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Not sure if it’s a norm, but it’d surely surprise me if the GP takes an investment call in a particular portfolio company without as much as doing a cursory review of its exit potential & potential exit valuation – they probably do too, but don’t necessarily assign a value, given the magnitude of arbitrariness in doing so. It hence is somewhat ironic that the exit valuation in this model is a merely a derivative of the overall size/ value of the fund raised by the VC and doesn’t factor-in anything that’d determine the potential of an individual investee enterprise – confounding this further is the VC having to justify this derived value. So while the proposed analysis does sound like a non-nonsense approach to assessing the fund performance, that part about “reality checking those putative outcomes” would still remain the single most challenging & expectedly the most contentious aspect even as LP-GP engage with an intent to cracking the funding arithmetic. Nonetheless, it’s good to be reminded that for all practical reasons the sum of individual valuations of portfolio companies in a particular fund is but an unexciting statistic to the PE Portfolio manager in the LP organization keen on showcasing something akin to the promise of an ‘absolute return’ his hedge-fund counterpart typically presents :-)
Toggle Commented Sep 25, 2013 on All About the Benjamins at Super LP
makes a riveting read Chris! – the angst behind your pun is very tangible. While you’ve put it out clear in the lingo understood by the cool kids… I recorded it my own simplistic way on my kindle while reading Mahendra Ramsinghani’s book on VC.. my NOTE on the section that mentioned about the IRR falling for any fund size ging beyond 200mio USD was as follows; “Probability at play, once again. Surprising that the same LPs that wish to cash in on investments into IPOs of innovation driven companies on a growth path promising great IRR conveniently ignore the fact that availability of such a high ROI asset pool requires that there’s a pipeline of emerging performers nurtured & sustained only by VCs.”
Toggle Commented Feb 27, 2013 on A Dollar and a Dream -- Redux at Super LP
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Feb 27, 2013