What drives venture capital fund performance?

ABSTRACT

This study analyses the determinants of the return on Korean venture capital (VC) funds in terms of fund management strategies. In particular, I adopt the quantile regression analysis to identify the heterogeneous effect of a strategy based on the performance level of a fund. As a result of the analysis, it has been shown that to achieve high performance, it is necessary to use instruments to deal with the uncertainty of investment targets and information asymmetry such as stepwise investment, use of conversion securities, syndication. In addition, for very high performance, it is necessary to focus on a certain industry and to include a few companies in the portfolio with large investment. As well, in order to achieve high returns, investing large amount in a small number of portfolios is confirmed to be valid strategy.

KEYWORDS:

• Venture capital
• quantile regression
• fund management strategy
• fund performance

JEL CLASSIFICATION:

• G24
• C10

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ Among 331 VC funds, some are liquidated and the others are not. For funds that are not fully liquidated, the net asset value (NAV) reported by GP may not be the true value of them. Nonetheless, according to the Jenkinson et al. (2019) the NAV produced by private equity managers is accurate and unbiased predictors of future discounted cash flows (DCF). Although I decided to include them, I targeted only those funds that finished their investment period to minimize the impact of NAV issue.