There is currently considerable enthusiasm for emerging private equity markets, where investors believe they have access to “untapped deal flow”. Early entry may allow them to capitalize on exceptional growth opportunities; however, the pioneering investors enter immature capital markets and have no local transaction experience. This may outweigh the potential benefits of low deal-flow competition and expected growth. We address this potential drawback by analyzing a unique, hand-collected dataset of emerging private equity market transactions. We refer to 1157 deals in 86 host countries between 1973 and 2009, and find that early transactions underperform later deals. The evidence presented is robust and consistent with the improvement in the deal-making environment over time and the benefits of learning how to conduct emerging market private equity deals. The learning benefits are stronger if investors are located in the same country as the investee firm.

This paper addresses the problem to assess the effect of leverage on the cost of capital for buyout performance analyses. It draws on a unique and proprietary set of data on 133 US buyouts between 1984 and 2004. For each of them, we determine a public market equivalent that matches it with respect to its timing and its systematic risk. We show that under realistic mimicking conditions, the average cost of capital is below the commonly used benchmark S&P 500. Thereby, we control for two important aspects: for the risks taken by lenders in the buyout transactions (which affects the sponsors’ risks), and for the corresponding cost of debt (which lowers the return of the public market equivalent). Only with borrowing and lending at the risk-free rate is the average cost of capital close to the average index return. This finding is particularly important as existing literature on that topic tends to rely on benchmarks without a proper risk-adjustment.

We calculate composite indices to compare the attractiveness of 27 European countries for institutional investments into the Venture Capital and Private Equity asset class. To achieve this we use 42 different parameters, and propose an aggregation structure that allows for benchmarking on more granulated levels. The United Kingdom leads our ranking, followed by Ireland, Denmark, Sweden, and Norway. While Germany is slightly above the average European attractiveness level, the scores are rather disappointing for France, Italy, Spain, and Greece. Our analyses reveal that while the UK is similar to the other European countries with respect to many criteria, there are two major differences, which ultimately affect its attractiveness: its investor protection and corporate governance rules, and the size and liquidity of its capital market. The state of the capital market is likewise a proxy for the professionalism of the financial community, for deal flow and exit opportunities. We determine a reasonable correlation between our attractiveness index scores and actual Venture Capital and Private Equity fundraising activities and prove the robustness of our calculations. Our findings across all the European countries suggest that, while investor protection and capital markets are in fact very important determinants for attractiveness, there are numerous other criteria to consider.

We overview the papers of this special issue of the Journal of Corporate Finance and explain how they fit within the different segments of the entrepreneurial finance literature, including equity crowdfunding, angel investors, debt, venture capital, and private equity. We point to the growing importance of different sources of capital for entrepreneurs and emerging research trends pertinent to academics, practitioners, and policymakers. We explain common questions and suggest scope in future work for combining segments.

This paper analyzes how the affiliation of a venture capital firm affects the deal terms for innovative entrepreneurial ventures. We develop a theory to explain the advantages of independent and bank-affiliated venture capital funds for entrepreneurs. We assume that independent venture capital firms provide better support quality while bank-affiliated firms are less financially constrained. The entrepreneur selects the optimal contract by trading-off these characteristics. The model allows several empirically testable predictions concerning the nature of projects financed by either type of venture capital firm. Entrepreneurs should seek capital from independent or affiliated venture capitalists contingent on the degree of sophistication of their project, their liquidation value, the importance of expected management support, and the remaining time to fundraising.

This paper investigates the performance of venture capital-backed (VC-backed) firms upon their exits through mergers with special purpose acquisition companies (SPACs) or “more traditional” initial public offerings (IPOs) during the recent SPAC wave. Compared to their IPO peers, VCbacked ventures merging with SPACs tend to exhibit smaller size, less current and analystprojected future profitability, and additional characteristics that indicate lower venture quality. Notably, SPACs merging with VC-backed ventures demonstrate significant underperformance relative to both SPACs merging with non-VC-backed companies and “standard” IPOs. This suggests that VCs may have exploited a relative lack of regulation and investor naivety. They may have presented their lower-quality ventures as appealing opportunities for mergers with SPACs, which resulted in their substantial underperformance.