Venture capital shares : an investment analysis / S.J.J. van Heerden

An investors' objective is to earn a return from savings due to their deferredconsumption, compensating the investor for the time, the expected rate of inflationand the uncertainty of the return. Arguably, the equity markets in general offeredrelative moderate returns over the past number of years. Venture capital investmentson the contrary are perceived to offer super returns but also bear very high risk. Giventhe restricted ability of the equity market to produce super returns, the likelihood toinclude venture capital in an investment portfolio must be considered. Therefore,when considering supplementing a well diversified portfolio with venture capitalequity, one should investigate whether this action potentially increases the portfolio'srate of return significantly, whereas the associated portfolio risk augmentsinsignificantly.At first this paper examines Portfolio theory under the Markowitz and Sharpe Models.It then moves on to Capital Market theory that extends Portfolio theory and developsa model for pricing all risky assets. Subsequently, scrutinizing investment risk,investment's rates of return and the risk return ratio associated with investments aredone.Upon completion of the literature study, an empirical study was done on the JSEVenture Capital securities to assess the validity of including venture capital in welldiversified portfolios. This study has found venture capital securities to becharacterised with low or no rates of return. Since there is no correlation between therate of return of the security and the market return, the beta coefficient as a measure ofmarket related risk for venture capital can not be used. Furthermore, the venturecapital low or no rate of return phenomena causes high variability in the coefficient ofvariation. Consequently, using the coefficient of variation as criteria for comparingventure capital security risk/return relationships with other securities isn't suitable.The results also indicate that venture capital and small capitalisation securities yieldsimilar results. Therefore, when portfolio compilation is done, small capitalisationsecurities can be exchanged for venture capital securities without increasing the riskor altering the risk/return relationship of the portfolio.