Venture Capital and Private Equity
Course Number 1428
Associate Professor Matthew Rhodes-Kropf
Winter; Q3Q4; 3 credits
The growth of private equity internationally has been dramatic, to the point that the asset class has been both lauded as the savior and vilified as the cause of our current economic malaise. Over the past two decades, private equity- ranging from venture capital to buy- outs and even to certain activities by absolute return funds (hedge funds) -has come to play an increasingly important role in shaping our economy. Their promise of "above market" returns has attracted investments from pension funds upon which millions of our elders rely and universities which educate future contributors to society. Yet private equity organizations often operate in mysterious ways, with little public visibility. This course seeks to understand how these organizations work, why they take the forms that they do, and where crucial problems-and opportunities for innovation-exist. We examine the strategies and incentives of the various players and how they maneuver through the business cycle. Cases are recent and class speakers are common so the current private equity environment and the changing landscape are features of every class.
This course is geared to students interested in working within some aspect of the private equity industry-whether directly, as a practitioner or supplier of capital, as an entrepreneur or corporate manager who is financed by private equity; as a banker or advisor involved in private equity transactions; or as a regulator whose purview might include private equity. In addition, a solid understanding of private equity tenets can be useful for those students interested in applying them to other settings, whether within large corporations or in international development.
The course focuses on the "private equity cycle," and starts by considering how private equity funds are raised and structured, with attention paid to the differing perspectives and incentives of institutional investors, "gatekeepers," fund-of-fund managers, and private equity investors. Second, we explore how investments are evaluated, structured, and overseen. We examine the crucial problems that firms seeking private equity pose to investors, and how private equity organizations address these problems. Finally, we address the often-problematic ways in which private equity investors harvest their investments. The course's final module investigates the future of private equity. We consider both the internal management challenges that private equity organizations face as they grow and contend with an environment that is increasingly international and in which they play an increasingly large role, posing the question of how one can outperform a market of which one is a significant proportion. The cases are global and many are very recent.
Course Content and Organization
Class Sessions: The course has 20 cases. The cases include venture capital, leveraged buyout, growth equity, and limited partner problems. Guests will attend many of the classes. Class participation will account for 40% of the grade.
Exercises: A few cases will have short exercises associated with them. These will count for 20% of the grade.
VCPE Game: The VCPE Game is the required project and the reason why this is a 20 case course. The VCPE PE Game replaces the nominal 10 cases plus a final exam in the typical 30 case EC course. You will be assigned to a three- or four-person VCPE Game team. Each team assumes the role of a private equity firm operating in a simulated market. The simulation runs over eight simulated game years and involves over 9,000 companies in which each firm may potentially invest. Each team must select a strategy, consider and structure investments, negotiate with other teams to co-invest, and make decisions regarding how best to manage the portfolio. The VCPE Game will account for 40% of the grade.