses the factors which lead to management buy-out failure using both financial and non-financial information. The evidence is consistent with the view that some mechanisms introduced to deal with agency cost problems, particularly management incentives and undertaking restructuring activity in a timely fashion are associated with a lower probability of failure. Excessive leverage and delays in restructuring are associated with a higher probability of failure.

The investor-led buy-out: A new strategic option

Abstract This article examines new developments in corporate refocusing policies with particular emphasis on the role of venture capitalists in the divestment process. Venture capitalists, through their involvement in management buy-outs and newer investor-led buy-outs, may increasingly have important roles to play in enhancing the options open to divestors. With new evidence from major corporate divestors and venture capitalists, the article provides insights for practitioners and researchers into the process of divestment, choices between modes of divestment, the importance of auctions and the role of incumbent management in divisions which are to be sold.

Entrepreneurial attitudes to venture capital investment realization: evidence from the UK and France

This paper discusses the comparative influences on attitudes of entrepreneurs towards exit from venture capital backed investments in the UK and France and presents survey evidence relating to the attitudes towards exit of a sample of venture-backed entrepreneurs in the two countries. The study identifies statistically significant differences in attitudes to realization both within and between the two countries, both in relation to preferences for different options and the reasons for preferring one rather than another.

Secondary management buy‐outs and buy‐ins

This paper provides an exploratory examination of the growing phenomenon of secondary management buy‐outs and buy‐ins, where an enterprise having initially been bought out by management is later the subject of a second buy‐out or buy‐in. Such transactions provide a further dimension to the exit opportunities available to venture capital investors and also to the maintenance of independent entrepreneurial businesses. The paper uses large scale data to test propositions relating to the expected differences between secondary buy‐outs and buy‐ins and buy‐outs and buy‐ins in general as well as detailed case study evidence from entrepreneurs and venture capitalists to examine the rationale for such transactions. The quantitative data suggest that secondary buy‐outs and buy‐ins are more likely to involve enterprises in traditional industrial sectors and are significantly more likely to occur a longer time after the initial buy‐out than are trade sales or flotations. The case study evidence reveals that secondary buy‐outs and buy‐ins can arise for various reasons but are rarely the first choice exit route for venture capitalists, though they provide a means by which entrepreneurs can maintain the enterprise’s independent private existence.