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Venture capitalist and buy-out funds are often considered experts at investing in high-risk projects and companies. To be successful investors, private equity funds must therefore manage the many aspects of risk that are associated with investing in non-public enterprises. This study examines how Indian private equity funds manage several dimensions of risk in comparison to non-Anglo-Saxon funds. We analyze risk management preferences in Indian and Franco-German funds in pre- and post-investment stages. The results, which are discussed in detail, show significant differences between the two groups.
Keywords: Risk management; agency theory; legal systems; culture; venture capital.
1. Introduction
Global expansion in venture capital and buy-outs has increased the number of funds operating in mature and developing markets. Globalization has also increased the number of cross-border deals, the number of funds expanding into different geographic areas and the number of funds looking to complete deals outside their country of domicile. Expansion in any firm entails taking risks, to a large extent as a result of information asymmetry but also due to numerous other reasons. The expansion of the venture and buy-out industry has corresponded to another well-studied phenomenon: how developing countries attempt to increase wealth by supporting and financing small-to medium-sized business and by restructuring large enterprises.1
International expansion among established funds and newly started domestically based funds require an increased understanding of how funds manage existing and new risks. Risk management among venture capital and buy-out funds has only recently received attention from researchers although private equity funds face many different types of risks. Recent research (e.g., Manigart et al., 2000) point to structural differences among venture capital markets in different countries. Kut et al (2004) found differences in risk management among European private equity funds. Other studies investigate if the private equity industry differs from country to country based on country of origin (e.g., Wright et al, 2002). In this study, we analyze how risk management practices differ in Indian and Franco-German private equity funds. According to extant research by La Porta et al (1997), legal systems have an impact on a number of economic variables such as shareholder rights, which are generally the strongest in countries with an Anglo-Saxon legal system (e.g., India), which is based on common law. The legal...