![Venture capital in Europe: Closing the gap to the U.S. 13
European (and also Asian) entrepreneurs, on the other hand, typically suffer detrimental
reputational losses if they have to file for bankruptcy or, as Nuechterlein (2000) puts
it, ‘[in Europe] bankruptcy carries a stigma that frequently destroys an entrepreneur’s
future.’
Local support
Besides the role that the federal government plays in enhancing entrepreneurial develop-
ment, support on a local level is also crucial. Such support is generally more developed in
the U.S. than it is in Europe. The U.S Small Business Administration (SBA), for example,
administers the Small Business Development Center Program, which consists of more than
1100 local offices that provide current and prospective entrepreneurs with management
assistance.
SBA centers are allocated throughout the U.S. to provide assistance not only in major
urban centers but also in remote regions. In addition, they provide various customized pro-
grams to help economically and socially disadvantaged groups such as women, veterans,
and the disabled start their own firms.4
Furthermore, the SBA created the Angel Capital
Electronic Network (ACE-Net, recently renamed to Active Capital), an online system
that brings together entrepreneurs looking for private investment, and investors who seek
investment opportunities. The system allows entrepreneurs to post their business plans
on-line for as little as US$450 and to register up to US$5 million in securities for sale per
year (see Leach and Melicher, 2006).
Litigation risk
Although the U.S. is, in many respects, one of the best locations for an entrepreneur
to start a business, it does have its drawbacks. High wages, high health care costs,
and expensive corporate real estate may be one detriment. In addition, entrepreneurs
frequently view the high risk of being sued as a major problem. Damage awards or
settlements in product liability or employment discrimination suits – to name a few – are
often significantly larger in the U.S. when compared with Europe; and, while companies
can insure themselves against some of these risks, they do bear the costs indirectly in the
form of higher insurance premiums.
Potential problems
While we outlined various ways in which governments can support entrepreneurial devel-
opment, it is important to understand that none of the prescribed changes are easy to
implement. Changing the tax code or bankruptcy laws, for example, is certainly a time-
consuming and difficult process. Similarly, with most of Eastern Europe having been
under communist rule for more than four decades, it may take some time to instill an
entrepreneurial spirit in its people.
Finally, with often large amounts of money at stake, corruption and the resulting mis-
use and misallocation of funds can become a serious problem. While the U.S. and most
European countries are arguably less affected by this issue, the extant academic litera-
ture sees corruption as a serious impediment for economic growth in many developing
4
See also the SBA’s website at http://www.sba.gov/sbdc/aboutus.html.](https://image.slidesharecdn.com/19763-250227143859-4c90512a/85/Venture-Capital-in-Europe-Quantitative-Finance-1st-Edition-Greg-N-Gregoriou-49-320.jpg)
Venture Capital in Europe Quantitative Finance 1st Edition Greg N. Gregoriou
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- 5. Venture Capital in Europe Quantitative Finance 1st Edition Greg N. Gregoriou Digital Instant Download Author(s): Greg N. Gregoriou, Maher Kooli, Roman Kraeussl ISBN(s): 9780750682596, 0750682590 Edition: 1 File Details: PDF, 3.23 MB Year: 2006 Language: english
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- 8. Quantitative Finance Series Aims and Objectives • Books based on the work of financial market practitioners and academics • Presenting cutting-edge research to the professional/practitioner market • Combining intellectual rigour and practical application • Covering the interaction between mathematical theory and financial practice • To improve portfolio performance, risk management and trading book performance • Covering quantitative techniques Market Brokers/Traders; Actuaries; Consultants; Asset Managers; Fund Managers; Regulators; Central Bankers; Treasury Officials; Technical Analysts; and Academics for Masters in Finance and MBA market. Series Titles Return Distributions in Finance Derivative Instruments: theory, valuation, analysis Managing Downside Risk in Financial Markets: theory, practice & implementation Economics for Financial Markets Performance Measurement in Finance: firms, funds and managers Real R&D Options Forecasting Volatility in the Financial Markets, Second edition Advanced Trading Rules, Second edition Advances in Portfolio Construction and Implementation Computational Finance Linear Factor Models in Finance Initial Public Offerings: an international perspective Venture Capital in Europe Series Editor Dr Stephen Satchell Dr Satchell is the Reader in Financial Econometrics at Trinity College, Cambridge; Vis- iting Professor at Birkbeck College, City University Business School and University of Technology, Sydney. He also works in a consultative capacity to many firms, and edits the journal Derivatives: use, trading and regulations and the Journal of Asset Management.
- 9. Venture Capital in Europe Edited by Greg N. Gregoriou Maher Kooli Roman Kraeussl AMSTERDAM • BOSTON • HEIDELBERG • LONDON • NEW YORK • OXFORD PARIS • SAN DIEGO • SAN FRANCISCO • SINGAPORE • SYDNEY • TOKYO Butterworth-Heinemann is an imprint of Elsevier
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- 11. Contents Foreword by Josh Lerner xiii Preface and Acknowledgments xv About the Editors xvii List of Contributors xix Part One European Venture Capital Markets: Recent Developments and Perspectives 1 1 Venture capital in Europe: Closing the gap to the U.S. 3 Andreas Oehler, Kuntara Pukthuanthong, Marco Rummer, and Thomas Walker 1.1 Introduction 3 1.2 The European and U.S. venture capital markets – a comparison 4 1.3 Economic effects and government intervention 10 1.4 Conclusion 14 References 15 2 Public venture capital across Europe: A 15-year perspective 19 Christof Beuselinck and Sophie Manigart 2.1 Introduction 19 2.2 Public versus private VC 20 2.3 Hypotheses 21 2.4 Data 22 2.5 The evolution of public VC in Europe 23 2.6 Multivariate analyses 27 2.7 Conclusion 29 References 30 3 Why venture capital markets are well developed in some countries but comparatively small in others: Evidence from Europe 33 Kuntara Pukthuanthong, Dolruedee Thiengtham, and Thomas Walker 3.1 Introduction 33 3.2 Literature review 34 3.3 Data 36
- 12. vi Contents 3.4 Methodology and results 43 3.5 Conclusion 47 References 48 4 A survey of the venture capital industry in Central and Eastern Europe 51 Rachel A. Campbell and Roman Kraeussl 4.1 Introduction 51 4.2 The route of transition and the current economic environment 52 4.3 Recent developments of VC funding in CEE 54 4.4 An action plan towards a well-functioning VC market 62 4.5 Conclusion 64 References 65 Appendix 67 5 Venture capital in European transition economies: A scoring system 71 Robert W. McGee 5.1 Introduction 71 5.2 Some factors to consider 72 5.3 Results 78 5.4 Conclusion 81 References 82 6 Recommendations for the development of a European venture capital regulatory corpus: Lessons from the U.S. 85 Edward J. Lusk, Gregor Schmidt, and Michael Halperin 6.1 Introduction 85 6.2 Wealth creation: the final launch price and its market implications 86 6.3 A study of strategic price setting from the U.S. 88 6.4 Results 89 6.5 Summary of the U.S. study 93 6.6 Recommendations and conclusion 93 References 96 Part Two Evaluation, Exit Strategies, and Theoretical Aspects 99 7 Productivity growth in Spanish venture-backed firms 101 Luisa Alemany and José Martí 7.1 Introduction 101 7.2 Literature review and hypotheses 102 7.3 Data and methodology 105 7.4 Results 109 7.5 Conclusion 112 References 113
- 13. Contents vii 8 Is the Spanish public sector effective in backing venture capital? 115 Marina Balboa, José Martí, and Nina Zieling 8.1 Introduction 115 8.2 The role of venture capital 116 8.3 Data and descriptive analysis 118 8.4 Methodology 122 8.5 Results 123 8.6 Conclusion 124 References 126 9 A review of the venture capital industry in Italy 129 Fabio Bertoni, Massimo G. Colombo, Annalisa Croce, and Evila Piva 9.1 Introduction 129 9.2 Venture capital in Italy: the supply side 131 9.3 Venture capital in Italy: the demand side 135 9.4 The effect of venture capital on NTBF performance 138 9.5 Public policy in support of the venture capital industry 139 9.6 Conclusion 140 References 141 10 Exit strategy and the intensity of exit-directed activities among venture capital-backed entrepreneurs in Sweden 143 Anders Isaksson 10.1 Introduction 143 10.2 Research framework 145 10.3 Data collection 149 10.4 Results and discussion 151 10.5 Conclusion 154 References 155 11 Private equity fund managers do not overvalue their company investments 157 Tom Weidig, Andreas Kemmerer, Tadeusz Lutoborski, and Mark Wahrenburg 11.1 Introduction 157 11.2 Valuation guidelines 158 11.3 Literature review 158 11.4 Data sample 160 11.5 Empirical findings 161 11.6 Conclusion 166 References 167 Appendix 168
- 14. viii Contents 12 A search model of venture capital, entrepreneurship, and unemployment 171 Robin Boadway, Oana Secrieru, and Marianne Vigneault 12.1 Introduction 171 12.2 The model 172 12.3 The social optimum 177 12.4 Optimal policy 179 12.5 Conclusion 181 References 182 Appendix 184 Part Three Financing and Contracting 185 13 Capital structure in new technology-based firms: Venture capital-backed versus non-venture capital-backed firms in the Irish software sector 187 Teresa Hogan and Elaine Hutson 13.1 Introduction 187 13.2 Theoretical background and testable implications 188 13.3 Survey and sample characteristics 190 13.4 Capital structure 192 13.5 Founders’ perceptions of information asymmetries 194 13.6 Conclusion 196 References 197 14 German business ventures – entrepreneurs, success factors, and financing 199 Ann-Kristin Achleitner, Christoph Kaserer, Niklas Wagner, Angela Poech, and Martin Brixner 14.1 Introduction 199 14.2 Research set-up 200 14.3 Results 202 14.4 Conclusion 214 References 215 15 Financing practices in the German venture capital industry: An empirical study 217 Andreas Bascha and Uwe Walz 15.1 Introduction 217 15.2 Theoretical background 218 15.3 The data 221 15.4 Descriptive analysis 221 15.5 Does theory match with practice? 224 15.6 Conclusion 228 References 229
- 15. Contents ix 16 Covenants in venture capital contracts: Theory and empirical evidence from the German capital market 233 Ron C. Antonczyk, Wolfgang Breuer, and Klaus Mark 16.1 Introduction 233 16.2 Venture capital, agency problems, and hold-up 234 16.3 Incentive instruments in venture capital financing relationships 236 16.4 Empirical data 237 16.5 Contract design and characteristics of portfolio firms 241 16.6 Conclusion 245 References 246 17 Supply and demand of venture capital for biotech firms: The case of the Belgian regions of Wallonia and Brussels 249 Véronique Bastin, Georges Hübner, Pierre-Armand Michel, and Mélanie Servais 17.1 Introduction 249 17.2 Context 251 17.3 Venture capital in Belgium 251 17.4 Methodology 252 17.5 Literature: relevant dimensions 255 17.6 Empirical material 258 17.7 Analysis of perceptions 266 17.8 Conclusion 270 References 272 Part Four Performance 275 18 Simple and cross-efficiency of European venture capital firms using data envelopment analysis 277 Greg N. Gregoriou, Maher Kooli, Philipp Krohmer, and Rainer Lauterbach 18.1 Introduction 277 18.2 Background 278 18.3 Methodology 280 18.4 Data 284 18.5 Empirical results 288 18.6 Conclusion 293 References 293 19 Agency theory and management buy-out: The role of venture capitalists 297 Hans Bruining and Arthur Herst 19.1 Introduction 297 19.2 Agency theory 298 19.3 Management buy-out 302
- 16. x Contents 19.4 Agency theory and management buy-out 305 19.5 Conclusion 307 References 308 20 Does the value of venture capital vary over the investee life cycle? Evidence from Irish investees 311 Nancy Huyghebaert and Sheila O’Donohoe 20.1 Introduction 311 20.2 Literature review and development of hypotheses 314 20.3 Sample selection 316 20.4 Venture capitalist involvement in investee firms 318 20.5 Valuation of venture capitalists by investees 323 20.6 Relation between venture capitalist involvement and their perceived contribution to performance 324 20.7 Conclusion 328 References 329 21 German banks as venture capitalists 331 Tereza Tykvová 21.1 Introduction 331 21.2 Venture capital in Germany 332 21.3 Duration of the venture capital financing and the venture capitalists’ retention rate 333 21.4 Hypotheses 334 21.5 Data 335 21.6 Multivariate analyses 337 21.7 Conclusion 339 References 340 Appendix 341 22 Long-run venture-backed IPO performance analysis of Italian family-owned firms: What role do closed-end funds play? 343 Stefano Caselli and Stefano Gatti 22.1 Introduction 343 22.2 Literature and hypotheses 346 22.3 Data sample and methodology 351 22.4 Empirical results 354 22.5 Explanations of IPO underperformance 356 22.6 Conclusion 359 References 360 23 Securitization and venture capital fundraising 365 Paul U. Ali 23.1 Introduction 365 23.2 European private equity securitizations 366
- 17. Contents xi 23.3 Generic Collateralized Private Equity Obligations structure 366 23.4 Investors in CPOs 367 23.5 Funds of private equity funds 368 23.6 Conclusion 369 References 369 24 Total loss risk in European versus U.S.-based venture capital investments 371 Dieter G. Kaiser, Rainer Lauterbach, and Denis Schweizer 24.1 Introduction 371 24.2 Determinants of total losses of pre-market equity capital stakes 372 24.3 Data description 375 24.4 Description of the model 377 24.5 Results 378 24.6 Conclusion 385 References 386 Index 389
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- 19. Foreword During the 1980s and 1990s, there was a tremendous boom in the American venture capital industry. The pool of U.S. venture funds – partnerships specializing in early stage equity or equity-linked investments in young or growing firms – has grown from just over US$1 billion in 1980 to about US$160 billion at the end of 2005. Despite the pattern of boom-and-bust that has characterized the sector – the rapid increases in fundraising in the late 1960s, mid-1980s, and late 1990s were followed by precipitous declines in the 1970s, early 1990s, and early 2000s – the American venture industry today is far more developed and mature than it was in earlier decades. In recent years, this growth has extended outside the U.S.: Israel, India, and China are just three examples of nations that have experienced a dramatic surge in venture investment. In part, the capital has been provided by home-grown groups, but affiliates or branch offices of U.S.-based groups are playing an increasingly important role. Much of this growth seems to have by-passed Europe. European venture capital funds have long been overshadowed by the funds specializing in buy-outs and other later-stage transactions: not only have the level of such activities been far lower than elsewhere but so have the returns. While there was a brief surge of European venture capital activity in the late 1990s, it proved short-lived and many of the new entrants collapsed early in this decade. Many of the policy initiatives of that era, such as the creation of the pan-European EASDAQ market for young growth companies, have been written off as failures. The small size and very modest success of the European venture capital industry is trou- bling because considerable evidence has emerged that venture capitalists play an important role in encouraging innovation. The types of firms that these organizations finance – whether young start-ups hungry for capital or middle-aged firms that need capital to grow – pose numerous problems and uncertainties that discourage other investors. To be sure, the financing of entrepreneurial firms is a risky business. Uncertainty and informational gaps often characterize these firms, particularly in high-technology industries. These information problems make it difficult to assess these firms, and per- mit opportunistic behavior by entrepreneurs after the financing is received. To address these information problems, venture investors employ a variety of mechanisms, which seem to be critical in boosting innovation. A considerable body of evidence suggests that the early participation of venture firms – including their guidance, monitoring, shap- ing of management teams and boards, networking, and credibility – helps innovators successfully nurture start-ups and sustain their success long after their company goes public. Thus, the state of the European venture capital market is an important public policy issue. This collection of essays will help scholars, investors, and academics better
- 20. xiv Foreword understand the challenges faced by the European venture industry and – hopefully – suggest steps that can address some of these problems. Josh Lerner Jacob H. Schiff Professor of Investment Banking Harvard Business School
- 21. Preface After looking for information on European venture capital we noticed that there was not enough literature in this area and strongly believed an edited book on the subject was warranted. The articles exclusive to this book represent the latest cutting-edge research that examines venture capital in Europe. Acknowledgments We would like to thank Karen Maloney, publishing editor at Elsevier, for her support throughout the entire process; and Dennis McGonagle, assistant editor at Elsevier. We would also like to thank the copyeditor, Sue Thomas, as well as the handful of anonymous referees of the selection of papers for inclusion in this book.
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- 23. About the Editors Greg N. Gregoriou is Associate Professor of Finance and coordinator of faculty research in the School of Business and Economics at the State University of New York (Plattsburgh). He obtained his Ph.D. (Finance) from the University of Quebec at Montreal, which is part of the joint Doctoral Program in Administration that merges the resources of Montreal’s four major universities (McGill, Concordia, and HEC). He is hedge fund editor and editorial board member for the peer-reviewed scientific journal Derivatives Use, Trading and Regulation published by Palgrave-MacMillan in London. He has authored over 50 articles on hedge funds and managed futures in various U.S. and U.K. peer-reviewed publications, including the Journal of Portfolio Management, Journal of Futures Markets, European Journal of Operational Research, Annals of Operations Research, European Journal of Finance, Journal of Asset Management, and Journal of Derivatives Accounting, etc. This is his fourth edited book with Elsevier and his latest book is entitled Initial Public Offerings: An International Perspective. Maher Kooli is Assistant Professor of Finance at the School of Business and Management, University of Quebec in Montreal (UQAM). He holds a Ph.D. in Finance from Laval University (Quebec) and was a postdoctoral researcher in finance at the Center of Interuni- versity Research and Analysis on Organisations. Maher also worked as a Senior Research Advisor for la Caisse de Depot et Placement de Quebec (CDP Capital). He has published articles in a wide variety of books and journals including the Journal of Multinational and Financial Management, the Financial Management, The Journal of Private Equity, the Canadian Investment Review, Derivatives Use and Trading Regulations, FINECO, and Gestion. He has co-authored a book entitled Principes de Gestion financiere, Gaëtan Morin edition. His current research interests include alternative investments, initial public offerings, and mergers and acquisitions. Roman Kraeussl obtained a first-class honours Masters in Economics with a specialization in Financial Econometrics at the University of Bielefeld, Germany, in 1998. He completed his Ph.D. in Financial Economics on the Role of Credit Rating Agencies in International Financial Markets at Johann Wolfgang Goethe-University, Frankfurt/Main, Germany, in 2002. As the Head of Quantitative Research at Cognitrend GmbH, he was closely involved with the financial industry. Currently he is Assistant Professor of Finance at the Free University of Amsterdam and research fellow with the Centre for Financial Studies, Frankfurt/Main. He is a specialist on venture capital and private equity and has written numerous papers on these topics. Roman is also a Research Fellow at the Center for Financial Studies in Frankfurt/Main.
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- 25. List of Contributors Luisa Alemany holds a B.Sc. in Economics and Business Administration from the Com- plutense University of Madrid, an M.B.A. from Stanford (U.S.A.) and a Ph.D. in Corporate Finance from Complutense University of Madrid. She has gained professional experience in consulting with McKinsey & Co, in finance with Goldman Sachs, and in venture capital with The Carlyle Group. She is currently part of the Finance faculty at ESADE Business School (Barcelona, Spain). Her main research interests are venture capital, valuation of start-ups and companies in general, entrepreneurship, and corporate finance. Paul U. Ali is an Associate Professor in the Faculty of Law, University of Melbourne and a Visiting Associate Professor in the Faculty of Law, National University of Singapore. Paul was previously a finance lawyer in Sydney. Paul has published several books and journal articles on finance and investment law, including, most recently, Opportunities in Credit Derivatives and Synthetic Securitisation (London, 2005) and articles in Derivatives Use, Trading and Regulation, Journal of Alternative Investments, Journal of Banking Regulation, and Journal of International Banking Law and Regulation. Ron C. Antonczyk is assistant at the chair of Finance at RWTH Aachen University, Germany’s leading Technical University. In 2003 he received his diploma in Business Studies at Humboldt University, Berlin. He has written a textbook on the basics of corporate finance. His research interests include corporate finance and particularly venture capital. Marina Balboa is Associate Professor of Economics at the University of Alicante, Spain. She has a Ph.D. in Business Administration (Finance) from the University of Alicante. She has published in several international as well as Spanish journals. Her research areas are venture capital, private equity, and corporate finance. Andreas Bascha joined the German Central Bank in 2002, after he received his Diploma and Ph.D. in Economics from the University of Mannheim and University of Tübingen, in 1996 and 2001, respectively. From 1996 to 2001 he was research and teaching assistant at the University of Bochum and the University of Tübingen. He received a prize from Ernst & Young Stiftung E.V., Stuttgart for his Ph.D. dissertation. His area of specialization is contract theory, and his recent research interests include venture capital, financial intermediation, and banking supervision, especially Basel II. He is currently working in a senior position at the Department of Banking Supervision and Bank Examinations at the German Central Bank, Regional Office in Mainz, Germany.
- 26. xx List of Contributors Véronique Bastin is a Ph.D. student at HEC Management School – University of Liège, Belgium. She has been F.N.R.S. (Belgian National Fund for Scientific Research) Research Fellow at the Research Center for Management of Bio-Industries at the University of Liège. She holds a Masters Degree in Management from the School of Business Administration of the University of Liège. She also studied for one year at Maastricht University, and visited the University of Quebec at Montreal for three months. She is currently finalizing her thesis, which deals with the financial management of biotechnology firms. She has written several papers related to investment and financing policy in the bio-industry and has presented some of them at international finance conferences in Canada and Europe. Fabio Bertoni is a researcher at the Department of Management, Economics and Industrial Engineering at the Politecnico di Milano. His research activity is in the field of corporate finance. His research interests include venture capital and corporate governance. Christof Beuselinck is Assistant Professor of Accounting at Tilburg University and research fellow of CENTer. He holds a doctoral degree from Ghent University and was a Marie Curie research fellow at Manchester University. Christof has a specialization in financial reporting of SMEs and VC-backed firms and has written several working papers on the financial reporting characteristics of VC-backed firms, which are currently under review in international peer-reviewed journals. Robin Boadway is Sir Edward Peacock Professor of Economic Theory at Queen’s Univer- sity and a Fellow of CESifo and the Institute of Intergovernmental Relations. He studied at RMC, Oxford and Queen’s and has been a visiting scholar at the Universities of Chicago, Oxford, and Louvain. He has served in the past as President of the Canadian Economics Association and Head of the Department of Economics at Queen’s. He has been editor of the Canadian Journal of Economics and the German Economic Review, and is currently editor of the Journal of Public Economics. His research work is in the broad area of public sector economics, with special emphasis on fiscal federalism, tax policy, social policy, and cost–benefit analysis. He has been involved in projects for various organ- izations including the World Bank, the International Monetary Fund, the Canadian Tax Foundation, the Canadian International Development Agency, the Forum of Federations, the United Nations University, and governments in a number of countries. Wolfgang Breuer is full professor of Finance at the RWTH Aachen University, Germany’s leading Technical University. From October 1995 to February 2000 he was a full Professor of Finance at the University of Bonn. He earned his Ph.D. degree in February 1993 and his postdoctoral degree in July 1995, both at the University of Cologne. After his diploma in 1989 he worked for one year in Frankfurt as a consultant at McKinsey & Co., Inc., before continuing his academic career. Wolfgang Breuer has written about a dozen books, more than 30 articles in books, and numerous peer-reviewed journal articles comprising a great variety of topics in the field of finance. His current research interests focus on portfolio management, international financial management, and corporate finance. Martin Brixner has been a research assistant at the Center for Entrepreneurial and Finan- cial Studies (CEFS) at the Technische Universität München (TUM), Germany, since 2003. Previously, he graduated at the European Business School – International University
- 27. List of Contributors xxi Schloß Reichartshausen (ebs), Oestrich-Winkel, Germany, in business administration. His course of studies comprised semesters at the Sorbonne University, Paris, France, and the San Francisco State University. He majored in finance and business information technol- ogy. His research at CEFS focuses on business venture financing, mezzanine financing, and corporate pension schemes. Hans Bruining is Associate Professor in the Department of Strategy and Business Environ- ment at RSM Erasmus University Rotterdam, The Netherlands. He is senior lecturer in Strategy, Entrepreneurship, and Management Control. His research interests include man- agement buy-outs, strategic renewal, corporate entrepreneurship, corporate governance, private equity, and venture capital. He undertook the first major study of management buy-outs in The Netherlands and received his Ph.D. in 1992 from Erasmus University Rotterdam. Rachel A. Campbell completed her Ph.D. on Risk Management in International Financial Markets at Erasmus University, Rotterdam in 2001. She currently works at the University of Maastricht as an Assistant Professor of Finance. Her work has been published in a number of leading journals, including the Journal of International Money and Finance, Journal of Banking and Finance, Financial Analysts Journal, Journal of Portfolio Man- agement, Journal of Risk, and Derivatives Weekly. Stefano Caselli is associate professor in corporate finance at Bocconi University. He has written many academic papers and books about corporate banking, financing of SMEs, private equity and venture capital, and the new Basle Accord. He is co-editor with Stefano Gatti of the book Venture Capital: A Euro-System Approach (Springer, 2003). He is also academic director of Master in International Management CEMS at Bocconi University and Director of the Executive Master in Banking and Finance at SDA Bocconi. He is a member of the board of directors of Enter, the Research Center of Entrepreneurship of Bocconi University. Massimo G. Colombo is full Professor of Economics of Technical Change at the Depart- ment of Economics and Industrial Engineering of the Politecnico di Milano. His main interests cover industrial economics, economics of innovation, and strategic management. Annalisa Croce is a Ph.D. student in the Doctoral Program in Management, Economics and Industrial Engineering at the Politecnico di Milano. Her scientific activity is mainly in corporate finance. Her areas of research include venture capital and equity valuation. Stefano Gatti is associate professor in corporate finance at Bocconi University. He has written many academic papers and books about corporate finance, project finance, private equity and venture capital, and company valuation. He is co-editor with Stefano Caselli of the book Venture Capital: A Euro-System Approach (Springer, 2003). He is also academic director of the degree in economic and finance at Bocconi University. He is a member of the board of directors of DIR, the research division of SDA Bocconi, and he is a member of the board of directors of the Ph.D. in Finance of Bocconi University.
- 28. xxii List of Contributors Michael Halperin is the Director of the Lippincott Library and the Safra Business Research Center of the Wharton School, University of Pennsylvania. He is the author of two books and numerous articles on business research techniques and related authorship on empirical market studies. He is the principal designer of the ‘Business FAQ’, a knowledge database of business research sources currently being shared by eleven major academic business libraries in the U.S. Arthur Herst is Professor of Finance at the Open University School of Management (OU). He holds an MA in Business Economics from Erasmus University Rotterdam (EUR). His Ph.D. thesis, titled Lease or Purchase, was published in the U.S. Since 1971 he has had (part-time) functions at the EUR, the OU (doing research and developing material for distance teaching in the fields of finance and investment) and Maastricht University (doing research and responsible for investment and other courses). Since 2002 he has concentrated on the OU, exploring the field of behavioral finance. Teresa Hogan is a lecturer in Entrepreneurship at Dublin City University, and she recently obtained her Ph.D. from University College Dublin. As well as venture capital, Teresa’s research interests include the financing of high-technology enterprises, private capital, high-technology entrepreneurship, academic spin-offs, the Irish software industry, and enterprise education. Teresa has published in finance, entrepreneurship, and management journals, including the Global Finance Journal, Venture Capital: An International Journal of Entrepreneurial Finance, and the International Entrepreneurship and Management Journal. Georges Hübner (Ph.D., INSEAD) is the Deloitte Professor of Financial Management at HEC Management School – University of Liège, and is Associate Professor of Finance at Maastricht University. He is also a Research Director at the Luxemburg School of Finance, University of Luxemburg, an Affiliate Professor at EDHEC (Lille/Nice), and an Invited Professor at the Solvay Business School (Brussels). He has taught at the executive and postgraduate levels in several countries in Europe, North America, Africa, and Asia. Georges Hübner has published numerous research articles about credit risk, hedge funds, and derivatives in leading scientific journals and books. He was the recipient of the prestigious 2002 Iddo Sarnat Award for the best paper published in the Journal of Banking and Finance in 2001. He is also the inventor of the Generalized Treynor Ratio, a simple performance measure for managed portfolios. Elaine Hutson holds a Ph.D. in finance from the University of Technology, Sydney, where she worked as a lecturer in finance for 9 years. After submitting her thesis in 1999, she moved to Dublin and is now a lecturer in the School of Banking and Finance at University College Dublin. She has published over 20 articles in a wide variety of books and journals including the Journal of Empirical Finance, the Journal of International Financial Markets, Institutions and Money, the International Review of Financial Analysis and the Journal of the Asia Pacific Economy. Elaine’s research interests include mergers and acquisitions, the performance, regulation and history of managed funds, international risk management, and asymmetry in financial returns.
- 29. List of Contributors xxiii Nancy Huyghebaert is Associate Professor of Finance at K.U. Leuven (Belgium), where she obtained her Ph.D. in December 2000. Her work has been published in Strategic Management Journal, Journal of Corporate Finance, European Financial Management, Journal of Business Finance and Accounting, and Tijdschrift voor Economie en Manage- ment. Her current research interests are in corporate finance. She studies the financial structure, the performance, and survival of entrepreneurial firms, with a special interest in the interactions with product-market characteristics. She also examines initial public offerings, privatizations, and mergers and acquisitions. Anders Isaksson is a Lecturer at the Umeå School of Business and Economics in Umeå, Sweden. His research mainly focuses on small business finance, with a special emphasis on the venture capital process and the relationship between venture capital firms and entrepreneurs. His professional experience includes working as a special advisor on ven- ture capital issues for the Swedish Ministry of Industry, where he acted as a strategic advisor to the minister, representing the government in professional councils and working closely with central authorities. He has published several research papers, textbooks and consultancy reports. Dieter G. Kaiser is responsible for the institutional research of Benchmark Alternative Strategies in Frankfurt, Germany (since March 2003). He started his professional career in the structured products sector at Dresdner Kleinwort Wasserstein in Frankfurt, Germany. Afterwards he joined Crédit Agricole Asset Management in Frankfurt where he was then responsible for the fund-of-hedge-funds Marketing Support within the Institutional Sales & Marketing division. Dieter G. Kaiser has written several articles on the subject of alter- native Investments. He is the author of the German books Hedge Funds – Demystification of an Investment Class – Structures, Opportunities, Risks (Gabler, 2004) and Alternative Investment Strategies – Insights into the Investment Techniques of the Hedge Fund Man- agers (Wiley, 2005). He is also co-editor of the Handbook of Alternative Investments (Gabler, 2006). Dieter G. Kaiser holds a Diploma in Technical Business Administration from the University of Applied Sciences in Offenburg and a Master of Arts (M.A.) in Banking and Finance from the HfB – Business School of Finance and Management in Frankfurt. Christoph Kaserer is full professor of financial management at the Munich University of Technology (Technische Universität München, TUM), Germany, and co-director of the Center for Entrepreneurial and Financial Studies (CEFS) at TUM. Since October 2005 he is also dean of TUM business school. He has published research in leading international and German academic journals. Moreover, he is the editor of the Zeitschrift für Bankrecht und Bankwirtschaft, a leading German academic journal in the field of finance and law. An active advisor of large private companies and public institutions, he worked as a consultant for the German and the Swiss governments as well as for the European Venture Capital Association (EVCA). Before joining TUM business school, he became full professor of financial management and accounting at Université de Fribourg, Switzerland, in 1999. After graduating in economics at the University of Vienna, Austria, he was appointed research assistant at the department of banking and finance at the University of Würzburg, Germany, where he also earned his qualification as a university lecturer (Habilitation) in 1998.
- 30. xxiv List of Contributors Andreas Kemmerer is the author of several research articles on the private equity industry. He is currently working on his Ph.D. thesis at the Centre for Financial Studies, University of Frankfurt under the supervision of Professor Wahrenburg. He holds a Master Diploma in Finance from the University of Frankfurt and worked for Haarman & Hemmelrath as an associate in corporate finance and audit. He also had internships at Dresdner and Direct Funding Inc., a mortgage company based in Florida. Philipp Krohmer completed his masters studies of business administration at the University of Mannheim, Germany, Ècole de Management, Lyon, France and Universidad Autónoma de Barcelona, Spain with a focus on finance and statistics. He is currently finishing his Ph.D. thesis at the Johann Wolfgang Goethe University, Frankfurt/Main, Germany within the research-project ‘Venture Capital and the New Markets in Europe’, in collaboration with the Center for Financial Studies (CFS). His research and publishing activities focus on performance determinants and investment patterns of closed-end private equity and venture capital funds. He joined CEPRES in 2002 and is as senior consultant responsible for the data center and the initiation and execution of consulting projects. Before joining CEPRES, he worked at HeidelbergCement and Andersen Consulting S.A. (Barcelona). Rainer Lauterbach is head of the Private Equity department of Harald Quandt Holding. He joined Harald Quandt Holding in the year 2000 after graduation from the Wharton MBA Program. His major in Entrepreneurial Management prepared him well to build a portfolio of venture capital direct investments as CEO of QVentures, an affiliate of Harald Quandt Holding. Parallel to running QVentures, he is responsible for private equity and venture capital fund investments nationally and internationally for Harald Quandt Holding. Before Wharton, he was employed by IBM from 1991 until 1997 in the areas of software and business development in Germany, the U.S. and the U.K. Rainer Lauterbach is enrolled in the external Ph.D. program in Entrepreneurial Finance at the Goethe University in Frankfurt, Germany, with the research focus on risk and performance aspects of venture capital and private equity investments. Edward J. Lusk is Professor of Accounting at the State University of New York, College of Economics and Business, Plattsburgh, New York, and Emeritus at The Department of Statistics, The Wharton School, The University of Pennsylvania, Philadelphia. As a professor at the Otto-von-Guericke University, Magdeburg Germany, he taught the course ‘Venture Capital: The Creation of Tomorrow’ in the Master’s program for five years. Tadeusz Lutoborski is a corporate finance advisor and specializes in private equity financ- ing and M&A and is based in Frankfurt. He worked in the finance department for an international consumer goods manufacturer, IT-consulting, and M&A-advisory. He holds a Masters Diploma in Finance from the University of Frankfurt. Sophie Manigart is full professor of finance and entrepreneurship at Ghent University, Belgium and the Vlerick Leuven-Ghent Management School, and is guest professor at the London Business School. Sophie did part of her doctoral studies at the Wharton School of Business of the University of Pennsylvania and is specialized in the area of entrepreneurial financing. Sophie has published several articles on entrepreneurship and venture capital financing in various journals such as Journal of Business Venturing, Entrepreneurship,
- 31. List of Contributors xxv Theory and Practice, European Financial Management, Small Business Economics, and Journal of Private Equity. Klaus Mark, Ph.D., works as a consultant at an auditing company in Düsseldorf, Germany, in the division for Corporate Finance and Advisory. He earned his Ph.D. degree in Finance at RWTH Aachen University in June 2005. After his diploma in Political Economics at the University of Bonn he worked for five years as a research analyst at RWTH Aachen University in the Department of Finance. In addition to venture capital his research interests include topics in risk management and the evaluation of firms. José Martí is Senior Associate Professor of Corporate Finance at the Complutense Univer- sity of Madrid. He has a Ph.D. in Business Administration (Finance) from the Complutense University of Madrid (1984). He has conducted the yearly surveys on private equity in Spain since the mid-1980s. His research areas are entrepreneurship, venture capital, private equity, and buy-outs. Robert W. McGee is a professor at the Andreas School of Business, Barry University in Miami, Florida. He has published more than 300 articles and more than 40 books in the areas of accounting, taxation, economics, law, and philosophy. His experience includes consulting with the governments of several former Soviet, East European, and Latin American countries to reform their accounting and economic systems. Pierre-Armand Michel (MBA, Ph.D., Stern School of Business, New York University) is Professor of Investment Analysis at HEC Management School – University of Liège (Belgium), and Affiliate Professor of Financial Accounting at Solvay Business School – Free University of Brussels. He is also the Academic Director of the Luxembourg School of Finance – University of Luxembourg. He has had the honor of being invited as visiting professor in several universities in Europe, North America, and Africa. Pierre A. Michel has written several books on finance and accounting and has published numerous research articles in leading scientific journals and books about asset valuation, risk estimation, market efficiency, and corporate finance. He is also the President of the Economics and Management Commission of the National Fund of Scientific Research (Belgium). He acts as a consultant on the implementation of value-based management systems, and organizes, directs, and participates in management development programs. Sheila O’Donohoe (B.Comm, M.B.S., Ph.D.) currently lectures in Finance at the Waterford Institute of Technology, Ireland where she is course director on the M.B.S. in Interna- tionalization. She has lectured in Malaysia and has presented at several Irish and U.K. conferences. Her research interests include the role of venture capital, small firm finance, banking relationships, and mergers and acquisitions. Andreas Oehler is a Full Professor of Finance at Bamberg University (Germany) and has held a Chair in Management, Business Administration & Finance there since 1994. He received his M.Sc. (Diploma) and his Doctoral degree in Economics, Business Adminis- tration & Finance from Mannheim University in 1985 and 1989, and his Postdoctoral degree in Economics & Finance from Hagen University 1994. During his academic career he worked as a senior and managing consultant at Price Waterhouse and other companies.
- 32. xxvi List of Contributors His major fields of research are empirical, experimental and behavioral finance, risk management, and banking and financial institutions. Evila Piva is a Ph.D. student in the Doctoral Program in Management, Economics and Industrial Engineering at the Politecnico di Milano. Her scientific activity is mainly in industrial economics and economics of technical change. Her areas of research include academic start-ups, venture capital, and the determinants of the performance of new technology-based firms. Angela Poech is assistant professor of entrepreneurial finance at Munich University of Technology (Technische Universität München, TUM), Germany, and managing director of the Center for Entrepreneurial and Financial Studies (CEFS). Her educational back- ground is interdisciplinary, as she studied business administration and received her Ph.D. in organizational behavior. During her Ph.D. she worked self-employed in the field of communications and media. Before joining the KfW Endowed Chair in Entrepreneurial Finance she worked for the president of TUM. Her research interest lies in psychological aspects of private equity financing. Kuntara Pukthuanthong is an Assistant Professor in Finance in the College of Business at San Diego State University. She received a B.A. degree in Economics from Chulalonkorn University, Thailand, an M.B.A. in Finance from Washington University, and a Ph.D. in Finance from the University of California, Irvine. Her research interests are in the area of IPO valuation, entrepreneurial finance, and stock options. She has published or forthcoming papers in the International Corporate Control and Ownership Journal, the Journal of Investment Management, and the Journal of Corporate Ownership and Control. Marco Rummer is currently affiliated with the Said Business School, Oxford, U.K. as a visiting postdoctoral research fellow and is finishing his Ph.D. in Financial Economics at the University of Bamberg, Germany. He holds an M.Sc. in Economics and Finance from the University of York, U.K., which was funded by the German Academic Exchange Ser- vice, and a BA in Management from the Georg-Simon-Ohm Fachhochschule Nuremberg, Germany. His research interests are in empirical and experimental financial markets and corporate finance. Gregor Schmidt worked as a Corporate Finance Analyst for a German VC firm. After operating in the VC-industry for almost two years, he now works as a Program Consultant at Jet Aviation Management AG in Zurich, Switzerland. He holds two masters degrees: a Master of Commerce in Accounting & Finance and a Diplom Kaufmann in International Management. Denis Schweizer is a research assistant at the endowed chair of asset management at the European Business School (EBS). His research focus is on the asset allocation of alternative investments. He also works as an academic assistant in the creation of exec- utive educational programs at the EBS Finanzakademie. Additionally he is a speaker for finance programs. He also received a diploma in business administration from the Johann-Wolfgang Goethe University.
- 33. List of Contributors xxvii Oana Secrieru is an economist at the Bank of Canada. She holds a Ph.D. from Queen’s University (Kingston, Ontario) in Canada. Her main research is in the area of public eco- nomics, in particular entrepreneurship and venture capital financing. Her other research is in the areas of industrial organization and regulation. She has taught at Queen’s University and Central European University. Melanie Servais is a Commercial Engineer and holds a Masters Degree in Management from the School of Business Administration of the University of Liege. She has been FRFC (National Funds for Collective Research) researcher at the Research Center for Manage- ment of Bio-Industries at the University of Liege. Her research has mainly focused on the valuation of the intellectual property of biotechnology companies and the difficulties in finding necessary funds for the unlisted ones. Dolruedee Thiengtham is a native of Thailand. After completing her undergraduate studies in French at Thammasat University in Bangkok, Thailand, she moved to the U.S. where she received an M.B.A. and MTM (Master of Technology Management) degree from Washington State University in Pullman, Washington. Mrs Thiengtham joined Concordia University in Montreal, Canada, as a staff member in 2002 where she worked in the International Aviation M.B.A. Department and the Office of Dean of the John Molson School of Business. Besides her work she is actively engaged in academic research. She has published articles in the Canadian Journal of Administrative Sciences and has articles under review at other peer-reviewed journals. Her research interests are in securities regulation and litigation, aviation finance, and venture capitalism. Tereza Tykvová graduated from the Charles University of Prague (Economics) in 1997. She went to the University of Saarland, where she attended the postgraduate program ‘European Economics’ and obtained the title ‘Master of Economics – Europe’ with a thesis ‘Venture Capital in Germany and its Impact on Innovation’. The thesis received the 1999 Prof. Dr. Osthoff Award. Tereza Tykvová was a research assistant at Prof. Keuschnigg’s Institute of Public Finance at the University of Saarland. In September 1999 she joined the Centre for European Economic Research (ZEW) in Mannheim. In 2004, she obtained her Ph.D. from the Frankfurt University (supervisor: Prof. Uwe Walz). The topic of her thesis was ‘Financing, IPO and Post-IPO Performance with Different Types of Venture Capitalists’. Her fields of interest are venture capital, private equity, and initial public offerings. Marianne Vigneault is a Professor of Economics at Bishop’s University in Canada. She holds a B.A. from Bishop’s University, and an M.A. and Ph.D. from Queen’s University. She has also taught at Queen’s University as a visiting professor. Her research has been in the area of public economics, with particular emphasis on fiscal federalism and tax policies towards entrepreneurs, venture capitalists, and multinational corporations. Pro- fessor Vigneault has acted as Chair of the Economics department at Bishop’s University and as a consultant and researcher for the Canadian International Development Agency, the World Bank, the federal Department of Finance, and the Institute for the Economy in Transition in Moscow.
- 34. xxviii List of Contributors Niklas Wagner is assistant professor of finance at Munich University of Technology (Technische Universität München, TUM), Germany, and managing director of the Center for Entrepreneurial and Financial Studies (CEFS). He received a Ph.D. in finance from Augsburg University, Germany, and held postdoctoral visiting appointments at the Haas School of Business, U.C. Berkeley, and at Stanford GSB. Research visits led him to TUM’s Center of Mathematical Sciences and to the Department of Applied Economics, University of Cambridge, U.K. His research interests cover the areas of applied financial econo- metrics, including portfolio optimization, risk management, trading strategies, corporate finance, and applications in behavioral finance. He has published internationally, includ- ing papers in the Journal of Asset Management, the Journal of Banking and Finance, Quantitative Finance, and the Journal of Empirical Finance. His industry background is in quantitative asset management. Mark Wahrenburg holds the chair of bank management at the department of finance, School of Business and Economics at Goethe University Frankfurt, Germany. He is also the dean of the Goethe Business School, Goethe University Frankfurt, which established the Duke Goethe Executive M.B.A. program in cooperation with Duke University’s Fuqua School of Business. Furthermore, he is the director of the research program ‘Venture Capital and the New Markets in Europe’ of the Center for Financial Studies (CFS) and the director of the e-finance lab, both located in Frankfurt/Main. Thomas Walker is a native of Germany. He received a Ph.D. in Finance and an M.B.A. in Finance and International Business from Washington State University in Pullman, Washington, and a B.Sc. in Wirtschaftsinformatik (Management Information Systems) from the Technical University of Darmstadt, Germany. Dr Walker joined Concordia Uni- versity in Montreal, Canada, as an Assistant Professor in 2001. Prior to his academic career, he worked for several years in the German consulting and industrial sector at such firms as Mercedes Benz, Utility Consultants International, Lahmeyer International, Telenet, and KPMG Peat Marwick. His research interests are in IPO underpricing, secu- rities regulation and litigation, institutional ownership, insider trading, aviation finance, and venture capitalism. Uwe Walz has been full Professor of Economics at the University of Frankfurt/Main, Germany since 2002. He received his Ph.D. from the University of Tübingen, Germany in 1992, and teaches at the University of Mannheim, Germany. From 1992 to 1995, he was a postdoctoral fellow of the German Science Foundation and visiting research fellow at the University of California at Berkeley, and at the London School of Economics, U.K. From 1995 to 2002 he was Professor of Economics at the University of Bochum and the University of Tübingen. His area of specialization is industrial organization, and his recent research interests include contract theory, venture capital, (new) capital markets, corporate finance, and economics of network industries. He is Research Program Director for ‘Venture Capital and New Markets in Europe’ at the Center for Financial Studies, Frankfurt/Main, Research Fellow at the Center for Economic Policy Research (CEPR), London, adjunct to the Stuttgart Institute of Management and Technology (SMIT), and serves as referee for several internationally published journals.
- 35. List of Contributors xxix Tom Weidig is a co-author of the first book on managing private equity fund invest- ments. He has written several academic articles on private equity funds, funds of funds, and the impact of the new Basle Accord. His study The Risk Profile of Private Equity has been publicized and endorsed by the European Venture Capital Association, and translated into German and French. He holds a Master of Science in Theoretical Physics from Imperial College London and a Ph.D. from the University of Durham. He was a postdoctoral researcher at the University of Manchester, and a visiting researcher at Trinity College, University of Cambridge. Leaving physics behind, he then worked as a risk analyst in derivatives for the U.S. investment bank Bear Stearns in London. He also worked for the European Investment Fund, researching and modeling private equity funds. He has his own company offering consultancy and expert systems to the industry: http://www.quantexperts.com. Nina Zieling is a Ph.D. student of Finance at the University Complutense of Madrid. She has a Masters in Finance from the same University and her research focuses on venture capital and private equity.
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- 37. Part One European Venture Capital Markets: Recent Developments and Perspectives
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- 39. 1 Venture capital in Europe: Closing the gap to the U.S. Andreas Oehler, Kuntara Pukthuanthong, Marco Rummer, and Thomas Walker Abstract We review recent developments in the European venture capital (VC) markets. For decades, most of the Continent has lagged behind the U.S. in attracting and retaining young entrepreneurs. Despite several government attempts to provide tax incentives and an appro- priate infrastructure that would allow young start-up firms to establish themselves, European private and public markets for high-risk companies are still weak. While we document that Europe’s VC markets have grown considerably over the past eight years, European VC funds underperform U.S. funds by a significant margin. We explore the reasons behind this under- performance and discuss possible remedies. Our study draws valuable lessons from the U.S. to show how important a flourishing venture capital market is to a country’s economic development and how Europe may close the existing gap between the old and the new world. 1.1 Introduction Although the U.S. venture capital market remains the largest in the world, venture capi- talist activity abroad has been growing rapidly in recent years. Accompanying this trend has been an increased interest in the relative performance of venture capital investments around the world and in the reasons behind some of the documented differences (see, for example, Mayer et al., 2004). Young start-up firms frequently lack sufficient revenue during the first few years of their corporate life and have to look to outside investors for financial support. As noted by Nuechterlein (2000), about two-thirds of the average VC-backed company’s total equity is supplied by venture capitalists. Such start-up funding is typically used to develop a prototype and fund marketing and sales. In addition, venture capitalists frequently fund firms during later stages to allow them to grow more quickly than retained earnings alone would allow. If all goes well, the funded firm will reach the point where it can go public, allowing the venture capitalists to realize a return on their investment and exit the firm. Alternatively, venture capitalists can cash out by selling the start-up firm to another company. In the U.S., both exit strategies are used equally often (Schwienbacher, 2005; Nuechterlein, 2000). In contrast, in Europe – which until recently lacked a liquid,
- 40. 4 Venture Capital In Europe transnational stock market that is at par with the U.S. National Association of Securi- ties Dealers Automated Quotation (NASDAQ) market and which has an underdeveloped equity culture – venture-backed companies are more likely to be acquired by another company or another VC fund than sold to the public through an initial public offering. The lack of appropriate exit venues is frequently viewed as one of the main reasons why the European VC market lags behind that of the U.S. (Bottazzi and Da Rin, 2002). Our study aims to provide a detailed comparison of the VC markets in Europe and the U.S. and draws important lessons that should be of use for VC fund managers, academics, and regulators alike. In the first part of our study, we analyze venture capital flows both in Europe and the U.S., using a comprehensive sample of venture investments made between 1998 and 2005. We then survey the comparative empirical literature to contrast recent developments in the VC markets both within Europe and between Europe and the U.S. While our results suggest that the European VC markets have caught up with the U.S. in terms of size, the literature notes that large differences still remain. One of the most problematic differences between European and U.S. VC investments is that the former vastly underperform their U.S. counterparts.1 We identify several factors that may cause these performance differences and examine what European regulators can do to overcome them. In the second part of our study, we focus our attention on recent developments in the European stock markets. Exiting a VC investment by means of an Initial Public Offering (IPO) is viewed by many VC fund managers as highly desirable. Yet, while regulators across Europe have made numerous attempts to create a financial infrastructure that would make it easier for young high-tech firms to access the equity markets, many of these endeavors have failed. Finally, in the third part of our study, we discuss various other strategies that regulators can employ to aid entrepreneurial firms and the venture capitalists backing them. If properly implemented, such policies should lead to economic growth and help reduce Europe’s high unemployment rates. 1.2 The European and U.S. venture capital markets – a comparison The venture capital industry started in the U.S. and slowly spread around the globe. As the U.S. VC markets matured, the industry began to emerge in Europe (see Bruton et al., 2005). In the late 1970s, The U.K. and Ireland were among the first European countries to attract venture capitalists. Early VC funds were typically set up as affiliates of U.S. firms and drew heavily on American capital and expertise. Continental Europe followed in the early 1980s, where VC funds were frequently set up by large domestic banks. While the European VC industry closely follows the U.S. model (Manigart, 1994), differences in the institutional environment and in the tax and securities laws governing VC investments have caused the European VC market to develop very differently from that in the U.S. 1 Cochrane (2005) shows that – after controlling for selection biases using a maximum likelihood estimate – venture capital investments are very similar to traded securities, averaging a log return of approximately 15% per year. Yet, comparable studies in Europe find returns that are frequently below risk-adjusted required rates of return (see, for example, Hege et al., 2006; Engel, 2004).
- 41. Venture capital in Europe: Closing the gap to the U.S. 5 1.2.1 Facts and figures Table 1.1 provides an overview of the venture capital markets in the 16 largest European economies and the US during the period from 1998 to 2005.2 In Panel A, we provide information on aggregate VC fund flows in each country. Panel A provides yearly data of the total VC funds disbursed in a given country per year, measured in US$ million. Panel B divides the VC funds disbursed in a given country by the country’s GDP. For better readability, results are displayed in one hundredth of a percent. Data on venture capitalist funding are derived from the Security Data Company’s Venture- Xpert database. GDP data are based on national accounts data provided by the World Bank and the Organisation for Economic Co-operation and Development (OECD). Consistent with Bottazzi et al. (2004) we observe that during the earlier part of our sample period, the European VC markets were dwarfed by the U.S. market. In 1998, for example, European venture capitalists disbursed approximately US$8 billion, less than half the funds that were disbursed in the U.S. during that year. Fueled by the high-tech boom of the late 1990s (see Mayer et al., 2004) the venture capital markets both in Europe and the U.S. grew rapidly in 1999 and 2000. Yet, while U.S. VC markets experienced a rapid decline in 2001/2002, the European markets remained comparatively strong and actually overtook the U.S. in terms of total funding activity in 2004 and 2005. To account for differences in the size of each country’s economy and thus allow for a better comparison of VC markets across countries, Panel B divides VC fund flows in each country by the country’s GDP during that year. The last two rows support the observations we made in Panel A, in that Europe lagged behind the U.S. in the late 1990s but subsequently caught up with the American market. Interestingly, the figures in Panel B reveal large differences in relative VC market sizes across Europe. Consistent with Bruton et al. (2005), we observe that the U.K. and Ireland have particularly well-developed VC markets, with VC fund flows in some years close to 1% of GDP. In Continental Europe, France and Germany show a well-developed VC market, but also smaller countries such as Belgium and the Netherlands stand out. As Bottazzi and Da Rin (2002) point out, differences in laws, tax regulations, and institutional structures may likely explain some of these differences. The VC market in the Netherlands, for example, flourished earlier than in the rest of Continental Europe because the pension fund industry invested in private equity and because special tax treatment for pension fund contributions created one of the largest pension fund industries in the world (Sormani, 2001). Spinner (2003) notes that other European countries are following suit and are making a series of legislative changes designed to encourage enterprise and jumpstart the venture capital industry. In 2002, for example, Germany overhauled its takeover laws. More recently, tax laws have been introduced that are intended to relax the requirements needed for Benelux countries to create a fiscal unity and allow advantageous tax treatment to apply. At the same time, Italian lawmakers are overhauling financial assistance rules contained in the Italian Code to allow target companies’ assets to be used as general security for acquisition finance. The importance of such regulatory changes is emphasized by Cumming et al. (2004). 2 We also examined fund flows in Eastern Europe. These countries are not included here because their VC markets were either negligible or non-existent throughout our sample period. For important insights on this topic, see Schöfer and Leitinger (2002) who provide recommendations addressed at European regulators to assist the development of a VC industry in these countries.
- 42. Table 1.1 The venture capital market in Europe and the U.S. 1998 1999 2000 2001 2002 2003 2004 2005 Panel A: Total VC Funds Disbursed (in US$ Million) Austria 501 4817 1556 2008 283 643 1077 434 Belgium 1659 5319 4940 6870 8258 2396 6986 6491 Denmark 156 3671 4247 2702 15743 5475 5755 12314 Finland 1064 922 3601 6726 6150 3071 2121 3687 France 4361 18606 58040 31864 70007 44369 41891 63616 Germany 4577 14720 46485 24519 29850 53948 10 9628 84123 Greece 00 00 00 654 16 685 00 151 Ireland 2420 3754 5878 6809 12982 13674 8004 7834 Italy 1516 4960 13677 10430 6700 21161 14261 16377 Netherlands 4315 7759 12610 9166 6366 15720 9220 8058 Norway 32 1300 1325 2988 653 3528 1371 2469 Portugal 110 1972 477 393 128 00 00 33 Spain 2399 3380 4804 7331 8653 12826 10386 6891 Sweden 1508 3046 14929 15401 7721 3467 5707 3906 Switzerland 1935 2979 5883 3868 3935 6249 3228 5644 U.K. 52140 11 5132 13 8828 82644 72883 62756 13 5505 99114 Europe Total 78694 19 2335 31 7280 21 4372 25 0327 24 9969 35 5142 32 1142 U.S. 18 5680 37 1717 63 9298 28 3968 22 0484 28 6850 24 0954 27 0587
- 43. Panel B: Total VC Funds Disbursed Relative to GDP (in 1/100%) Austria 135 1188 803 1041 136 252 369 193 Belgium 663 2119 2163 3021 3360 788 1983 1804 Denmark 090 2120 2684 1700 9201 2594 2384 4839 Finland 822 721 3003 5549 4659 1898 1141 1268 France 300 1289 4371 2378 4804 2480 2047 2312 Germany 213 698 2446 1296 1476 2208 4000 1846 Greece 000 000 000 557 012 395 000 142 Ireland 2782 3925 6190 6592 10778 8988 4407 6645 Italy 127 420 1273 957 565 1441 850 929 Netherlands 1097 1947 3402 2386 1520 3066 1592 2024 Norway 021 823 794 1760 343 1599 548 717 Portugal 098 1714 448 358 106 000 000 020 Spain 408 561 827 1205 1261 1456 999 583 Sweden 608 1211 6232 7010 3195 1150 1647 1400 Switzerland 738 1152 2391 1545 1423 1942 903 922 U.K. 3663 7885 9652 5774 4657 3491 6379 4904 Europe Average 735 1736 2917 2696 2968 2109 1828 1909 U.S. 2129 4035 6547 2818 2113 2619 2057 2343
- 44. 8 Venture Capital In Europe 1.2.2 A review of comparative studies While our statistics suggest that the European venture capital markets have caught up with the U.S. in terms of size, the extant literature points out that large differences still remain between the two markets. A detailed comparison between Europe and the U.S. is provided by Schwienbacher (2005) who surveys venture capitalists on both sides of the Atlantic. He finds that European VC investments are not as profitable as those of their U.S. counterparts and attributes the relative underperformance of European VC funds to several factors: (1) European fund managers monitor their portfolio companies much less frequently than their U.S. peers, (2) European VC funds face less liquid markets, both in terms of human capital and in terms of exit strategies that are available to them (forcing them to shop around longer when it comes to replacing key employees or selling shares in one of their ventures), (3) European venture capitalists syndicate less frequently, thus incurring higher risk, and (4) European venture capitalists are much less likely to use convertible securities. Yet, despite these differences, Schwienbacher also documents that young European and U.S. VC firms are actually quite similar, suggesting that only older and larger VC funds show substantial dissimilarities. As the European VC industry grows and additional funds become established, these factors may ultimately lead to a convergence of both markets. Schwienbacher’s results are not unique. Earlier studies by Cumming and MacIntosh (2003a, 2003b) examine all possible exit routes (not only IPO exits), and find that European venture capitalists have a much harder time exiting their investments (for a comparable U.S. study, see Das et al., 2004). They argue that even the surge in high-tech IPOs in Europe in the late 1990s and the creation of several new stock markets geared to high-tech companies did not alleviate these problems. Other comparative studies between the European and U.S. VC markets include Cumming (2002), Bascha and Walz (2002), and Kaplan et al. (2004). Their results are generally similar. Engel (2004) notes that European VC firms had to make a large number of write- offs in recent years, suggesting some serious problems and inefficiencies in the European VC markets. Engel cites reports by the European Private Equity and Venture Capital Association (EVCA, 2002, 2001) that list 36.5% of all divestments in Germany in 2001 and 22.1% in 2002 as write-offs, much higher than comparable figures in the U.S. A more recent study by Hege et al. (2006) provides additional evidence on the per- formance of European and U.S. venture capitalists. In line with Schwienbacher (2005), they find that U.S. venture capitalists generate significantly higher returns than European VC firms. Their results suggest significant differences in terms of contracting behavior such as staging frequency and syndication that may explain the performance differences. Yet, when they compare U.S. venture funds investing in Europe with their European peers, they find no evidence that would suggest that U.S.-managed funds outperform. Thus, while the U.S. VC market is one of the largest and most successful in the world, they suggest that the U.S. model can not be easily exported or imitated. While earlier studies by Manigart (1994) and Sapienza et al. (1996) attribute the differences between the venture capital markets to heterogeneous cultural norms, studies by Black and Gilson (1998), Jeng and Wells (2000), and, more recently, Cumming et al. (2006) suggest that capital markets are the primary cause of the discrepancies. In brief, they argue that the presence of a well-developed market for IPOs and a norm of relatively rapid exit by venture capitalists in the U.S. create a vibrant industry that motivates a greater intensity of involvement and a more rapid development of expertise in the
- 45. Venture capital in Europe: Closing the gap to the U.S. 9 U.S. than, for example, in Germany and other places where public markets for high-risk companies have been comparatively weak. Thus, while their view includes an element of institutional forces (that is, norms of implicit expectations of venture capitalist exit), they focus on the impact of capital markets on differences in industry structure and behavior (see Bruton et al., 2002). In the following section we explore capital market differences in more detail and examine recent developments in Europe that were intended to close the existing gap between the two markets. 1.2.3 European small-company stock markets Many European countries provide venture capitalists with insufficient exit mechanisms, thus limiting their willingness to pursue certain investments. As a result, young start-up firms may not be able to raise the funds they need, which may ultimately hamper economic growth and job creation in that country (Botazzi and Da Rin, 2002). One of the main reasons for the lack of exit venues lies in the illiquidity of local stock markets. Even though European countries such as Belgium, France, Germany, Italy, the Netherlands and the U.K. have exchanges that are specifically aimed at small and medium start-up companies, entrepreneurs in these countries face some significant financing obstacles (Nuechterlein, 2000). First, unlike in the U.S., institutional investors in Europe tend to concentrate their investments in larger capitalization stocks. Moreover, most European countries prohibit pension funds from investing in VC funds, thus limiting the amount of capital that these VC funds can raise and infuse into start-ups (Hardouvelis et al., 2006). Another problem arises from the fact that many European small-company exchanges are not independent, that is, they are frequently under the same management as the countries’ primary markets. With two or more exchanges under their control, managers tend to promote the larger, more prominent exchange (Nuechterlein, 2000). In contrast, the NASDAQ market in the U.S. is independent from both the NYSE and AMEX, resulting in fair competition for new listings among the exchanges. As a result of these differences, venture capitalists in Europe are much more likely to exit their investment through a third-party acquisition than through an initial public offering – the preferred exit venue in the U.S. To remedy some of these problems, Europe created the EURO Neuer Markt (EURO.NM), a transnational stock exchange specifically aimed at young start-up firms. To overcome the lack of liquidity that most start-ups experienced in their respective home countries, the EURO.NM allowed for cross-border trading in the small company mar- kets of Belgium, France, Germany, the Netherlands, and Italy. The EURO.NM was quite successful. By early 2000, the exchange had attracted over 150 listings with a combined market capitalization of more than US$30 billion (see Nuechterlein, 2000). The member markets share trading and disclosure rules, access to all EURO.NM markets through cross-membership of financial intermediaries, a common infrastructure for the dissem- ination of market information, and joint marketing agreements to promote companies internationally. Another attempt by European stock markets to establish a transnational stock market was the European Association of Securities Dealers Automated Quotation (EASDAQ) market, which was created in September 1996, the same year as the EURO.NM, and organized across 14 countries in Europe with headquarters in Brussels. The purpose of the EASDAQ was to provide a broader range of financial resources for start-ups than
- 46. 10 Venture Capital In Europe the typical stock market in Europe. Yet, in contrast to the EURO.NM, the EASDAQ grew with lackluster speed. Within three years of its organization, only 49 firms listed on the exchange with a total market capitalization of US$21 billion. Eventually, in mid 2001, the EASDAQ was acquired by the NASDAQ and has since become NASDAQ Europe. The companies listed on the EASDAQ (now NASDAQ Europe) are generally larger and face tougher listing and disclosure requirements. In addition, the exchange maintains a fast-track trading link with the NASDAQ, which appeals to institutional investors (Nuechterlein, 2000). Another noteworthy development is the creation of the Neuer Markt by the Frankfurt Stock Exchange in 1997. The market was off to a great start and soon played a dominant role in Europe in terms of issue activity. For example, in both 1999 and 2000 more than 130 firms went public on this stock market segment, even though it had the most rigid listing requirements within the different segments of the Frankfurt Stock Exchange. Yet, after the stock market bubble burst, IPO activity in Germany soon came to a complete standstill, with not a single IPO in 2003. As a result, the Frankfurt Stock Exchange closed the Neuer Markt and established a new stock market segment with new listing requirements. In late 2005 the Frankfurt Stock Exchange founded the Entry Standard, which aims to be a market for small and medium-sized companies with few listing requirements. This stock market segment is modeled on the AIM Market in London, which was very successful even during the market downturn in 2003 and 2004 and also aims to be a market for small and medium-sized companies with few listing requirements. 1.3 Economic effects and government intervention A flourishing VC industry has been shown to have a positive influence on a country’s economic growth and its domestic job market. Nuechterlein (2000), for example, notes that venture-backed companies have historically created a disproportionate number of new jobs – many of them well-paid and highly skilled – and are a key source of research and development spending. When comparing the job markets in the U.S. and Europe, Sener (2006) finds that despite large companies cutting jobs on both continents, the U.S. economy has benefited from a significant number of new business formations, with Europe trailing far behind. This is supported by Shi et al. (2006) who show that between 1995 and 2002, 2300 U.S. companies went public in the U.S., compared with less than 1100 in Europe. As a result, many governments have become increasingly interested in promoting a healthy VC market. Yet, the European and American VC markets have undergone distinct developments in recent years that were not always crowned by success. We discuss the recent developments in both regions, paying particular attention to the question what actions governments can take to promote funding for new ventures. 1.3.1 Governmental promotion of the venture capital industry Direct government support There are various ways in which a government can support entrepreneurs and/or the VC industry. One possibility is to provide direct financial support to start-up firms. The U.S. government, for example, designed a program, the Overseas Private Investment
- 47. Venture capital in Europe: Closing the gap to the U.S. 11 Corporation (OPIC), under which it offers loan guarantees, small business loans, project finance, and political risk insurance for U.S. companies undertaking projects abroad. To be approved for funding, applicants typically have to show that their projects will not only develop and expand business operations in certain emerging markets but also that they have the potential to create U.S. jobs and accelerate U.S. exports (see Madeo, 1994). Besides financing large overseas projects, the agency has a special program under which it provides financing support for U.S. small and medium-sized enterprises (SMEs). While it is still comparatively small, the program continues to grow. In 2005, for example, OPIC committed US$343.2 million in financing to 52 SME projects, compared with $240.2 million for 49 projects in 2004.3 In addition, several U.S. states enacted legislation allowing the creation of Certified Capital Companies (CAPCOs). These VC funds have to invest at least 60% of their capital in private in-state companies for the purpose of stimulating economic growth in regions that have traditionally not received much venture capital. In contrast to private VC firms, which are mainly funded by institutional investors and pension funds, CAPCOs are financed by insurance companies, which are given tax credits as an incentive to become limited partners (see Nuechterlein, 2000). To date, CAPCO legislation has been adopted in five states, including Louisiana, Missouri, Florida, New York, and Wisconsin and is under consideration in eight other states (see Barkley et al., 2001; Rubin and Stankiewicz, 2005). Tax incentives High tax rates can be a serious impediment for economic growth. Thus, by reducing taxes, governments can provide a crucial catalyst for the formation and ultimate success of young start-up firms. Nuechterlein (2000) and Gompers and Lerner (2001) provide a good example for the effect of tax reductions, showing that VC financing and new business registrations increased significantly in the U.S. following a decrease in the capital gains tax rate from 49% to 28% in 1978, and to 20% in 1981. In contrast to the U.S., most European countries tax capital gains at rates of 60% or more, hindering the formation and expansion of new ventures. Another way in which the government can support entrepreneurs relates to the tax treatment of stock options. Many start-up firms – especially those in the high-tech sector – are short on cash during their early years, yet they need to offer competitive salary packages to attract and retain talented employees. To draw employees from larger, more established firms, start-up firms frequently use stock options that require no cash outlay when they are issued but may result in significant payoffs in later years if the company’s stock performs well. As noted by Gompers and Lerner (2001), the U.S. tax code makes stock options considerably more attractive than they are in Europe. Specifically, U.S. stock option holders are taxed on their profits when they sell the underlying stock. Stock options in most European countries, on the other hand, are taxed as regular income at the time they are granted (Nuechterlein, 2000). As a result of these differences, European start-ups face a tough time when competing with larger firms in the European labor market, and confront an even tougher challenge if they try to attract talented personnel from the U.S. 3 Overseas Private Investment Corporation, OPIC News – February 2006, Vol. 8 No. 2, page 1.
- 48. 12 Venture Capital In Europe Adequate infrastructure Besides providing young start-up firms with a well-developed infrastructure in the form of a reliable and efficient transportation, utility, and communications system, governments can make various other infrastructure investments to spur entrepreneurial development. Following our earlier discussion, establishing a liquid stock market that allows venture capitalists to exit their investments is viewed as one important step a country can take. In addition, it is important to understand that a growing number of businesses are founded with no assets other than their intellectual property rights (Nuechterlein, 2000). The success of many of these businesses depends on a fast and efficient patent and copyright system and the adequate enforcement of the laws governing intellectual property rights. While the European copyright system is widely viewed as one of the most efficient systems in the world, the patent process costs about US$150 000, compared with US$20 000 in the U.S. (see Singer and Stauder, 2003; Nuechterlein, 2000). Bankruptcy laws Governments should not only create appropriate exit channels for VC firms but also provide for effective liquidating strategies in case an investment does not perform as planned. While both the U.S. and Europe have well-developed bankruptcy legislation, there are some significant differences that make European bankruptcy laws considerably stricter than comparable U.S. laws. In Europe, managers can face severe sanctions if they delay a bankruptcy filing past a certain point (see White, 1996). In France, for example, managers can be held personally liable for the firm’s debts if they don’t file for bankruptcy within 15 days of the firm becoming insolvent. Bankruptcy laws in the U.S., on the other hand, do not impose any penalties for filing delays. Another difference relates to the question of who initiates the bankruptcy. Voluntary bankruptcy filings are almost always initiated by a company’s managers, while invol- untary bankruptcies are typically initiated by outside creditors. In the U.S., involuntary bankruptcy is discouraged, as three or more creditors have to file the required petition together. In contrast, under most European laws, any party – including managers, mem- bers of boards of directors, workers’ representatives, and the bankruptcy court itself (see White, 1996) – is encouraged to initiate an involuntary bankruptcy filing. From the entrepreneur’s perspective, it is thus much riskier to operate a business in Europe than it is in the U.S. Finally, when a European firm files for bankruptcy, courts will appoint an outside party to take a position in the firm, which severely limits the control the existing manager has in the bankruptcy process. In the U.S., the procedure is similar if a firm chooses to liquidate, that is, if it files for Chapter 7 bankruptcy protection. If a firm chooses to restructure, however, it may file for Chapter 11 bankruptcy protection, which allows the existing manager to remain in control. Taken together, U.S. entrepreneurs generally have a better opportunity to restructure their firms (and re-emerge from bankruptcy) than their European peers who lose most of their influence once bankruptcy proceedings have been initiated. From an entrepreneur’s personal perspective, there are large incentives for incorporating in the U.S. as well. A U.S. entrepreneur who manages a company that eventually goes bankrupt is quite frequently viewed as experienced and entrusted to start another firm.
- 49. Venture capital in Europe: Closing the gap to the U.S. 13 European (and also Asian) entrepreneurs, on the other hand, typically suffer detrimental reputational losses if they have to file for bankruptcy or, as Nuechterlein (2000) puts it, ‘[in Europe] bankruptcy carries a stigma that frequently destroys an entrepreneur’s future.’ Local support Besides the role that the federal government plays in enhancing entrepreneurial develop- ment, support on a local level is also crucial. Such support is generally more developed in the U.S. than it is in Europe. The U.S Small Business Administration (SBA), for example, administers the Small Business Development Center Program, which consists of more than 1100 local offices that provide current and prospective entrepreneurs with management assistance. SBA centers are allocated throughout the U.S. to provide assistance not only in major urban centers but also in remote regions. In addition, they provide various customized pro- grams to help economically and socially disadvantaged groups such as women, veterans, and the disabled start their own firms.4 Furthermore, the SBA created the Angel Capital Electronic Network (ACE-Net, recently renamed to Active Capital), an online system that brings together entrepreneurs looking for private investment, and investors who seek investment opportunities. The system allows entrepreneurs to post their business plans on-line for as little as US$450 and to register up to US$5 million in securities for sale per year (see Leach and Melicher, 2006). Litigation risk Although the U.S. is, in many respects, one of the best locations for an entrepreneur to start a business, it does have its drawbacks. High wages, high health care costs, and expensive corporate real estate may be one detriment. In addition, entrepreneurs frequently view the high risk of being sued as a major problem. Damage awards or settlements in product liability or employment discrimination suits – to name a few – are often significantly larger in the U.S. when compared with Europe; and, while companies can insure themselves against some of these risks, they do bear the costs indirectly in the form of higher insurance premiums. Potential problems While we outlined various ways in which governments can support entrepreneurial devel- opment, it is important to understand that none of the prescribed changes are easy to implement. Changing the tax code or bankruptcy laws, for example, is certainly a time- consuming and difficult process. Similarly, with most of Eastern Europe having been under communist rule for more than four decades, it may take some time to instill an entrepreneurial spirit in its people. Finally, with often large amounts of money at stake, corruption and the resulting mis- use and misallocation of funds can become a serious problem. While the U.S. and most European countries are arguably less affected by this issue, the extant academic litera- ture sees corruption as a serious impediment for economic growth in many developing 4 See also the SBA’s website at http://www.sba.gov/sbdc/aboutus.html.
- 50. 14 Venture Capital In Europe countries. Thus, even if governments adopt strategies aimed at supporting entrepreneurs, corruption can result in the selective granting of tax incentives, the misallocation of government grants, and a variety of related problems. 1.4 Conclusion Despite various attempts by European governments to provide proper incentives and an adequate infrastructure to help attract and retain young entrepreneurs on the Continent, they have lagged behind the U.S. in doing so. Sure, there are cultural differences between Europe and North America. While a majority of the North American population has its roots in Europe, the pioneer spirit of the early settlers and the belief that with hard work and the proper attitude one can achieve everything (become a ‘self-made man’) are still ingrained in the average American and foster a strong entrepreneurial spirit. Yet, while cultural differences such as these may be hard to overcome, governments have considerable leverage in influencing the economic environment that may ultimately determine the success or failure of a young entrepreneur. An expensive and complicated patent system is only one of the hurdles an entrepreneur faces in Europe. Yet, an efficient system to protect intellectual property rights is now more important than ever as we move into the digital age. The lack of adequate exits for venture capitalists is another problem faced by Europe. While several European exchanges have established trenches for high-risk firms in the past, many of them have failed. Many market participants blame corporate scandals for the downfall of the EURO.NM and similar markets across the continent. Yet, the U.S. has had its fair share of scandals as well, but its main exchange for young start-up firms, the NASDAQ, has survived. Rather than establishing short-lived trenches for high-risk firms that can be closed when things go wrong, Europe may be better off if it had an exchange such as the NASDAQ that is independent of other exchanges and has the ability to promote itself without stepping on the toes of larger exchanges behind it. Finally, the retention of highly qualified employees remains a problem in Europe. As managerial compensation in the U.S. far outweighs European salaries and bonus packages, Europe experiences an out flux of management talent to the U.S. Changing the tax treatment of stock option packages to equal that of the U.S. may at least be one step governments can take to close the salary gap and help retain qualified managers on the Continent. Both the U.K. and the U.S. have seen dramatic increases in the funds raised and invested in private equity and venture capital over the last 15 years.5 McGovern (2006) noted that, after a low point in 2003, commitments to venture capital and private equity investments are increasing again. Because of the increased interest in this asset class during the last years, the size of the deals is increasing significantly. As the private equity industry in the U.S. and Europe matures, there is likely to be further interest in emerging markets in the future, particularly Asia.6 Furthermore, a maturing industry should lead to the adoption of reporting standards, which would enable investors to compare the performance of different firms. A first 5 See Myners (2001) for a detailed discussion of the development of institutional investment in the U.K. 6 For a detailed discussion of global trends in private equity investments see PricewaterhouseCoopers (2005).
- 51. Another Random Scribd Document with Unrelated Content
- 52. bureau and deliver to the author in my presence a rancorous pamphlet, written against Lord Temple and Mr. Pitt, corrected by Mr. Grenville’s own hand, 5 and published immediately afterwards. This confidence I would not abuse. There came out, not long after my pamphlet, another piece that was to have made much noise. It was called “A Defence of the Minority in the House of Commons on the Question relating to General Warrants;” and had no meaner an author than Charles Townshend. His prodigious parts must not be judged of by this, or indeed by any of his few writings. He never was an author in proportion to his abilities. His thoughts flowed in too rapidly to give him time to digest them; nor was he ever enough in earnest about anything to consider it deliberately. This piece had poor success; and was confuted by some able retainer, if not by some able member of the Administration. Townshend was hurt by this miscarriage; and as he was, though so superior to rivals, infinitely jealous, he could not avoid conceiving a little spleen against me, though posterity may take my word, ay, and my vanity’s word, that I never felt myself so little as the moment he opened his mouth. I do not know whether they would own it with equal frankness, but many men greatly excelling me in talents, ought to have shrunk, too, into themselves, and felt their own futility when Charles Townshend was present. Yet such alloy did he bear about him to those marvellous parts, that children and women had more discretion and fewer weaknesses. Being hurt at the success of my Counter-Address, he wrote these very words to Mr. Conway: “The touches and re-touches on your character are fine; some strokes nobly free; but in general not what I expected. So Charles Yorke and others of our friends think.” Then, speaking of his own pamphlet, he added, “Mr. Pitt says it has had prodigious effect, and turned many. Grenville says it is serious, of great weight, and very hostile.” At that very instant Mr. Conway and I happened to know that Mr. Pitt declared he would not read it; and having afterwards read it, said he found it very inaccurate. There was the same want of truth in affirming that Grenville called it very
- 53. hostile. Townshend was afraid his friends should perceive how far it was from being offensive. 6 It must not be supposed that I would pass off these trifling anecdotes of myself and others for a history of England. But they contain that most useful part of all history, a picture of human minds. They shew how little men are, though riding at what is called the Top of the World. These and the following scenes were what filled me with disgust, and made me quit that splendid theatre of pitiful passions; not from having been too good for my company, but ashamed of being one of such Dramatis Personæ: and so far more inexcusable than the rest, that neither ambition nor interest had led me behind the curtain—perhaps if they had, I should have remained there still. I have mentioned my surprise at the coldness of Lord Temple. What was become of that unwearied alacrity with which he used to unbosom all his factious soul on every man that was ill-used or discontented? Whatever his views were, they were not ripe: and therefore, to retain a party, or the appearance of it, he gave a great dinner to the Opposition. I was of it; and after dinner took occasion to explain the threats and arbitrary language tried upon Mr. Conway, and scorned by him. I forbore to name Grenville, but painted him plainly enough to fill the company with surprise and indignation. As the company was promiscuous, the discourse was circulated about the town, and reached Mr. Grenville’s ears. On the 1st of June I received a letter from Mr. Thomas Pitt, desiring me to contradict a report said to come from me, charging Mr. Grenville with having said that if Mr. Conway voted according to his conscience he must be turned out. Thus had they dressed up the real report and substance in absurd terms that nobody might believe it. I immediately comprehended that this was a mandate issued to me as an inferior officer of the Exchequer, to justify Grenville and sacrifice my friend. I perceived, too, the advantage they had put into my hands, and determined to make the most of it. Pitt’s letter was so incredibly weak, and owned so much, that nothing was easier than to confute
- 54. it. To add to their confusion, I had preserved exact minutes of the two conversations with Pitt and Grenville, of which they had had no suspicion. I felt the opportunity of doing justice both to Mr. Conway and to myself; and of making Mr. Grenville understand, that if he did not do me justice in the regularity of my payments, he was at my mercy, and must expect those letters would be laid before the public, if not before the House of Commons. This I hinted obscurely, being determined that nothing but persecution should drive me to that step. Knowing, however, the narrowness of Grenville’s mind, it was useful to curb him by this menace, as I did too in the Counter- Address, and very successfully. I wrote a long, firm, and unpleasant letter in answer to Pitt’s, and received another from him before there could be time for it (as he was in Cornwall), but by Grenville’s opening mine at the post: for with him was it concerted; and yet so flimsy, so fallen from the arrogance of the former was their reply, that I enjoyed not only triumph, but, I own, the teazing amusement of keeping them in hot water many months—the only use I allowed myself to make of those letters in punishing their culpable behaviour —moderate revenge enough after such insolence! and in which, when I had suffered the period to elapse, Grenville was far from having the generosity to imitate me. My payments were carefully made before the Parliament opened. When I had let the Session pass over without making use of the materials in my hands, an embargo was laid on the income of my employment. Have I been unjust in saying that almost any steps that are lawfully taken against banditti, were justifiable against such men? But I found means to retaliate, without violating the strictest laws of honour: nor have they been able to reproach me, though I had such opportunities of resembling them. Happily, I shall not have occasion to say more of myself for many pages, for though I slept not, the Opposition did. Mechell, the King of Prussia’s minister, was recalled. That Prince had formerly desired Sir Charles Hanbury Williams might be recalled by us, without assigning reasons for that request. He was now reminded of that transaction, and called upon to satisfy us in the same manner. An epigram in politics very consonant to the genius of
- 55. Sandwich, who loved to strike a stroke, and never allowed for the bad consequences it might have. About the same time our merchants printed a memorial in the newspapers, complaining of their not being permitted to cut logwood; an ill appearance after a peace so favourable to them, and so recent. The Ministers published in the Gazette the King of Spain’s denial of knowing anything of that refusal, yet was not the Spanish Governor punished or recalled: and ere this matter was cold, Monsieur de Guerchy presented a memorial, demanding restitution of effects appertaining to the Duchy of Bretagne, that had been plundered from Belleisle. The Ministers referred the matter to General Hodgson, 7 who replied, “he had been ordered to take Belleisle, and had taken it: he knew nothing farther.” On July 8th died William Pulteney, Earl of Bath, 8 little considered, though immensely rich; for it was known that he would neither part with his money to do good or harm. He left his vast wealth to an old brother whom he despised, and a few legacies to ancient domestics; but so sparingly, that it was plain he thought the smallest sum a valuable present. On the 10th came on the trial of the Chevalier d’Eon. He had asked for farther time to assemble witnesses, but being refused, made no defence; and absconding, was found guilty. He remained in England, and often in London, undisturbed and unnoticed. 9 The printers of the “North Briton” were likewise found guilty. Lord Mansfield reprimanded Sergeant Glynn, counsel for the prisoners, for telling the jury that they were judges both of law and fact; the former of which, the Chief Justice denied, and said, if it was controverted he would take the opinion of the Judges thereon—a resource he was fond of applying to, when he could not alone support his own arbitrary assertions. He and the Ministers now finding themselves almost irresistible, pursued their blow. Two hundred informations were filed against printers: a larger number than had been prosecuted in the whole thirty-three years of the last reign!
- 56. On the 15th of the following month, came advice of Tortuga, or Turks’ Island, being seized by Count d’Estain. This man had been twice taken prisoner by us in the last war, and both times had forfeited his parole of honour; yet with a laudable clemency had been spared. 10 France had rewarded him with the Order of the Holy Ghost; and he now commanded a squadron in the West Indies, with which he committed this new hostility and infraction of the peace. I saw the importance of the moment, and endeavoured to spirit up addresses against the peace-makers; but languor prevailed, and none of our great Lords could be brought to send directions to their agents for transfusing indignation through their counties. In the meantime the Ministers made representations at Versailles, which, however, despairing of redress, they did not dare to announce in the Gazette till an answer came disavowing D’Estain, and promising to restore the island and pay damages; yet with no mark of displeasure towards their own commander, who, it was not doubted, had acted by direction, both to keep down our stocks, and in revenge for some vessels, which one of our captains had burned at Newfoundland, where they had encroached. The man justified himself by his general orders; nor did the Ministers, though they privately reprimanded him for his zeal, dare to break him; but fearing farther hostilities, four men-of-war were ordered to Newfoundland. Mr. Legge, after languishing some months, died August 23rd. A blow considerable to our party, as he was the only man in it proper, on a change, to have been placed at the head of the House of Commons. His abilities were known and respected; his timidity and time-serving had not been much remarked, but by the few he had been most conversant with; for, being supple and cheerful and never offensive, he had always seemed to loiter behind his party, rather than to desert it. He met death with more manliness and unconcern than could have been expected, as he was not old, was happy, rich, and above the affectation of heroism or philosophy. An old friend visiting him the day before he died, Legge said to him, “Brother sportsman, I used to laugh at your being too heavy for a chase, but now you are come in at the death.” It was not equally sensible and
- 57. unaffected, that he sent to Mr. Pitt, to acquaint him with his own approaching dissolution, and to exhort him to do his utmost to remove the present Ministers. Legge ought to have known how little Pitt would regard the death-bed admonition of a man for whom living he had little veneration. Legge left behind him, with orders for publication, a relation of his quarrel with Lord Bute, relating to an election for Hampshire. This piece neither hurt the Favourite, nor reflected honour on the deceased. That the former should have meddled in an election, even before his master’s accession to the Crown, could not surprise nor seriously shock any man: nor, though the narrative was not to appear till after his death, had Legge worked it up with a spirit to do himself honour. His obsequiousness pierced through the veil of hostility, and everybody saw that, without other views, he would not have encountered a rising Minister; nor by Legge’s own account, had the Favourite mitigated the scorn with which he treated him. I have said that Lord Bath loved money so much, that he thought a paltry sum, though given after his death, considerable bounty: it was much the same with Legge, he was so naturally compliant and inoffensive, that his daring to order the publication of a tame and posthumous satire seemed to him an effort of prodigious vengeance. 11 If the Ministers exerted little spirit against our neighbours, it was feared, on the other hand, that there were hostile views in the disposal of military commands at home. In fact, the Scotch obtained commissions every day: if by Lord Bute’s influence, I rather think it was meant for a defensive guard for himself and the Court, than with views offensive to the Constitution. Depending on favour and promotion, the Scotch themselves might have crowded into the army. Still it spread jealousy and alarm; and Mr. Pitt himself expressed dissatisfaction. These murmurs were largely increased by the elevation of one Colonel Fletcher to an old regiment over thirty- seven officers his seniors, among whom was Colonel Howe, 12 brother of the Lord of that name, and himself lately returned with glory from the Havannah. As Fletcher was devoted to the Favourite, and known to owe this promotion to him, the partiality was the more
- 58. grievously resented. To compensate for this step, the next regiment that fell was bestowed on Sir William Boothby, 13 but not without the secondary view of gaining this officer, who was a servant of the Duke of York. 14 That Prince returning from Italy passed to Paris; on which the King stopped his remittances, and obliged him to come home without delay. Grenville, who had taken umbrage at Lord Bute’s interfering in the disposal of military preferments, procured Sir William Boothby’s former regiment for Colonel Pearson. To give the finishing blow to the hopes and credit of the Opposition, the Duke of Devonshire, 15 who had gone to Spa at the end of August for a paralytic disorder, died there in the vigour of his age. He was by no means an able or enterprising man, but enjoyed a character uncommonly respected; and was universally regretted by all the Whigs as head of their party. No man would have disputed that pre-eminence with him; and we wanted even a nominal head. We had in the space of a few months lost three material men,—Lord Hardwicke, Mr. Legge and the Duke of Devonshire. It was almost as unfortunate that we had kept Charles Yorke, Charles Townshend, and the Duke of Newcastle. The health of the Duke of Cumberland made his life as little to be depended on. At this very time he had two slight fits at Newmarket, and was reported dead; but was saved by the breaking out of St. Antony’s fire. The Duke of Devonshire bequeathed 5000l. to Mr. Conway; a legacy honourable to him, and conducive to his popularity. The nominal post of High Treasurer of Ireland being vacated by the death of that Duke, Lord Sandwich begged it for Lord Corke, 16 (who had married his niece, and from whose family it had passed to the Cavendishes by the marriage of the late Duke with the heiress of Boyle, 17 ) but on supposition only that the new Duke would not ask it. “How shall we know,” said the King, “if his uncles will ask it for him?” Lord Sandwich said he could find out by his old fellow-traveller Lord Besborough, 18 who had married the late Duke’s sister. Lord Besborough, on the question being put to him by Sandwich as from himself, said laughing, “My Lord, is this to be a retainer?” “Why, to be sure,” replied Sandwich;
- 59. “it will be expected that the family should not act as they have done.” The young Duke was but sixteen, was awkward, and full of the bashfulness of his race. He was entirely in the hands of his three uncles, the Lords George, Frederick, and John, all warm Whigs, enthusiasts to the memory of their father and brother, of characters eminently unstained, and not a little persuaded that their family was, and ought to be, the most distinguished in the kingdom. Their property was enormous, their credit great, and reputation truly honourable: but the talents of the race had never borne any proportion to their other advantages. The first Duke, besides being the finest gentleman of the age, had succeeded to the merits of his friend Lord Russel’s martyrdom. Since that period the family had affected to drop all polish, and to wear the manners of plain English gentlemen, under an outside that covered considerable pride. Sir Robert Walpole had made advantage of their popularity, and having strongly attached the second and third Dukes to himself, he had placed them before himself as the leaders of the Whig party, and cried up their unembellished good sense, though the second Duke had no sense at all, 19 and the third a very dubious portion. 20 William, the fourth and late Duke, with something more of the manners of a Court, had less abilities than his father. His brother Lord George 21 had none at all. Lord Frederick was lively, and having lived in Courts and Camps, a favourite of the Duke of Cumberland, was by far the most agreeable, and possessed the most useful sense of the whole family. 22 Lord John, the youngest, was hitherto little known. I shall have occasion to mention him frequently hereafter. He had read a good deal, and his eyes saw not faster than his memory retained. He was accurate in repeating words, sentences, nay volumes, if he pleased; nor was he defective in quickness or reasoning. Under the appearance of virgin modesty, he had a confidence in himself that nothing could equal, and a thirst of dominion that was still more extraordinary. It consisted solely in governing those with whom he was connected, without views either of interest or power. To be first, in however small a circle, was his wish; but in that circle he must be absolute: and he was as ready to
- 60. sacrifice the interests and fortunes of those his friends and slaves, as he was his own. His plan seemed to be the tyranny of a moral philosopher. He was a kind of Heresiarch, that sought to be adored by his enthusiastic disciples, without a view of extending his sect beyond that circle. 23 His fair little person, and the quaintness with which he untreasured, as by rote, the stores of his memory, occasioned George Selwyn to call him the learned Canary-bird. 24 These three Lords determined their nephew should ask no favour of the Court; nor would they suffer him to carry their late brother’s riband to the King, lest his Majesty should draw any promise or professions from so raw a lad; or lest the boy himself should be wanting in proper respect, or be too blunt, if the King should mention his father. Lord Frederick, as of the Bedchamber to the Duke of Cumberland, was the only one of the family that since their brother’s disgrace had gone to Court: he therefore was thought most proper to restore the badge of the Order. At the same time, lest they should be taxed with rudeness, they desired Lord Besborough to thank Sandwich, but beg he would not neglect the interests of his friend. On this Sandwich ordered the patent to be drawn for Lord Corke; but Lord Mansfield, fearing the loss of that feather might root the Cavendishes in Opposition, prevailed to have it retarded. When Lord Frederick carried the Garter, the King used many expressions of concern for the death of the late Duke. Lord Frederick replied, his Majesty had not had a better subject, and that the family had never imputed their brother’s disgrace to his Majesty’s own movements. Having foreseen the death of the Duke of Devonshire, and apprehending that it would break up and dissolve our party, I determined to know if we had anything farther to trust to. During the summer I had had frequent conversations with Lord Lyttelton, who was on good terms again with Mr. Pitt and Lord Temple, and who really admired Conway. Lord Lyttelton’s object was to reconcile George Grenville and his brothers, and to make a coalition between that whole family and the Opposition, with or without the Bedfords,
- 61. but totally to the exclusion of Lord Bute. No man so addicted to wisdom was less wise than Lord Lyttelton; no man so propense to art was less artful; no man staked his honesty to less purpose, for he was so awkward that honesty was the only quality that seemed natural to him. His cunning was so often in default, that he was a kind of beacon that warned men not to approach the shallows on which he founded his attachments, always at a wrong season. 25 Mr. Pitt had neither tasted his views nor reasons; and Lord Temple, who was growing less disinclined to his brother George, neither trusted Lord Lyttelton with that secret, nor with the growing coolness between him and Mr. Pitt. On this miscarriage I resolved to feel my way myself, and went to Stowe. My doubts, if any remained, were there fully cleared away. I discovered that Lord Temple had no influence, scarce any intercourse with Mr. Pitt; and, though he endeavoured to slide over that coolness, I was determined to fathom it; and did. I said I had prayed Lord Lyttelton to bring about an interview between Mr. Conway and Mr. Pitt; that the latter wanted a second in the House of Commons, and could have no man so confidential, trusty, or creditable, as the former; that I was sorry to find no disposition to union in his Lordship’s friends; and that though I would try my utmost till Christmas to cement our party, I should give over a foolish and hopeless opposition, if I met encouragement nowhere. Lord Temple endeavoured to explain away this coolness, and said Lord Lyttelton was so newly reconciled to them that Mr. Pitt had not talked openly to him; but, continued he, if Conway had not been turned out, we should now have no Opposition—intimating, that my zeal was founded on resentment, not on any attachment to him and Mr. Pitt; and though with regard to himself this was most true, it was most unadvised arrogance in him to drop these words to me (as he did),—“Conway did not resign for us.” At the same time he was profuse of incendiary volubility, and of compliments to myself, particularly on my not only having overlooked Wilkes’s attacks, 26 but in voting for him. We agreed in our sentiments, that there should be a select junto of the ablest men in the House of Commons to
- 62. conduct the party. “Still, my Lord,” said I, “we should have difficulties even there: the Duke of Cumberland would object to the admission of Lord George Sackville to our councils.” Lord Temple answered abruptly, “We must not have a Prince of the blood for first Minister; that would entirely alienate the King.” This sentence explained the Duke of Cumberland’s complaints of Mr. Pitt’s coldness to all his overtures. I replied, I wished no more than his Lordship to see the Duke Minister; but he was of great credit to our party, and his life too precarious to make him formidable: “but,” said I, “I was speaking of Lord George”—“Oh!” interrupted he, “there are very, very great difficulties about Lord George: he must make his own way before we can do anything for him.” I was so offended at this royal style of we and us, and saw so plainly that Lord Temple, though he would be glad of our bearing him on our shoulders to St. James’s, could not even disguise his little inclination to us, that I determined to disappoint him, and forbear all connexion both with Mr. Pitt and him. I acquainted Mr. Conway with the ill-success of this visit; and here too, as usual, had a pill of mortification to swallow. Provoked at Lord Temple’s discourse, he wished, he said, I had not gone so far: Mr. Pitt should come to him; he would not go to Mr. Pitt; nor liked to be thought to court anybody. I replied that it was with his consent I had proposed that interview to Lord Lyttelton; that I should never wish my friend to court men in power: overtures of union to men out of power were different; nor was there any sense in opposing without union. I told him we must either form as strong a party as we could, or give up the game. We could do better without Pitt than he without us; for he would never dare alone and unfollowed to trust himself with Lord Bute. Our business was to serve our country and preserve our characters. I had staked everything, and valued not my fortune; but I did value my character, my understanding, and my ease; nor would expose my sense by a tame, middling, now-and-then opposition. That I would make no peace with the Ministers, but would go abroad, if I could not find more activity and more sense, than I had met with hitherto. Conway replied (unfeelingly enough as to me), that for himself he
- 63. was independent: he could wait; and supposed, if not soon, something would turn up at last. That he would oppose occasionally, but did not think it reasonable to say, It shall do now, or I will not try. This was a true picture of us both. I had embarked him and myself on principle, and without consideration; had gone on with redoubled zeal when I saw him injured; and now was impatient to repair the effects of my own rashness. He had been drawn in without knowing it, and had continued to act by system; could not bear to own, even to me, how deeply he felt the wound he had received; but was as much too much undisguised, on the other hand, in letting me perceive how little he felt the force of the sacrifice I had made to him. In this, and all his conversations, he dwelt on his obligations to the Dukes of Devonshire and Grafton. I said I respected their characters, but could not content myself with so narrow a bottom. He said, he thought himself bound in honour to acquaint Charles Townshend with what had passed. I said, it would immediately make him leave us; but I should not object to it, if he thought this strange delicacy honourable or necessary. He said he should not talk farther of it, nor appear cool to Mr. Pitt, lest it should be said that he had paid court to him, and was angry at the disappointment. He would have no opportunity, I told him, of showing either anger or civility to Mr. Pitt; but if he acquainted Townshend, all the world would know what had passed. He did write to Townshend the whole account. I was now reduced to as disagreeable a situation as can well be conceived. I had, from a point of honour, and from ancient friendship, gone all lengths for a man who I perceived had much more system than warmth of affection. My secrets were communicated to a babbler; and it would be known that I had tried every quiver to wound the Ministers, without finding a single arrow to my purpose. The only thing that remained to do, I did—I kept my temper; and neither let Conway nor any man else suspect the mortifications I underwent. It had been double pleasure to my enemies to know I was not content with him; and to have let him know it, had disappointed the purposes to which I might still apply
- 64. him both for his sake and my own. I wished to repair the hurt I had done him; nor till that was effected, could I accomplish my own object of withdrawing myself entirely from politics. The only notice I therefore took of what had passed, was at times to declare to Conway and others of the party, that I was so little satisfied with the conduct of the Opposition, that though I would never desert them while they remained oppressed, yet was I determined to take my leave of them as a party the moment, if ever that moment should arrive, in which they should be successful. This declaration I afterwards found as satisfactory to myself as it had been honest to those with whom I acted; and how much I was in earnest in making this resolution, my adherence to it will demonstrate. There was perhaps a greater difficulty attending us than all I have mentioned, though not very likely to befall us. It was, what answer we should make to a question Lord John Cavendish very sensibly put to me in one of our conversations. “If we do get the better,” said he, “whom can we make Ministers?” It had been to no purpose to answer, “I do not care whom.” Unless we could form an Administration, we must remain in Opposition. The event did happen; we were offered, and could not furnish out a Ministry; and yet it once more fell into our hands by a concourse of ridiculous circumstances, that if they do not ennoble History, yet render it perhaps more entertaining than revolutions of more serious complexion. There happened at this time, in another country, an event of which I shall take some notice, though it had no relation to our affairs. The deposed Czar, John of Muscovy, had been confined from his youth, and, as it was said, had had drugs administered to him destructive of his intellects. He had been spared, however, during the long reign of his rival Elizabeth; and had even been visited by her short-lived successor, Peter the Third. This visit might perhaps have awakened some sentiments in favour of Ivan in Russian breasts; at least jealousy in that of the foreign murderess, who now reigned in the room of both. 27 On a sudden it was given out, that
- 65. one Mirowitz had forced himself into the castle where Ivan was imprisoned, intending to deliver and proclaim him Emperor, but that so great was the fidelity and circumspection of the governor, that he had instantly cut the poor young Prince to pieces. This tale, almost as improbable as horrid, was believed by the greater number, and supported by a parade of forms and manifestos. Mirowitz was tried by the senate, and beheaded, after reading a confession consonant to the story divulged. His accomplice, for one they did allow him to have had, was said to have made his escape, and to have been drowned in his flight crossing a river. As Mirowitz suffered death unaccompanied with the torments used in that country, it is no forced construction to suppose he was threatened with torture if he did not authenticate what was required of him; or deceived with hopes of pardon, and prevented by sudden execution before he could recal a false confession. 28 Whatever was the truth, the Empress had given such earnest of her bold and remorseless nature in the assassination of her husband, that no wonder she was suspected of being as deeply concerned in the death of Ivan. I was assured by the Duchess of Choiseul, wife of the first Minister of France, that a French physician who had been at Petersburg at the time, and employed at that Court, had told her that they who knew most believed that the death of the Empress Elizabeth had been hastened too by the arts of Catherine: yet this fell character did Voltaire and the Literati of France select as the patroness of philosophy and toleration! She had artfully been generous to a few of them; and a poet and an author will go as far in whitewashing a munificent tyrant, as a Cossack or Calmuck in fighting for those who pay him. From Augustus to Catherine the Second, no liberal usurper has ever wanted an ode or a panegyrist. The Duchess of Choiseul, who had an excellent heart and solid understanding, being provoked at the scandalous encomiums poured forth by Voltaire on so black a character, wrote an answer to him with equal sense, spirit, and reason; a work, in her situation, improper to be seen: I was one of a very few that had the satisfaction of reading it.
- 66. On the 1st of November the sentence of outlawry was pronounced against Wilkes; and on the 4th died that bacchanalian bard, his friend Churchill. He was on a visit to his friend Wilkes at Boulogne, where his excesses threw him into a fever, and where he died in a few days with epicurean indifference—a meteor that had shone but four years, and never so brightly as he might have done. He had wished, he said, for an opportunity of satirizing Mr. Pitt and Charles Townshend, who had not yet entirely listed themselves with the Court, the moment for which Churchill waited impatiently; yet, writing as he did at random, it was a chance whether he would have touched or not the true blemishes and characteristic marks of men so compounded of defects and exquisite ingredients. Churchill could hew out a block that would brave time, and last to posterity, but stood not near enough to seize the lineaments and shades that distinguish a portrait, and exhibit a resemblance to the eyes of cotemporaries. Among Churchill’s papers was found a collection of letters from Lord Holland to Francis, 29 who had furnished them to the Satirist against his late patron. In one of those epistles Francis complained of Lord Holland for not making him an Irish Bishop, and threatened to publish something that would prove Lord Holland a still greater villain than the world believed him. To silence that wretch, Lord Holland sent him 500l., and gave him a place in Chelsea College. The death of the Master of the Rolls happening at this time, Norton was appointed to succeed him, with an additional pension of 1200l. a year; and Mr. Charles Yorke again consented to accept his former post of Attorney-General: on which the Duke of Cumberland said shrewdly, “We have lost a man of character, but they have not gained one.” This arrangement, however, did not take place. The Chancellor 30 objected to Norton for Master of the Rolls; and Charles Yorke was frightened 31 with the offence taken at his deserting the Duke of Newcastle and his friends. Norton remained Attorney; Sewell was appointed Master of the Rolls; and Yorke accepted a
- 67. patent of precedence over the Solicitor-General; 32 which only showed that he had made his peace without mending his fortune. About the same time was published a pamphlet, perhaps the ablest ever written, called an “Inquiry into the Doctrine concerning Libels.” It severely took to pieces the arbitrary maxims of Lord Mansfield and Norton, who were roughly handled, as well as the late Lord Hardwicke. Dunning, a rising lawyer, was supposed the principal author, assisted by the Lord Chief Justice Pratt, and one or two others. On the 19th died Stone, the famous Primate of Ireland, aged 57, having ruined his constitution by indulgence to the style of luxury and drinking established in Ireland, and by conforming to which he had found the means of surmounting the most grievous prejudices and of gaining popularity, ascendant, power: an instance of abilities seldom to be matched. He was aided, too, by several virtues: he was generous and charitable, and of a soul above revenge. When Lord Chesterfield 33 held the government of Ireland, he told the Primate, “My Lord, you must govern this kingdom, for you have the best parts in it; but you want one thing, you must take orders:” alluding to the irregularity of his life. But Stone had greater parts than Lord Chesterfield imagined, for he did govern that kingdom without conforming to the decencies of his profession. 34 Stone was survived but a few days by his ancient competitor the Earl of Shannon 35 —a more common character, he having sold his patriotism for a peerage; and maintaining by hypocrisy an influence that Stone had supported with the boldness of a statesman, and with scorn of the little knavery that he might have borrowed from his rank of Archbishop. The noise which our succession of Patriots had made in Europe, and the disgrace their prostitution had brought on the character, gave occasion to the following anecdote. Monsieur Elie de Beaumont, renowned for his defence of the family of Calas, was in England, and went to Bath. Conversing there with Lord Chief Justice
- 68. Pratt and Lord Strange, Monsieur de Beaumont said he wanted to see a Patriot. Lord Strange replied, there was no such thing. “You surprise me, my Lord, said the Chief Justice; till now I thought your Lordship one!” At the conclusion of the year the Cider counties instructed their members to join the Minority; and Sir George Yonge 36 carried a letter from some of the chiefs to the Duke of Newcastle, proposing union. The Duke sent the letter to Mr. Pitt, as an inducement to him to declare himself. Pitt thanked the Duke for the communication, but observed, the letter had not been intended for him (Pitt). He desired to be consulted no more, for he was, and would be, a single man. The Minority, he said, had heard the late glorious war abused the last session, and had sat silent. Therefore would he join nobody, but would act on every single occasion as he should think right. 37 Thus, without chiefs, numbers, or union, were we left to meet the opening of Parliament in the ensuing year!
- 69. CHAPTER II. Church Preferments.—Meeting of Parliament.—Conway’s Speech.—Lord Chatham’s Legacy from Sir William Pynsent. —Speeches on Dismissal of Officers.—Duel between Mr. Chaworth and Lord Byron.—Renewal of the Question of General Warrants. The primacy of Ireland being vacant, Mr. Grenville was desirous of procuring that dignity for Dr. Newton, Bishop of Bristol; but he declining it, Lord Granby solicited Grenville’s interest for Dr. Ewer, 38 who had been his tutor, and Grenville intended to bestow that mitre on him. In the meantime it was known that Lord Northumberland espoused Robinson, Bishop of Kildare, and sought to make him Archbishop. This was immediately considered as a contest for power between the Favourite and the nominal Minister,—for that Grenville was only nominal Minister, appeared by Robinson’s obtaining the Archbishoprick; though when Grenville found he could not obtain it for Ewer, he had maliciously and artfully instigated the Duke of Bedford to solicit for Bishop Carmichael, 39 who being a Scot, his promotion would have struck mankind as the act of Lord Bute, more than the appointment of Robinson, whom he really supported. The intrigues of the late Primate had been so noxious and troublesome to the English Government, that it was determined no future Archbishops of Armagh should be Lords Justices, or have any power in the Administration. The new Primate, a proud but superficial man, had not talents to recover the credit enjoyed by his predecessors. 40
- 70. January 10th,—the Parliament met. The King notified to the two Houses the intended marriage of his youngest sister, the Princess Caroline Matilda, with the Prince Royal of Denmark, her first cousin. Princess Louisa, her eldest sister, was so remarkably small of her age, that, though she lived three years after this, she never appeared but as an unhealthy child of thirteen or fourteen years of age. Lord Townshend and Lord Bottetort moved the address of the Lords; Lord Warkworth and T. Pitt, of the Commons. An accidental debate happening in the latter House, General Conway, to the surprise of everybody, and particularly of me, who had with astonishment beheld his tranquillity, broke out on his own dismission, and attacked George Grenville with a fire, eloquence, and rapidity of passion and bitterness, that showed both how much he had resented and how much he had concealed. Very warm words passed between them; great applause was given to Conway by the Opposition; and the Ministers felt that the vengeance they had exerted began to lose something of its sweetness. They had infused a spirit into Conway with which all his friends would in vain have endeavoured to inspire him. On the 15th, the King sent another message to both Houses, referring to their consideration an offer made by France to pay 670,000l., in three years, for our maintenance of their prisoners, instead of 1,100,000l., which had been settled, but with no specification of time, by the late peace. This offer was accepted on a subsequent day. About the same time happened the following extraordinary event. Sir William Pynsent, a baronet of Somersetshire, died and left his whole fortune to Mr. Pitt, no ways related, nor personally known to him. Nor, as it appeared, was this great legacy so much the reward of his illustrious services as of his opposition to General Warrants. Sir William Pynsent, at his death, was aged 86, had formerly served in Parliament, and had voted against the Treaty of Utrecht; his principles being zealously and unalterably Whig. He was said to have had parts and humour. 41 * * * * * * Lord North had
- 71. married his next relation 42 —had courted him, and stood fair to be his heir; 43 till, having voted for the tax on cyder, Sir William, who had long lived retired upon his estate, had not only quarrelled with his cousin North, but had encouraged the mob to burn him in effigy. He then became enamoured of Mr. Pitt; is said to have cast some inconstant glances towards Wilkes, and, immediately before his death, had indubitably given orders to his lawyer, to draw a new will entirely in favour of General Conway; but it was not prepared in time. Mr. Pitt, therefore, found himself in possession of real and personal estates worth above forty thousand pounds, without the regret of losing a friend; without the imputation of having flattered his benefactor, for he had never seen him; without injuring a family, for Sir William had no very near relation, 44 and not one that expected his fortune; and with the satisfaction of owing such a public mark of esteem to his own virtue or merits. On the 18th a meeting of the Opposition was held at Sir George Saville’s, to consult whether they should bring on, or defer for some time longer, a renewal of the question on General Warrants. The doubt was raised by the ill health of Mr. Pitt. James Grenville and a nephew of Lord Chief Justice Pratt, who attended the meeting, would not say that Mr. Pitt desired the motion should be deferred. The company squabbled till two in the morning, and then agreed to adjourn the measure. Sir William Meredith wrote to acquaint George Grenville with this procrastination—a ridiculous piece of candour, and received properly by Grenville, who made no answer. These assemblies I seldom or never attended; they were childish imitations of Parliaments, rarely produced any good, and only taught a party to quarrel and split into less factions. Many who cannot utter in the House of Commons can prattle in a private room. Business can never be reduced to too few heads. There should, in party as well as in Government, be one man who should consult others separately, and act as he finds best from the result of that advice, and of his own judgment: but he should let the rest know as little as possible that they are almost all probably of different opinions.
- 72. On the 21st, Dowdeswell proposed to reduce the sixteen thousand seamen to eleven thousand, but without effect. On the contrary, Charles Townshend spoke for the larger number in warm terms, and declared he had always approved the peace. This desertion did not surprise me: nor was it owing solely to his fickleness. He was now influenced by Lord George Sackville, who, dissatisfied with Lord Bute for not supporting him, had joined the Opposition: Oppositions are always great whitewashers. But the declining state of the Opposition, by deaths and other causes which I have mentioned, had alarmed Lord George, and he began to look towards Grenville, who would want all manner of strength to support himself against the Favourite. On Jan. 23rd, the day of voting the army for the year, there happened a very spirited debate. 45 Beckford began it, by declaring that if any man would second him, he would oppose so large a number as 16,000 men, because we were in no danger of being attacked by surprise; and because he apprehended there was an intention of modelling the army, which he concluded from the dismission of General Conway. He mentioned, too, an expression dropped by Charles Townshend, which he said had made his ears tingle; it was that the Colonies were not to be emancipated. The Colonies, said Beckford, are more free than Ireland, for America had not been conquered: on the contrary, it was inhabited by the conquerors. Townshend ridiculed Beckford’s alarm, affirming he had only meant that the Colonies were not to be emancipated from their dependence on the supremacy of this country. Beckford told him he had expressed a single idea by a multitude of circumlocutions, and was troubled with a diarrhœa of words—an expression with which Townshend was much hurt. Nicholson Calvert and George Onslow opened on the dismission of Conway in very strong terms. The former said, Grenville 46 had avowed it was for parliamentary conduct when he owned he had thought himself turned out for a similar cause. Onslow called the Ministers profligate and abandoned; and Lord Strange attempting to
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