Private Equity and Venture Capital Funds: What Drives the Demand and Supply?

Abstract

This study investigates determinants for the demand and supply for PE/VC funds. Six factors were identified through Factor Analysis: Economic Activity, Development of Stock Markets, Corporate Governance, Social and Environmental Development, Entrepreneurship and Taxation. These factors were defined through 25 variables and transformed into five factors by factor analysis. The resulting factors were used in econometric models for investigating relationships among said factors and the fundraising of PE/VC funds first, and then with the amount invested by PE/VC funds. The results indicate that investments are adversely affected by the depth of the capital market: the PE/VC funds seek an exit strategy which the stock market offers through IPOs (Initial Public Offering). Other significant factors were protection of investors, social and environmental development and level of entrepreneurship. Different from expected, the economic activity was of low impact on demand. The result seems controversial but its lack of significance highlights the importance of the capital market (through IPOs as a way of disinvestment) as a key driver of the PE/VC market. Taxation was also not significant to the demand side, a fact which denotes that the government can influence the local PE/VC market, and that it should offer high enough discount rates or tax incentives to mitigate the effect of other barriers faced by the PE/VC market.

Keywords: Private Equity, Venture Capital, Factor Analysis

JEL Classification: G1, C31, C33, C38, F21, G24