What Do General Partners in Private Equity and Venture Capital Funds Bring to the Table: Intellectual Capital and Value Generation

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Dr. Tamir Agmon is an invited contributor to The Business Thinker. He is a Professor of Financial Economics at the School of Business, Economics and Law at Gothenburg University in Sweden.

Much of the value in the world today is generated from intellectual capital (or intellectual assets). Intellectual capital is human made, based on ideas and is expressed as capabilities, systems, organizations, and other non-physical and intangible structures within firms that generate future cash flows. The growing industry of private equity funds and venture capital funds is one place where specific intellectual capital owned by the general partners is applied to generate value. The difference between physical (tangible) assets and intellectual (intangible) assets can be observed and measured in two dimensions; the past, how the asset was built using primary factors and labor, and the future, how the market evaluates the future stream of cash flows from an asset. The discussion of the difference between intellectual and physical assets is done in the paper in the context of an incomplete market with imperfect competition. Where the general partners of a private equity fund add intellectual capital to the existing assets in place in a target company, they do so in the expectations of generating additional value. The process by which additional value is generated by employing specific intellectual capital is demonstrated in the context of valuation model as practiced by private equity funds.

1. Introduction

H.R. 2834 introduced to the US Congress on June 22, 2007 by Representative Sander M. Levin and others. The bill states that carried interest paid to the general partners in private equity and venture capital funds, as well other similar partnerships, will be treated as an ordinary income. Currently, carried interest is tax in the US as capital gains. In a CRS Report for the Congress titled: “Taxation of Private Equity and Hedge Fund Partnerships: Characterization of Carried Interest” by Donald J. Marples of September 7, 2007 the author states that: “Central to the current debate concerning the tax treatment of carried interest is whether it is compensation for services, or an interest in the partnership’s capital”. The central proposition of this paper is that general partners in private equity and venture capital funds generate value by employing specific intellectual capital that they bring to the target companies in which they invest. The current taxation in the US is congruent with this proposition.

Recently following the financial crisis the interest in a change in the US tax code as was proposed in H.R. 2834 was renewed. Although tax changes are affected to a great extent by political and public opinion considerations it is important to understand whether there is an economic reasoning for the proposed change. The discussion of intellectual capital in general, and the specific intellectual capital that general partners in private equity funds “bring to the table” provides insights to a better understanding of what general partners of private equity funds do.

Much of the value generated in the world of today is generated by employing intellectual capital. The shift from physical to intellectual capital (assets) is a process that has begun in the last quarter of the 20th century and it is growing in importance as the 21st century folds on. In the last few years there is a growing body of literature that deals with intellectual assets, intellectual capital, and intangible assets. Much of the literature is focused on measuring and discussing several aspects of intellectual capital. This paper begins with a discussion of two related questions; in what way intellectual capital differs from physical capital We do that by discussing intellectual capital in the context of the definition of financial economics of what is an asset (Modigliani and Miller, 1958), in the context of models of dynamics economics, (Baumol, 1970), and in the context of economic models of growth as a result of a change in factor intensity (Findlay, 1970). Relating the concept and the measurement of intellectual capital to basic models in economics and in financial economics provides insights to the nature of these assets.

There is no clear and agreed definition of an intellectual asset or of intellectual capital. Wikipedia defines “intellectual capital” as: “Ambiguous combination of human capital, instructional capital, and individual capital employed in productive enterprise”. It is claimed at Wikipedia that” “there is little agreement how the “intellectual” is an asset and it is suggested that it will be subsumed by the term “intangible”. Intangible assets are defined by Wikipedia as: “those non-monetary assets that cannot be seen touched or physically measured and which are created by time and effort”. In the next session the classic the question of what is intellectual capital, and what are intellectual assets is discussed in the context of financial economics.

2. The past and the future of an asset

Modigliani and Miller (MM) define an asset in their seminal paper on the cost of capital (1958) as the risk adjusted discounted value of all future cash flows generated by a specific activity of a firm. The cash flows are described as if they are are generated by a known probability distribution defined by two parameters; expected value and variance. Modigliani and Miller set up their model in a world described by the twin assumptions of complete and perfect market. In such a world all potential events in the future are known although it is uncertain which event will actually takes place in the future. The future is fully described by a finite series of all inclusive mutually exclusive events. Moreover, it is possible to issue a claim against each possible event and these claims are traded continuously in a perfect market. In general, capital is defined as inputs that are not consumed in the current period, but they are invested in order to generate future consumption. Future consumption can be generated by investing a combination of physical and intellectual capital, or by employing intellectual inputs only. To see the difference let us consider the following example; assume two individuals that made the following production decisions; one individual will provide shelter services in the future and the second individual will provide new ideas about how to improve the quality of life for people. Assume further that the current present value of the two streams of future cash flows associated with the two assets discounted in a risk adjusted discounting factor is the same. The first individual begins by growing a tree, cutting it and building a house that provides shelter services for the next 20 years. Assume that the time lapses between the decision to provide shelter services and the construction of the house is 5 years. After five years the asset that the individual built is expressed physically as a house that will provide shelter services for the next 20 years. During the five years period that elapses between the decision to build the shelter and the completion of the house the individual will spend time and effort and physical factors of production, (tree, land, water). The accumulated effort component is intellectual capital, and the asset that was generated is a combination of intellectual and physical capital. The second individual is thinking about ways to improve quality of life and communicating his ideas. Assume that it takes five years for the second individual to generate cash flows from her ideas, and during this tile the individual will spend time and effort without physical inputs (factors of production). Assume that after five years the two assets in our example will have the same expected risk adjusted value, but they have different history. In the two cases the investor (individual) has made an investment decision and has employed capita for five years in order to get an expected return in later years. In the first case the capital was a combination of physical and intellectual capital and in the second case it was intellectual capital only. In both cases the value of the asset is measured by the future cash flows. In the world of complete and perfect market, the common twin assumptions of the Modern Finance Theory that begun with the Modigliani and Miller 1958 article, the pricing of the asset in the market is not affected by the question whether the asset was generated by intellectual or by a combination of intellectual and physical capital. In the more realistic world of incomplete market and imperfect competition it does make a difference. The difference is discussed below.

In a book titles: “Economic Dynamics” Baumol (1970) states that: “In analyzing the state of the economy at a particular moment, that is, the details of any particular “time slice”, we can neither ignore the influence of the past nor deny the relevance of the future. The state of economic affairs at any point of time depends upon the past in a multitude of ways – the nature and quantity of capital equipment, existing techniques, the established institutional framework, and so on. What is past, however, is history and cannot be altered, so we accept it as givenTe future, however, affects the present in an entirely different manner. It affects it through the minds of men in that they think of tomorrow as well as of today and arrange their activity with reference to what they expect in the future as well as in the present”, (p. 59).

As was shown above, current assets are expressions of decisions and actions of individuals in the past. Rephrasing Baumol the following question can be asked: Is the current value of an asset, which is a summary of the past and an estimate of the future differ between physical and intellectual assets? In the world of complete and perfect market the answer to this question is negative. In the more realistic world of incomplete market and imperfect competition the answer is positive.

There is no distinction in the pricing (valuation) between intellectual and physical assets given the assumptions of complete and perfect market. This is so as in a complete market all the future events are known as a part of a finite series of all inclusive and mutually exclusive events that described the future completely. Every individual can write a claim against each and every event and these claims, assets, are traded continuously in a perfect market. In other words in a world of complete and perfect market there is one and only one price for each asset and this price is accepted by all. In an incomplete market with imperfect competition there is a disagreement among investors regarding the probabilities of future events and there is no one general equilibrium prices. It is shown later that there are some marked specific differences between the issuers and the potential buyers of intellectual assets.

There are very few pure physical assets. Most physical assets are combinations of physical and intellectual elements. The example of a building that provides shelter services is a case of such a combination.  Yet, if the non-physical asset component in a combined asset is small the definition of a physical asset holds.

The difference between an intellectual asset and a physical asset can be described as comprised of two dimensions; the past (Baumol) dimension and the future (MM) dimension. The differences between physical and intellectual assets by the two dimensions are summarized in Table One below.

Table One

The Differentiation between Physical and Intellectual Assets

Physical Assets               Intellectual Assets

The Baumol                   A combination of               A combination of

(past) dimension             natural resources               labor and time

Labor and time

The MM (future)             One shared                       Different probability

Dimension                       probability                        distribution to owners

distribution                        and outsiders

The way to understand Table One and the distinction between intellectual and physical assets is to begin with an analysis of the past and then see how the nature of the assets, physical or intellectual, determined by past investment decision affects the perception of the future cash flows of the asset. As was shown above the value of an asset is a function of both past and future. To illustrate the interface between the past and the future consider the following example. Assume that in the first period there are two factors of production, labor and natural resources, (land, water, sun, and other natural resources). Labor and natural resources in various combinations generate cash flows in the future that determine the value of the assets. Physical assets are tangible, and relatively easy to measure therefore it is assumed that there is a general agreement about the shape of the probability distribution of the future cash flows that they generate In Table One above they are described by having a shared probability distribution. Intellectual assets are often intangible and they are harder to measure, therefore it is assumed that there is a difference in the perception of the owners/initiators of the asset (the insiders) and the perception of the others, (the outsiders) regarding the shape and the parameters of the probability distribution of the future cash flows. Hence, there is a difference regarding the value of the assets. This is an incongruent result in a world of complete and perfect market, but a very likely result in a world of incomplete market with imperfect competition.

One can gain additional insights into the difference in the MM dimension (the future cash flows) between intellectual and physical assets by considering two approaches discussed in the finance literature. In a recent paper Coval and Thakor (2005) are making a distinction between two classes of investors/initiators; entrepreneurs and savers. Entrepreneurs are optimistic in their perception of the probability distribution of their (intellectual) assets, whereas investors (savers) take a dimmer view of the probability distribution of the future cash flows of the projects initiated by the entrepreneurs.  Coval and Thakor suggest that there is a need for financial intermediaries to bridge the gap between optimistic entrepreneurs and pessimistic investors. Over time the gap between the perceived probability distribution of the entrepreneurs and the investors (savers) is closed and unique intellectual assets become more acceptable and tradable. Another way to understand the difference in the perceived probability distributions of future cash flows derived from physical assets compared to those derived from intellectual assets is by invoking the difference between ambiguous and unambiguous information. (The application of the concept of ambiguous and unambiguous information is done in section 3 below). Physical assets are tangible and easier to measure and to understand therefore they generate unambiguous information and their risk is measured by a generally accepted probability distribution of future cash flows. Intellectual assets are intangible and innovative, and they generate ambiguous information. The normal risk analysis is not applicable in this case. Different actors in the market, (e.g. the owners/initiators of intellectual assets and potential investors) do look at the probability distribution of the future cash flows of intellectual assets in different ways

It is shown later in the paper that this distinction is closely related to the valuation of intellectual assets or the valuation of investment projects where intellectual capital (assets) plays an important role. Valuation is based on the future cash flows. Baumol has argued that the past investment decisions have an effect on the valuation of future cash flows. In the next section investment decisions that generate intellectual and physical assets are related to factor intensity. It is shown later that developing specific factor intensity is the base for building up intellectual capital as is the case with private equity and venture capital funds.

  1. 3. Building up assets: a basic economics model

In a paper published in 1970 Findlay introduced a simple but powerful model that deals with the way by which countries develop a new comparative advantage. In this section the same basic model is used to demonstrate the way by which physical and intellectual assets are formed.  Findlay’s main result is summarized by a quote from the 1970 paper: “The Heckscher-Ohlin theorem stops at factor proportion as the fundamental determinant of trade. However, we have shown in (9) that the factor proportion L/K ultimately depends on the “dynamic determinants”, s  (the propensity to save) and n (the growth in the labor force)”. (Findlay 1973, p. 31).  Capital is the outcome of employing factors of production over time and not consuming the output. What Findlay said is that the accumulation of capital in a certain country is affected by the decisions made in the country regarding factor intensity that is resulting in capital accumulation. It is shown in the next section that general partners of private equity funds generate specific factor intensity together with their limited partners and that intensity leads to specific intellectual capita of the fu this specific factor nds. To gain a better insight into the process of building up intellectual capital consider the following simple example/

Assume a small country in a world with two factors of production, primary factors like land, water, sun and other natural resources, K, and people, L. The term ‘small country’ means that the country is a ‘price taker’ and does not affect world prices. This case is easily transferred to a firm as it is done in this paper. Another important factor is time. Assume further that there are two consumption goods in the world X and Y. Cash flows are defined in terms of X and Y. Given the relative demand for goods X and Y, a production function of constant returns to scale, a fixed stock of primary assets, K, and a zero growth rate of the population there is a market equilibrium in terms of the factor intensity L/K, and the quantities of X and Y that are produced in the economy. In terms of the model described above this is equivalent to having two assets in the country, one is the present value of the future cash flows generated by the expected production over time of X, and the second asset is the present value of the cash flows generated by the future production of Y. (The term cash flow is used although the measurement is in terms of consumption goods X and Y. It is common in such cases to denote the cash flows in terms of one consumption good X or Y). In the static version of the model with certainty the future cash flows are known and they are discounted by the risk less interest rate. In the Findlay’s model the future cash flows are generated by domestic and foreign sales and the cash flows are paid to the owner of the labor, people, and to the owners of the primary factors. This structure can be presented in an accounting paradigm where the small country is analyzed as if it is a firm. There are  two assets in the assets’ side of the balance sheet, the present value of the future sales of X and of Y, and two liabilities on the liabilities and net worth’s side, liabilities to workers, L, and liabilities  to the owners of the primary factors, land, water, sun, and other natural resources, L. All the value accrues from the current and future sales of X and Y is paid to the owners of the factors of production K and L.

This situation is described in Table Two below.

Table Two

The Balance Sheet of the Economy Phase One

Assets                                                      Liabilities

Asset X     100                                       Liabilities to L    150

Asset Y     100                                       Liabilities to K     50

200                                                                  200

The interesting aspect of the model discussed by Findlay is how additional value is generated by changing the factor intensity L/K. This is done in the Findlay’s model by introducing an intermediate good Z and time. By giving up a part of the current and future consumption of X and Y and direct these amounts to investment in the intermediate good Z it is possible to change the factor intensity and move in the future to higher sales of X and Y. The process is described by the following set of equations:




s is the average propensity to save in the economy, and aij are technical coefficients. The first two equation show how much investment goes to Z in terms of labor and primary factors. The third equation shows how the investment is financed by savings where at equilibrium investment equals savings in the economy. The same simple system can be used to show the development of physical and intellectual assets from an idea, a concept or a plan. Let’s assume that some people in the economy have an idea that by investing in building a machine today and using the machine for production tomorrow it is possible to produce and sell more in the future than it is possible now by using only labor and primary factors. Doing this the total value of the assets of the economy, (the welfare in Findlay’s terms), will increase. If these people have the ability to identify and make the necessary investment decisions the result will be an increase in the wealth of the economy. Assume for simplicity that with the new machine the economy will specialized in the production of X exporting most of the production and importing Y.  At the end of the investment period the balance sheet of the economy, maintaining the assumption that all production is organized in one firm, will look as it is presented in table three below.

Table Three

The Balance Sheet of the Economy Phase Two

Assets                                                      Liabilities

Asset X     300                                             Liabilities to L   150

Liabilities to K   50

Liabilities to K* 100

300                                                                                                                            300

The added value of 100 is a result of an idea followed by an investment in Z at the cost of current consumption for a while, and the completion of the building of the new machine. The future cash flows that will be generated from now on will be paid to the owners of a new liability denoted K*. In the terms of Findlay the situation depicted in Table Three corresponds to the completion of the change in the comparative advantage, a change from producing X and Y to producing only X, and an increase in the welfare from 200 to 300.

In the example discussed above the change in the value of asset X is expressed in the form of a physical asset, a machine. However, the initiative to implement the change is in itself an expression of a thought process. In this respect, although the change is expressed in physical terms, a new machine, it is a result of employing intellectual capital. The same process can take place where the change in the value of the asset is expressed in the form of a patent, a capability, market acceptance, brand, or any other intellectual (non tangible) asset. In general there is a sequence of making an investment that combined primary factors, labor, time and ideas followed by an increase value.

One important difference between physical and intellectual assets is measurability. The primary factors components in physical assets and the physical dimensions make it easier to form a shared probability distribution of the future cash flows. In the example described above the machine and its future expected output has a measurable dimension. There is a risk concerning the quantity and the price of the output in the future, but there is a measurable starting point. In the case of an intellectual asset, the future output is hard to measure. (This difficulty is resolved in a complete and perfect market as everything can be concrete and measurable by writing a claim against it, and the claim is tradable in a perfect market). A way to gain insights into this issue is to use the discussion in the literature concerning ambiguous and unambiguous information. In a recent study Ozsoylev and Warner, (2009) has stated that: “The effects  of ambiguous uncertainty (information) and ambiguity aversion in financial markets have been studied over the past two decades. Dow and Warlang, (1992) showed that an agent facing ambiguous uncertainty (information) about payoff of an asset will choose not to trade the asset for a range of prices. Building of this result, Cao, Wang, and Zhang, (2005) showed that ambiguity aversion may lead to limited participation in trading in asset market equilibrium.” As time proceeds the ambiguous information becomes clear. If the optimistic entrepreneur was right the tradability and therefore the value of the asset increases, if the pessimistic investors were right the value of the asset may go down to zero. In both cases ambiguous information becomes unambiguous.

At the conclusion of their study Ozsoylev and Warner say that ambiguity is resolved by informed investors. General partners of private equity funds and of venture capital funds are informed investors. In their investment activities they do resolve ambiguity and on the average they generate value. As was mentioned earlier they do so by using their specific intellectual capital. One critical dimension of the investment activity of general partners of private equity funds and venture capital funds is valuation. This dimension is presented and discussed in the next section.

  1. A valuation model for intellectual assets

The accepted valuation model in all the finance textbooks is the net present value model (NPV). In a world of risk the common version of the valuation model is what is known as the Risk Adjusted Discounted Cash Flows (RAD DCF) model. The NPV model is based on the twin assumptions of complete and perfect market. In their book “Project Valuation” Brennan and Trigeorgis (2000) have argued that the traditional textbook version of the RAD DCF model is appropriate to those cases where the value of the project is independent from any future actions of the decision maker (the investor). This is a proper valuation model to one of two cases either the case of a complete and perfect market at equilibrium, or where the investment under consideration behaves in a similar way. For example, if a portfolio manager considers an investment in a US government bond as a part of her portfolio the value of the investment, the bond, does not depend on the current and the future actions of the portfolio manager. The future value of the bond is uncertain. It may depend on several global, political, and macro economic variables, but from the point of view of the decision maker this is objective, measurable risk. The compensation for the risk is captured by a risk premium observed in the market.

In many cases the RAD DCF model with its assumptions is inappropriate. This is particularly true in a case of investment decisions by general partners in private equity and venture capital funds. The purpose of private equity funds and venture capital funds is to generate high expected return relative to the market return. The way that they do so is by using their specific intellectual capital. By combining capital from the limited partners, primarily institutional investors, with their specific intellectual capital the general partners of the fund generate higher return that uniformed investors would have generated by taking a very high risk in the market. This is evident by the finding that over years the same venture capital and private equity funds provide the highest return whereas the ranking of stock market funds and bonds funds change from one year to the next. In the following the focus is on valuation process and model for private equity funds. The valuation process of general partners of private equity funds can be described as follows:

  1. The general partners (GP) of the private equity fund think that given a certain change in the strategy and the management of a given company, the target company, its value can increase substantially.
  2. This information is ambiguous in the sense that it differs from the current information as it is expressed in the current price of the target company.
  3. The implementation and the success of the change depends on a combination of three factors; the assets in place of the target company, the capital of the fund, and the intellectual capital of the general partners of the fund. The first factor is unique to the target company, the second factor is a unique high risk capital allocated for this purpose by the institutional investors (the limited partners), and the third factor is unique to the general partner.
  4. Added value, high expected return, can be generated only by combining the three unique factors.

To illustrate consider the acquisition of a part of Lenovo by three private equity funds, TPG, GA, and Newbridge. In 2005 TPG has led an investment of $350 million by the three private equity funds mentioned above in Lenovo. Lenovo was in the midst of a substantial change process to become a leading company in the global PC market. Lenovo brought to the process a number of assets, physical, organizational and human capital. The management of Lenovo and the general partners of TPG, GA, and Newbridge, realized that to implement the planned change process of Lenovo there is a need for a new combination of the assets in place of Lenovo high risk capital and the intellectual capital of the general partners of experienced private equity funds. Such a combination will generate additional value by enabling the growth and the globalization of Lenovo. The intellectual capital of the general partners of the private equity funds is similar to the intermediate factor Z in the model described in section 3 above whereas the assets in place and the high risk capital are similar to the X and Y.

The contribution of the private equity funds to the value of Lenovo was expressed by the top management of Levovo as follows: “Lenovo will benefit from TPG, GA, and Newbridge’s recognized expertise in helping technology companies successfully implement their long-term strategies. … TPG, GA, and Newbridge have extensive insights into business operations, as well as strong competency in strategic planning. With rich experience helping companies integrate operations, their participation in the new Lenovo will further ensure a smooth transition period and stable development into the future”.

General partners of private equity funds bring to the table an intellectual capital.

To generate value the intellectual capital has to be combined with other factors; high risk capital and “changeable” assets in place.

The common risk adjustment discounted cash flow (RAD DCF) valuation model is contradictory to the essence of private equity investment. This is so because private equity investment is about generating value by the interface between the target company and the high risk and intellectual of the private equity fund that is considering the investment. What is needed is a valuation model that will capture the contribution of the specific intellectual capital of the general partners of the private equity fund. The interactive valuation model described below fills this need. The model is comprised of two parts; first, a determination of the lower and the upper limits of the value of the project that generates value for the investors, (e.g. the private equity fund). The second part is a negotiation process that determines the actual price to be paid by the investor for the investment project. The interactive valuation model differs from the traditional RAD DCF valuation model in two important ways; the value of the investment depends on the intellectual capital of the general partners of the private equity fund and specific combination between the specific intellectual capital and the assets-in-place of the target company and the actual price to be paid for the project and therefore the value of the project for the investor depends on a negotiated price that may vary from project to project and from investor to investor. The second difference, the need to negotiate arises from a “jointness in production” argument. The intellectual capital and the assets in place are both necessary conditions for the success of the investment and as we know from the economic literature this problem has no analytic solution, see for example Adar, Agmon, and Orgler, (1975).

To illustrate consider the following simple example. Assume that a private equity fund makes investment decision based on a valuation model that sets the value of a target firm as EBITDA times a multiplier. Common valuation model will set the value of the target firm as:

Vt = EBITDA t x MULTIPLIER t      t=current time

Vt is the current value that includes all the current available information based on the expected performance of the company expressed by EBITDA t before the contribution of the specific intellectual capital of the general partners of the private equity fund.

The general partners of the private equity fund will set Vt as the minimum value for the company and Vte as the maximum value for the target company that fully reflects the contribution of the specific intellectual capital to the value of the target company. This value, Vte, is expressed as:


EBITDAte = EBITDA after the business plan of the private equity investor was implemented and the target company is ready for an exit.

MULTIPLIER te = the multiplier at te the exit time given EBITDA te.

Vte = the discounted value of the expected value of the target company at the expected exit time. Vte is discounted for time and risk.

Vte is the maximum value (the reservation price) that the private equity fund is willing to pay for the company. Given the range of values Vt to Vte the private equity fund will enter a negotiation for the investment.

The nature of the negotiation depends on a number of factors like the relative demand and supply for risk capital at the time of the investment, the relative strength of the two sides, the target company and the investor, and financial contracting issues like the interface between the cash flows dimension and the decision dimension in the actual investment contract. The first factor is a function of asset allocation by financial institutions in the US and other major developed countries, the second factor is discussed in game theoretic models like the “double holdups”, and the third factor is discussed in the context of incomplete contracts in the literature of financial contracting. At the extreme the situation is similar to the classic case of monopoly vs. monopsony. The major finding of this literature since the days of Edgworth Box is that the price is indeterminate and that it is a function of a negotiation. (For a recent discussion of such a model see Just and Rausser, 2006).

  1. Do general partners in private equity funds have specific intellectual capital?

In a book titled: “Intellectual Property and Entrepreneurship” published in 2004 Petrusson begins the discussion by stating that: “This book is about how to construct business and create wealth in an increasing intellectualizing economy. It is a book that aims to promote and foster the entrepreneurial skills to intellectually construct new innovations, ventures, and even markets. Questions that immediately spring to mind are: what does it mean that the economy is becoming intellectualized, and what challenges does it post to managers, entrepreneurs and other business actors?” (Petrusson 2004, p. 1-2). This paper focuses on a narrower but important question. Do general partners in private equity funds and venture capital funds have specific intellectual capital? Answering this question involves a discussion of the nature of intellectual assets vs. physical assets using models from economics and financial economics.

The definition of capital in Econterm is: “Capital is something owned which provides on-going services”. Wikipedia is more elaborate in defining capital. “In classical economics capital is one of the three factors of production, the other being land and labor. Goods with the following features are capital:

  • It can be used in production of other goods
  • It is human made
  • It is not used up immediately in the process of production

Given the above definitions and the discussion presented in this paper the contribution of general partners of private equity funds and venture capital funds can be seen as a return to their specific intellectual capital. The intellectual capital like any other capital is human made but it relates to an organization, private equity or venture capital fund. As was pointed out by Petrusson the intellectual dimension of the economy is growing and intellectual capital is becoming more and more important.

The discussion of intellectual assets and of intellectual capital provided in the paper contributes to a better understanding on the process by which intellectual assets are generated and valued in the market place. The way by which specific intellectual capital generates value in the financial market is crucial to the development of the knowledge economy. Private equity funds and venture capital funds are two specific intermediaries that use intellectual capital to generate value from a combination of assets in place, financial capital and ideas. It is likely and desirable that more specific intermediaries will be developed to maximize value in the management of the rapidly intellectualized world.


Adar, Z., T.Agmon, and Y.E.Orgler, 1975, “Output Mix and Jointness in Production in the Banking Firm” Journal of Money, Credit and Banking, Vol. 7, no. 2, pp. 235-243

Baumol, 1970, “Economic Dynamics”, Yale University Press

Brennan, M. and G. Trigeorgis, 2000, “Project Valuation”. Prentice Hall

Epstein, L.G. and J. Zhang, 2001, “Subjective Probabilities on Subjective Unambiguous Events”, Econometrica, March, 69(2), 265-306

Findlay, R., 1973, “International Trade and Development Policy” Columbia University Press, New York

Just, R.E., and G. Rausser, 2006, “General Equilibrium in Vertical Markets Structure: Monopoly vs. Monopsony”, December, ssrn

Modigliani, F., and M. H. Miller, 1958, “The Cost of Capital, Corporation Finance, and the Theory of Investment”, American Economic Review, June, 48(3), 261-297

Ozsoylev, H. and J. Werner, 2009, “Liquidity and Asset Prices in Rational Expectation Equilibrium with Ambiguous Information”, ssrn, May

Petrusson, U., 2004, “Intellectual Property and Entrepreneurship”, The Center for Intellectual Property, Sweden


About the Author

Tamir Agmon is Professor of Financial Economics at the School of Business, Economics and Law at Gothenburg University in Sweden. He has been active in the academic world since receiving a PhD in Finance from the University of Chicago in 1971. He was Professor of Finance and International Business a Dean and a Chair of Finance Departments in business schools in Israel and in the US.

Professor Agmon is active in the world of venture capital and private equity as well as in the business world at large. He is currently the Managing Partner of Private Equity Group Ltd. and the Chairman of EPINAV Ltd. a US based company active in Africa.

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