PRIVATE EQUITY AND VENTURE FINANCE

07 14408
SPRING 2015
Lecturer: Wasim Ahmad; w.ahmad@bham.ac.uk

MODULE DESCRIPTION
The module deals with private equity and venture finance from inception of the idea to
harvesting (exiting) of the investment. The first half of the module deals with institutional
background of new venture financing and differences between entrepreneurial and
traditional corporate finance. The second half will cover aspects of initial valuation and
alternative ways to harvest equity investments. In particular, we deal with the initial public
offerings (IPO) process and financial performance of venture-backed- companies.
LEARNING OUTCOMES:
By the end of the module, students will be expected to be able to:

Appreciate differences between venture capital and mainstream corporate finance.

Appreciate institutional differences in raising and structuring private equity funds

Understand various financial and ownership aspects of private equity and venture
capital investments.

Be able to apply various valuation techniques in private equity settings.

Understand how firms make initial public offerings and the cost of such offerings.

Be able to evaluate short and long term performance of venture capital-backed

companies.

PREREQUISITES:
A successful completion of a corporate finance course is expected.
Students are also expected to be able to apply mathematical and statistical concepts
required for other finance courses at this level.
For guidance on minimum mathematical and statistical requirements, please refer to
Appendices 8A and 8B in the required text.

METHOD OF ASSESSMENT:

Examination component:
Coursework assessment:
Submission Date:

One 2 hour examination in the Spring Term

One piece of assessed work of 3,000 words

75%
25%

Monday 27th April, 2015 at 12 noon

METHOD OF DELIVERY:
Students will be expected to attend: 10 weekly lectures (each of two hours) and 9 weekly
tutorials (each of one hour).
Students will be expected to read relevant papers (as indicated in the course outline bellow)
before the lectures, and participate in the discussions.
A special session on Thomson One Banker database will be organized for students.
REQUIRED TEXT:
Smith, R.L. and J.K, Smith, Entrepreneurial Finance, John Wiley and Sons 2000 (or later
edition)
Smith, J.K., R.L.Smith, R.T. Bliss, Entrepreneurial Finance, Stanford University Press, 2011.

COURSE OUTLINE AND READINGS:

Topic 1 Venture finance and traditional corporate
finance theory
Problems of asymmetric information
Risk and returns of venture capital
Topic 2

Readings
Smith and Smith (2000; chapters 1 and 12);
Cochrane (2005); New edition chapters:
1&3

Raising and structuring private equity funds

Private equity in the US, Europe and
Emerging markets
New firms, buy-outs and restructurings
Private equity partnership agreements

Readings

Information, incentives and contracting

Adverse selection
Under-investment problem
Moral hazard
Over-investment problem
Initial valuation in private equity settings
Comparables
NPV and certainty equivalent
Venture capital method

Readings
Smith and Smith (2000; chapters
11,12,13,14,15; Kaplan and Stromberg
(2003); Cumming (2008); BVCA (2004);
New edition chapters: 12
Readings
Smith and Smith (2000; chapters 8, 9
and 10); New edition chapters: 9, 10,
11.

Topic 5

Exiting private equity investments

Initial public offerings (IPO)s
Liquidation, M&A, trade sales
Management buy-outs
Case: Netscape

Readings
Smith and Smith (Chapter 16);
Cumming and MacIntosh (2003);
Gompers (1996); Jelic and Wright
(2011). New edition chapters: 15.

Topic 6

Post exit market valuation

Readings

Brav and Gompers (1997); Jain and Kini

(1995); Jensen (1993); Ibbotson and
Ritter (1995).

Topic 3

Topic 4

Topic 7

Short and long term financial performance of

IPOs
Three apparent anomalies related to IPOs

Decision trees and real options

Smith and Smith (2000; Chapters 1, 2 and

14); Megginson (2002); Bottazzi et al.
(2004); European Venture Capital
Association Yearbook various issues; New
edition chapters: 2

Readings
Smith and Smith (2000; chapters 8, 9
and 10); Trigeorgis (2000). New edition
chapters: 4.

REFERENCE LIST:
Ahmad,W., and R. Jelic, (2014), Lockup Agreements and Survival of UK IPOs, Journal of
Business Finance and Accounting, 41, 717-742.
Barry, C., C. Muscarella, J. Peavy and M.Vetsuypens, (1990), The Role of Venture Capital in
the Creation of Public Companies: Evidence from the Going Public Process, Journal of
Financial Economics, 27, 447-471.
Bottazzi, L., M. Da Rin, and T. Hellmann (2004), The Changing Face of the European Venture
Capital Industry: Facts and Analysis , Journal of Private Equity.
Brav, A. and P. Gompers, (1997), Myth or Reality? The Long-Run Underperformance of Initial
Public Offerings: Evidence from Venture and Non Venture Capital-Backed Companies,
Journal of Finance, 52, 1791-1821.
Brealey, R. and S. Myers, (1996), Principles of Corporate Finance (5th Ed), McGraw-Hill, New
York.
British Venture Capital Association (BVCA), 2004, A Guide to Venture Capital Term Sheets.
Cochrane, J. (2005), The Risk and Return of Venture Capital, Journal of Financial Economics.
Copeland, T., F. Weston & K. Shastri, (2005), Financial Theory and Corporate Policy (or 1993
edition), Addison Wesley, Pearson.
Cumming, D., (2008), Contracts and exits in venture capital finance. Review of Financial
Studies, 21, 1947-1982.
Cumming, D.J. and J.G. MacIntosh (2003), A Cross-country Comparison of Full and Partial
Venture Capital Exits, Journal of Banking and Finance, Vol. 27, pp. 511-548.
Cumming, D.J. and S. Johan, (2009), Venture Capital and Private Equity Contracting: An
International Perspective, San Diego, CA: Elsevier Science Academic Press.
Da Rin, M., G. Nicodano, and A.Sembenelli (2006), What Role of Legal Systems in Financial
Intermediaiton? Theory and Evidence, Journal of Public Economics.
Dixit, A. and R. Pindyck, (1995), The Options Approach to Capital Investment, Harvard
Business Review, 73, 3, 105-119
European Venture Capital Association Yearbook various issues.
Gilligan, J. and M. Wright, (2010), Private Equity Demystified-an explanatory guide, ICAEW.
Gompers, P., (1995), Optimal Investment, Monitoring, and the Staging of Venture Capital,
Journal of Finance, 42, 133-156.

How, J.C.Y., R. Jelic, B. Saadouni, and P. Verhoven, (2007), Determinants of Financial

Performance of Malaysian Second Board IPOs, Pacific Basin Finance Journal,15, 3, 2007, 292314.
Ibbotson, R.G. and J.R. Ritter, (1995), Initial Public Offerings, in R. Jarrow et al. (eds),
Handbook in OR and MS, vol. 9, 993-1016.
Jain, B. and O. Kini, (1995), Venture Capitalist Participation and the Post-Issues Operating
Performance of IPO Firms, Managerial and Decision Economics", 16, 6, 593-606.
Jelic, R. and M. Wright, (2011), Exits, Performance, and Late Stage Private Equity:
The Case of UK Management Buy-outs, European Financial Management, 17,3, 560-593.
Jelic, R., (2011), Staying Power of UK Buy-outs, Journal of Business Finance and Accounting,
38, 7-8, 945-986.
Jelic, R., B. Saadouni and M. Wright, (2005), Performance of Private to Public Management
Buy Outs The Role of Venture Capital, Journal of Business Finance and Accounting, 32,
3&4, 643-681.
Jelic, R., B. Saadouni and R. Briston, (2001), Performance of Malaysian IPOs: Underwriters
Reputation and Earnings Forecasts, Pacific Basin Finance Journal, 9, 5, November, 457- 486.
Jelic, R., B. Saadouni and R. Briston, (1998), The Accuracy of Earnings Forecasts in IPO
prospectuses on the Kuala Lumpur Stock Exchange, 1984-1995, Accounting and Business
Research, 29, 1, Winter, 57-72.
Kaplan, S. and P. Stromberg (2003), Financial Contracting Theory Meets the Real World: An
Empirical Analysis of Venture Capital Contracts, Review of Economic Studies.
Kaplan, S. and A. Schoar (2005), Private Equity Performance: Returns, Persistence, and
Capital Flows, Journal of Finance.
Kerins, F., J.K.Smith, and R.Smith, (2003), Opportunity Cost of Capital for Venture Capital
Investors and Entrepreneurs, working paper.
Lerner, J., (2000), Venture Capital and Private Equity A Case book, John Wiley and Sons,
New York.
Lerner, J., (2004), Yale University Investment Office: June 2003, Harvard Business School
Case Study, 9-204-055.
Lerner, J., (2010), The Future of Private Equity, European Financial Management,
forthcoming.
Megginson, W. and K. Weiss, (1991), Venture Capitalist Certification in Initial Public
Offerings, Journal of Finance, 46, 879-903.

Megginson, W., (2002), Towards a Global Model of Venture Capital?, Journal of Applied
Corporate Finance, Fall.
Metrick, A. and Yasuda, A., (2010), Private equity - A survey, European Financial
Management, 2010, forthcoming,
Netscape Case, (1997), The Wall Street Journal and Finance Education Program.
Ritter, J., (2003), Differences between European and American IPOs, European Financial
Management, 9, 4.
Robotica Case, (2003), R.Jelic, University of Birmingham
Sahlman, W. (1990), The Structure and Governance of Venture Capital Organizations,
Journal of Financial Economics, v.27.
Stromberg, P. (2008), The New Demography of Private Equity, in Lerner, J. and A. Gurung
(Eds). The Global Impact of Private Equity Report 2008, Globalization and Alternative
Investments, (Working Papers, World Economic Forum), Vol.1, pp. 3-26.
The WACC Users Guide, (2005), USB.
Trigeorgis, L., (2000), Real Options and Financial Decision-Making, Contemporary Finance Digest,
FMA International, CIBC World Markets.

Wright, M. and K. Robbie, (1998), Venture Capital and Private Equity: A Review and
Synthesis, Journal of Business Finance and Accounting, 25 (5) and (6), June/July, 521-570.
Zhou, D., Jelic, R., and M. Wright, (2013), SMBOs: Buying Time or Improving Performance?
Forthcoming in Managerial and Decision Economics.