Venture capital and private equity investments: An analysis and statistical modeling of returns generated by VC and PE funds investing in emerging markets

Andreas Marslew Fritzen

Student thesis: Master thesis


This dissertation examines how country-specific factors influence returns on investments generated by venture capital and private equity funds investing in operating companies in emerging markets. Even though proportionally more funds have been investing in emerging markets in the past decade, the funds are utilizing existing knowledge and frameworks tailored for Western market conditions to evaluate the investment opportunities. The objective of the dissertation is consequently to examine how country-specific factors in emerging markets affect the returns of the venture capital and private equity funds, and further to statistically model the relationship. In order to examine which country-specific factors might influence the returns, the dissertation reviews existing literature on economic growth. The literature review identifies 17 growth facilitators. To generate data on prior investment results a survey is distributed to funds that have previously invested in operating companies in emerging markets resulting in 456 valid responses. With the intention of testing how the theoretical variables affect the returns of the funds empirically, the paper performs a multiple regression analysis. The regression analysis tests how the growth facilitators affect the returns generated by venture capital and private equity funds. By excluding the statistical insignificant variables, the remaining parameters are accordingly helping to explain the variability in the returns. The dissertation finds ultimately that 59.3% of the variability in the returns of the funds can be explained by the following parameters: debt to GDP, productivity level, school enrollment, unemployment level, leveled and squared exchange rate, and the level of credit in the country provided by banks. Having excluded the insignificant independent variables, the country-specific factors determine a notably proportion of the returns of the funds. Furthermore, the paper finds that when including intercept country dummy variables to capture country-specific events not encapsulated in the regression equation, the explanatory power of the model improves to 69.3%. Normatively, the paper addresses how investment officers of venture capital and private equity funds can utilize the regression model as an investment tool. The investment tool can help to determine which emerging market to invest in by focusing on the country-specific factors of the country of interest. The paper argues that the regression equation can be used supplementary to traditional financial models due to the fact that it instead of evaluating P&L statements and capital structures, it focuses on the framework conditions of the emerging market.

EducationsMSc in International Business, (Graduate Programme) Final Thesis
Publication date2012
Number of pages174