PRINCIPALES PROBLEMAS DE UN SEPARADOR DE AGUA LIBRE (FWKO)

On the basis of the neo-institutional theory, PE and VC firms are concerned with investment risks due to information asymmetries. As pointed out in section 3.1.3, the risks of adverse selection, moral hazard and hold up are caused by information asymmetries between investors and entrepreneurs. Explicit mechanisms of screening, contract negotiation, monitoring and mentoring, beside incentive measures are suitable to address the risks of information asymmetry. These explicit measures are associated with transaction-costs. Implicit mechanisms of trust and trust building measures are suitable to reduce the scope of the explicit mechanisms and thus transaction-costs (see section 3.1.3).

The present research programme is focused on the description of the explicit mechanisms along the investment process of PE and VC investors. On the basis of different investment approaches which are applied by business angels and venture capitalists, Engelmann and Heitzer (2001) conclude that the investment process is a suitable framework for successful investments in incomplete markets. They refer to the basic composition of the investment process and mention the phase of capital acquisition, deal flow, screening and selecting, negotiation, monitoring and mentoring, and the exit. The current examination is focused on the core investment process (see figure seven in appendix H) and is not concerned with the phases of capital acquisition and of investors repayment.

With regard to the present thesis, the transaction-cost theory is regarded as suitable to describe and to explain the process step of the deal flow. As pointed out in section 4.4.1, investors receive a large amount of business proposals. The handling of these proposals is associated with cost- intensive manpower. Therefore, the different deal sources support the process of deal acquisition

and are able to reduce transaction-costs. Nevertheless, the contribution margin depends on the particular deal source, which in some cases is associated with the payment of fees.

The principal-agent theory, the transaction-cost theory and the issue of information asymmetry are suitable to describe and to explain the process steps of the initial and the detailed screening. Due to different information levels between entrepreneurs and investors, this process step is necessary to reduce the risks of adverse selection, moral hazard and hold up. Depending on the extent of screening measures, transaction-costs vary and explain the difference in the scope of initial and detailed screenings.

Every perspective under the neo-institutional theory is regarded as suitable to describe and to explain the process of negotiation and contracting. Investors try to handle their investment risk by the negotiation of suitable contracts even though contracts could not be regarded as all- encompassing in order to qualify the risks of moral hazard and hold up. Therefore, depending on future developments, contracts require renegotiation which is associated with additional transaction-costs. In dependence on the results of the negotiation, possible contract structures differ and finally, influence the value of the investment (see sections 4.4.4 and 4.4.5).

The phase of monitoring and mentoring is best described and explained by the principal-agent theory, the property-rights theory, the transaction-cost theory and the issue of information asymmetry. In order to balance the information asymmetry between the principal and the agent, the investor requires information regarding portfolio company’s development. The scope of monitoring and mentoring depends on the particular investment of the investor, the contract content and the performance of the portfolio company (see section 4.4.6). Both monitoring and mentoring are associated with different amounts of transaction-costs which depend on the respective investment strategy and the condition of the portfolio company.

Finally, the different exit channels could be best described and explained by both the transaction- cost and the property-rights theory. By choosing the appropriate exit channel, investors try to achieve maximum returns. IPOs are the most preferred exit route due to possible capital gains. Trade sales are less preferred and associated with smaller transaction costs. Property-rights on the other hand, could determine the final exit channel in advance. This is, inter alia, the case in terms of silent investments which require the repayment after the investment period (see section 4.4.7).

The subsequent table nine summarises the application of the particular theoretical perspective with regard to the PE and VC market, public funding and the investment process chain.

The theoretical framework of the present thesis Research area Theories Principal Agent Property Rights Contract theory Information asymmetry Transaction Cost PE and VC market X X Public funding X X Deal flow X Deal screening X X X Negotiation/Contracting X X X X X Monitoring/Mentoring X X X X Exit X X

Table 9 The theoretical framework of the present thesis (own development)

3.4 Chapter summary

The research subjects of the present examination could be examined and described out of several theoretical perspectives. The earlier financial orientation is production flow oriented. The subsequent periods of industrialisation were then focused on the optimisation of production and financing processes. The latest financial orientation is associated with both the neo-classical and the neo-institutional theory (see section 3.1). The neo-classical theory is based on the assumption of perfect and complete capital markets which would ensure every type of financing (see section 3.1.1). The neo-institutional theory on the other hand negates the existence of complete and perfect capital markets. In accordance with the neo-institutional theory, difficulties in the market are caused by information asymmetries between market participants. These asymmetries are associated with the risk of adverse selection, moral hazard and hold up. In order to handle investment risks, every institutional framework is associated with transaction-costs. Therefore, the neo-institutional theory is focused on the examination of institutional frameworks regarding their suitability to reduce information risks and transaction-costs (see section 3.1.2).

The neo-classical theory is unsuitable to describe PE and VC markets in general and venture capital markets in particular. Both markets emerged due to capital markets' incompleteness and imperfectness. Therefore, the present thesis considers the neo-institutional theory as the suitable framework to describe the PE and VC market, the investment process and public funding measures. The MBGs and public-owned investor are regarded as the strongest form of financial intermediaries. Both the public investors and the MBGs are concerned with closing market gaps due to their status as self-helping institutions. Nevertheless, PE and VC firms obviously do not compensate every financing gap even though the market benefits from a large proportion of public funding (see section 4.3).

Hence, the present thesis is based on a neo-institutional perspective in order to understand the developments of the PE and VC market, the changes along the investment process and the application of public funding.