venture capital and private equity fund management, fund raising, and regulation

© Cumming & Johan (2013) Fund Management

Venture Capital and Private Equity Fund Management, Fund Raising, and Regulation

Cumming & Johan (2013, Chapter 4)

1


Chapter Objectives

• Part I: What do institutional investors care about?– Who are institutional investors in venture capital and private equity funds,– Analyze economic and regulatory considerations factors relevant to VC/PE investment,– Distinguish between fund commitments and draw downs,– Distinguish between direct fund investment, direct company investment and fund-of-

funds investment,– Consider expected rates of return from investment in venture capital and private equity,

• Part II: Fundraising– Empirically consider the effect of regulation of institutional investors and private equity

funds relative to market factors, among other things, on institutional investor capital allocations to private equity funds.

• Part III: Specialized fund mandates– Socially responsible investment mandates in particular,– Empirically compare the importance of an institution’s internal organization structure

versus legal and economic factors driving socially responsible private equity investment.

2


Chapter 4. Part I

What do institutional investors care about?

3


Illustrative Data: Dutch Institutional Investment in PE worldwide, 2004

Sources of FundsReturn Expectations

Regulation MattersRisk, Return, Performance Statistics

DataCapital Commitments vs DrawdownsModes of InvestmentGlobalizationGrowth & Institutional Investor Concerns

Figure 4.3. Current allocation to private equity

Yes29%

No71%

4


Capital Commitments / Assets




5


Drawdowns, not Commitments – Important re Desired Exposure




6


Modes of Investment




Figure 4.6. Current private equity allocation by type of investment

Direct Company Investment20%

Direct Fund Investment40%

Fund of Funds Investment40%

7


A Global Market




Figure 4.7. Current private equity allocation by region of investment

The Netherlands22%

Europe Excluding The Netherlands

46%

U.S.27%

Asia3%

R.o.W.2%

8


Mode of Investment Depends on Internationalization




9

Figure 4.8. Country breakdown by type of investment

31%

9%6%

0% 0%

40%

44%

36%

50%

53%

28%

48%

58%

50%

47%

0%

10%

20%

30%

40%

50%

60%

70%

The Netherlands Europe Excluding TheNetherlands

U.S. Asia R.o.W.

Direct company investments

Direct fund investments

Fund of funds investments


Growth in PE Investment




Figure 4.9. Future allocation to private equity (planned for 2006-2010)

No65%

Yes35%

10


What Institutional Investors Care About




Figure 4.10. Attractiveness of private equity segments within 2006-2010

1.4

2.0

2.2

3.3

3.5

3.5

3.9

4.1

1 2 3 4 5

Others

Non-financial objectives

Corporate objectives

Risk diversification

Reaching a yearly positive return over the entireperiod of the commitment

Balanced portfolio (looking at correlation ofprivate equity to other asset classes)

Increase of the relative return

Portfolio diversification

Unimportant Important

11


Return Expectations



Targeted ReturnsAbsolute Return ExpectationsRelative Return ExpectationsReturn BenchmarksPerformance Figures

Table 4.1. Targeted Absolute and Relative Returns, 2006 – 2010

In the case of a targeted absolute return, which absolute return is your

institution/group seeking to generate from private equity investments

In the case of a targeted relative rate of return, what level of over return (in basis points) is

your institution/group expecting from private equity in comparison to public equity

investments

Average 10 315

Median 10 300

Minimum 5 100

Maximum 20 1000

12


Absolute Return Expectations




Figure 4.11. Absolute return sought from private equity investments

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

4 6 8 10 12 14 16 18 20

Targeted Absolute Return %

Per

cen

tag

e o

f R

esp

ond

en

ts

13


Relative Return Expectations




Figure 4.12. Targeted relative rate of return:private equity net of public equity returns (in basis points)

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

100 200 300 400 500 600 700 800 900 1000

Expected Private Equity Returns - Expected Public Equity Returns (in Basis Points)

Per

cen

tag

e o

f R

esp

ond

en

ts

14


Return Benchmarks




Figure 4.13. Private equity benchmarks

0%

0%

0%

4%

7%

7%

9%

15%

24%

33%

0% 5% 10% 15% 20% 25% 30% 35%

FTSE All Shares

Hang Seng Index

Nikkei Index

AEX (Euronext Amsterdam)

S&P 500

Internal industry Rating by FundManager

Euro Stoxx

Others

MSCI World

Thompson Financial / VentureEconomics Benchmark Reports

15


Regulation Matters - US Experience



US ExperienceDutch Experience

4.16. Capital Gains Taxes and Fundraising in the US (Source: Poterba, 1989a,b)

0

1000

2000

3000

4000

5000

6000

1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

VC

Fu

nd

rais

ing

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

Cap

ita

l Ga

ins

Ta

x R

ate

VC Fundraising ($US m) Capital Gains Tax Rate

16


Regulation Matters - Dutch Experience



US ExperienceDutch Experience

Figure 4.15. Important changes in the Dutch legal and regulatory environment for private equity investment strategy

1.1

2.0

2.2

2.7

3.4

1 2 3 4 5

Others

Reform of Dutch bankruptcy laws in theperiod from 1997 to 1999

Implementation of Basel II

The new International FinancialReporting Standards (IFRS)

The proposed new "FinancieelToetsingkader" (FTK) in 2006 by the

Pensioen & Verzekeringskamer


17


Institutional Investor Experience



Institutional Investor ExperienceInvestment CriteriaRisks / HurdlesOpportunitiesPerformance

Figure 4.17. Experience among managers specifically assigned responsibility for private equity

0.6

2.9

3.0

4.8

10.9

0 2 4 6 8 10 12

Department head's average number ofprivate equity exits

Department head's average yearsoperational industry experience

Average number of personsresponsible for private equity

Department head's average yearsrelevant private equity industry

experience

Department head's average yearsexperience in banking, insurance or

investment management

18


Direct PE Fund Investment Criteria




Figure 4.18. Important selection criteria for direct investments in private equity funds

1.5

2.3

2.6

2.8

3.0

3.5

3.6

3.6

3.7

3.8

4.0

4.1

4.1

4.1

4.1

4.2

4.4

1 2 3 4 5

Others

Possibility of using fund manager as sparring partner for own program

Image and degree of recognition of the fund

Offering of customized products

Quality of co-investors

Fulfillment of corporate governance requirements by the fund manager

Team breadth (number of professional)

Transparency in selection process of portfolio companies

Operating value-added

Reporting quality

Industry know how of management

Financial experience of management

terms of investment

Fund track record

Fee structure

Operational experience of management

Fund manager track record


19


Fund-of-Funds Investment Criteria




Figure 4.19. Important selection criteria for investments in fund of funds

1.3

3.0

3.2

3.2

3.3

3.8

3.8

4.0

4.0

4.1

4.1

4.2

4.3

4.3

4.4

4.5

1 2 3 4 5

Others

Possibility of using the fund of funds manager as sparring partner for own program

Quality of co-investors in fund of funds

Image and degree of recognition of the fund of funds

Offering of customized products

Fulfillment of corporate governance requirements by the fund manager

Financial experience of management

Operational experience of management

Reporting quality

Industry know how of management

Terms of investment

Transparency in selection process of funds/fund managers

Fund of funds manager track record

fee structure

Fund of funds track record

Existing network and access to exclusive, top-quartile funds


20


Perceived Risks / Hurdles




Figure 4.20. Risks and hurdles associated with private equity investment

1.2

3.1

3.2

3.2

3.3

3.4

3.4

3.5

3.7

3.7

3.7

1 2 3 4 5

Others

Reporting and corporate governance

Effort to convince internal committees (e.g., board of directors)

Long-term commitment

Management time and resource consumption

Legal and contractual issues

Governance (monitoring and managing) costs compared to other assetsEffortto convinve internal committees (e.g., board of directors)

Lack of own know-how

Risk of default

Lack of performance transparency

Illiquidity


21


What to do to mitigate risks?




Figure 4.21. Important approaches to reduce the risk of private equity investment

1.2

2.8

3.2

3.3

3.4

3.4

3.6

3.7

4.0

1 2 3 4 5

Others

Working together with advisors

Development of internal know how

Diversification through differentfinancing stages (VC, Buyout)

Diversification through internationalinvestments

Diversification through investment infunds of funds

Diversification through differentindustries

Diversification through investments infunds

Diversification through the number ofinvestments


22


Perceived Investment Opportunities




Figure 4.22. Attractiveness of different private equity segments within 2006-2010

1.1

2.5

2.5

2.5

2.6

2.6

2.7

2.7

2.7

2.7

2.8

3.1

1 2 3 4 5

Others

Sustainable/Socially and EnvironmentalResponsible Private Equity

Dutch Venture Capital Investments

Asian Venture Capital Investments

Asian Development/Growth/BuyoutInvestments

Acquisition of Secondary Positions

U.S. venture capital investmebts

Investments in Emerging Markets

U.S. Development/Growth/BuyoutInvestments

Dutch Development/Growth/BuyoutInvestments

European Venture Capital Investments

European Development/Growth/BuyoutInvestments

23


Summary



• Managing a PE fund: need to consider what institutional investors care about

• Global market– Regions– Direct company, direct fund versus fund of funds

• Perceived risks, returns• Regulatory environment• Hurdles and strategies to overcome hurdles

24


Chapter 4. Part II

Fundraising: Economic and Institutional Effects

25


Motivation

• 2003 CALPERS disclosure lawsuit

• Public pension funds must disclose venture capital and private equity returns, even on unexited investments

• Implications for understanding determinants of, and reporting of, returns

26


Objectives

• Examine institutional investor behavior in response to a dearth of private equity regulations

• Examine role of reporting standards (IFRS, as well as FTK and Basel II) in shaping institutional investor attitudes towards private equity

27


InstitutionalInvestor 1

Venture Capital Funds

Entrepreneurial Firms

Fundraising Returns

Supply ofInvestments

Demand forInvestments

Intermediation Issues for Fundraising

Different Types:-Pension-Insurance-Bank

And DifferentCountries

PensionPlanMembers(you and I)

Regulated(FTK, IFRS,BASEL II)(helps differenttypes & fromdifferent regions)

ScantlyRegulated(e.g., noreportingstandards)(discouragesinstitutionalinvestors)

Institutional Investor 2

28


Venture Capital and Private Equity Regulation

1. No strict standards for valuing investments in unexited companies

2. Recent international developments [indirectly] relevant for private equity investments:

a. International Financial Reporting Standards (“IFRS”)(regulation of reporting standards and transparency)

b. Financieel Toetsingkader (“FTK”)(regulation of portfolio management standards such as of matching assets and liabilities)(analogous to Prudent Man Standards Rule for Pension Funds in US (ERISA 1979), which greatly stimulated US PE investment)

c. Basel II(regulation of risk management and disclosure standards)

29


Research Questions

1. Does a lack of transparency in private equity disclosures inhibit institutional investors from investing in private equity?

2. Have the IFRS, FTK and Basel II facilitateda. Investment in private equity?b. International private equity investment?c. The type of private equity investment (direct company,

direct fund, fund or fund)?

30


Main Findings

• A comparative dearth of regulations, particularly in regards to reporting, inhibits investment in private equity

– This effect is large: if institutional investors were 20% more confident in private equity with better regulations, then they would contribute an extra 1% of their total assets (to 2.44% from a current average of 1.44%) to private equity

• IFRS, FTK and Basel II have partly facilitated institutional investor confidence in private equity, and stimulated international investment in private equity

– This effect is also statistically and economically significant (details to follow…!)

31


Data

DataEmpirical Tests

Conclusions

Sponsors for hand collecting data:AEI Brookings / Sciences PoAdveq

32


Data

DataEmpirical Tests

Conclusions

• As discussed in Part I above, 100 participating Dutch institutions (approximately 10% of all Dutch institutional investors)

• Extremely detailed data on their allocations to private equity, as well as other asset classes

• Information in regards to their view on a dearth of private equity regulations, and the IFRS, FTK and Basel II

33


Table 4.3.Panel A. Characteristics of the Institutional Investors in the Dataset

Type of Financial Institution

Number of Institutions in

the dataset

Average Assets

(millions of

Euros)

Average Targeted

Absolute Rate of Return for

Private Equity Investments (%) (as at 2005) for

institutions that will invest

in private equity ’06-10

Average Targeted Relative Rate of Return

for Private Equity Investments Relative to

Public Equity (basis points) (as at 2005) for

institutions that will invest in private equity

2006-2010

Pension Fund 56€

2,942.86 10.35 286.11

Insurance Company 25€

5,008.00 8.14 287.50

Bank / Financial Services 19€

9,752.63 13.17 440.00

All Types of Institutional Investors 100

€ 4,753.00 10.40 314.81

34


Table 4.3. (Continued)Panel B. Asset Allocations (Percentage of Assets Invested in Different Asset Classes)

...Current (as at 2005)


Publicly Traded Equities Bonds

Cash / Currencie

sIndex Funds

Private Equity

Other Types of

Alternative Investments

Other

Pension Fund 33.38 50.89 4.32 1.60 1.17 7.43 1.21

Insurance Company 23.80 55.72 9.56 0.48 0.73 6.23 3.48

Bank / Financial Services 27.32 48.43 5.11 0.58 1.36 16.05 1.16

All Types of Institutional Investors 29.83 51.63 5.78 1.13 1.09 8.77 1.77

…Planned (for the period 2006-2010)


Publicly Traded Equities Bonds

Cash / Curren

cies

Index Fund

sPrivate Equity

Other Types of Alternative Investments

Other

Pension Fund 31.51 51.73 2.86 1.97 1.67 9.53 0.73

Insurance Company 24.71 59.02 2.52 2.16 0.62 8.37 2.60

Bank / Financial Services 24.95 47.59 2.68 1.05 1.86 21.34 0.53

All Types of Institutional Investors 28.56 52.77 2.74 1.85 1.44 11.48 1.16

35


Table 4.3 (Continued) Panel C. Private Equity Investments

...Current (as at 2005)


Number of Institutions Investing in Private

Equity (All Regions)

Percentage of Private

Equity Investments in The

Netherlands


Equity Investment

s in Europe outside

The Netherland

s


Equity Investmen

ts in the U.S.

Percentage of

Private Equity

Investments in Asia


Equity Investment

s in Rest of World

Percentage of Direct Company

Investments

Percentage of Direct

Fund Investmen

ts

Percentage of Fund of Fund

Investments

Pension Fund 14 23.00 43.43 25.71 4.86 3.00 8.57 41.86 49.57

Insurance Company 7 26.71 49.43 23.86 0.00 0.00 23.57 52.86 23.57

Bank / Financial Services 8 13.38 44.75 28.13 0.63 0.63 36.88 19.00 31.63

All Types of Institutional Investors 29 21.24 45.24 25.93 2.52 1.62 20.00 38.21 38.34

…Planned (for the period 2006-2010)


Number of Institutions Investing in Private

Equity (All Regions)


Equity Investments in The

Netherlands


Equity Investment

s in Europe outside

The Netherland

s


Equity Investmen

ts in the U.S.

Percentage of

Private Equity

Investments in Asia


Equity Investment

s in Rest of World

Percentage of Direct Company

Investments

Percentage of Direct

Fund Investmen

ts

Percentage of Fund of Fund

Investments

Pension Fund 19 13.00 52.42 28.58 3.21 2.79 6.32 36.58 57.11

Insurance Company 8 35.00 40.00 23.75 1.25 0.00 32.25 31.50 36.25

Bank / Financial Services 8 10.63 40.63 35.00 0.63 0.63 31.88 23.13 32.50

All Types of Institutional Investors 35 17.49 46.89 28.94 2.17 1.66 18.09 32.34 46.71

36


DataEmpirical Tests

Conclusions

Empirical Tests

37


Comparison of Means and Medians

DataEmpirical Tests

Conclusions

• Greater private equity investment where:

Lower rank on importance of dearth of PE regulations

High rank on importance of IFRS, FTK and Basel II

Higher assets, higher PE return expectations

38


Table 4.5. Difference of Means and Medians Tests

Planning on Investing in Private Equity in 2006 - 2010

Not Planning on Investing in Private Equity in 2006 -

2010 Difference of Means

Test

Difference of Medians

TestNumber

of Observati

ons

Mean Median

Number of

Observations

MeanMedia

n

Assets (million Euros) 35 10114 2000 65 1866 500 3.70***p <=

0.000***

Rank of Importance of Dearth of Legal Restrictions

35 2.77 3 65 3.02 3 -1.55p <=

0.014**

FTK (2006) 35 3.40 4 65 2.17 2 5.77***p <=

0.003***

IFRS (2005) 35 2.71 3 65 1.97 2 3.68*** p <= 0.546

Basel II (2004) 35 2.20 2 65 1.25 1 4.58***p <=

0.008***

Expected Return on Private Equity in Excess of Public Equity (Basis Points)

35 252.57 250 65 48.62 50 5.91***p <=

0.000***

39


Econometric Tests

DataEmpirical Tests

Conclusions

• Logit models of likelihood of PE investment

• OLS models of extent of PE investment (relative to other asset classes)

• OLS models of PE investment in different regions (Netherlands, Europe, US and Asia)

• Various robustness checks

40


Table 4.7 Panel A

(see chapter for others)

Model (1) Model (2)

For Models (3) – (5), the LHS percentage variable is transformed as ln (Y/(1-Y))

Model (3) Model (4) Model (5)

Logit Probability of PE Allocation in 2006 – 2010

Logit Probability of PE Allocation in 2006 – 2010

OLS of % PE Allocation in 2006 – 2010

OLS of % PE Allocation in 2006 – 2010

OLS of % PE Allocation in 2006 – 2010 for subsample

that was in PE in 2005 and/or will allocate to PE in 2006-

2010

Marginal Effect t-statistic

Marginal Effect t-statistic Coefficient t-statistic

Coefficient t-statistic Coefficient t-statistic

Constant -2.468 -3.483*** -0.897 -2.564** -5.914 -11.766*** -5.759 -11.524*** -3.731 -5.594***

Log (Assets) 0.199 3.231*** 0.088 1.794* 0.132 2.414** 0.121 2.442** 0.026 0.409

Log (Excess Expected Return on PE)

0.058 1.732* 0.100 2.806*** 0.029 1.991** 0.022 1.428 -0.020 -0.429

Pension Fund 0.513 2.921*** 0.136 0.992 0.472 2.660*** 0.293 1.306 0.755 3.120***

Insurance Company 0.378 1.281 0.099 0.556 0.065 0.364 -0.057 -0.275 -0.295 -1.061

Degree of Importance of Dearth of Regulations in PE

-0.323 -2.597*** -0.216 -1.787* -0.260 -1.885*

Dearth of Regulations Relative Rank

-0.014 -0.854 -0.019 -0.913

FTK 0.199 2.108** 0.214 2.616*** 0.222 2.257**

FTK Relative Rank 0.059 2.730*** 0.106 5.956***

IFRS 0.046 0.466 0.089 1.109 -0.031 -0.355

Basel II 0.370 2.601*** 0.246 2.587*** 0.152 1.333

Pseudo R2 (Adjusted R2 for Models (3) - (5))

0.605 0.547 0.469 0.471 0.248

41


DataEmpirical Tests

Conclusions

Conclusions(Part II)

42


Comparative Dearth of PE Regulations

DataEmpirical Tests

Conclusions

• A comparative dearth of regulations, particularly in regards to reporting, inhibits investment in private equity

– This effect is large: – 20% more confident in private equity with better regulations,

contribute an extra 1% of their total assets (to 2.44% from a current average of 1.44%) to private equity

43


IFRS, FTK and Basel II

DataEmpirical Tests

Conclusions

• IFRS, FTK and Basel II have stimulated Private Equity investment

• An increase in rank of importance of these factors by 20% affects:– Investment in PE:

• Increases the probability of private equity investment by 16%• Increases the amount invested by up to 1% of total assets

– International investment in PE:• Increases international PE investment by 0.8% of institutions’ assets

– Mode of PE Investment:• Reduces direct fund investments by up to 0.8% of institutions’ assets• Increases fund-of-fund investments by up to 0.6% of institutions’ assets

44


Chapter 4. Part III

Specialized Fund Mandates: SRI

45


Motivation

• Increasing practitioner and academic attention on:– Socially Responsible Investment (SRI)– Corporate Social Responsibility (CSR)

• Studies of SRI and CSR have focused on publicly traded companies

• Publicly traded companies start as privately held firms!

46


InstitutionalInvestor 1

Venture Capital Funds

Entrepreneurial Firms

Fundraising Returns

Supply ofInvestments

Demand forInvestments

Venture Capital Intermediation

Different Types:-Pension-Insurance-Bank

And DifferentCountries

PensionPlanMembers(you and I)

Regulated(e.g., IFRS)

ScantlyRegulated(e.g., noreportingstandards)(discouragesinstitutionalinvestors)

Institutional Investor 2

47


Questions

1. When do institutional investors make SRI investments into PE/VC funds?

2. Does SRI in VC/PE depend ona. Internationalization?b. Legal and reporting standards?c. Institutional and organizational structures?

3. Does the determinants of SRI for VC/PE differ relative to other institutional investments?

48


New Data… New Insights

• First direct look at institutional investor SRI investments in venture capital and private equity

• New generalizable results as to when SRI takes place for a variety of asset classes

49


Main Findings

• SRI in VC/PE for institutional investors that have:

– International investment focus

– Adhere to the International Financial Reporting Standards (IFRS)

– Individuals that work for the institutional investor do not compete for returns (i.e., the decision to implement SRI is centralized)

– Direct investments (not fund-of-fund investments)

• Similar determinants of SRI for VC/PE as for other asset classes

50


Data

Data

Empirics

Conclusions

Sponsors for hand collecting data:AEI Brookings / Sciences Po

Adveq

51


Figure 7.1. Socially Responsible Investment (SRI) Programs for Private Equity and Other Asset Classes among 100 Dutch Institutional Investors

0

5

10

15

20

25

30

SRI (2005) SRI (Planned New Programs 2006-2010)

Nu

mb

er o

f In

stit

uti

on

s

SRI Excluding Private Equity SRI for Private Equity

52


Pension FundInsuranceCompany Bank / Financial

Services All Types ofInstitutionalInvestors

SRI Private Equity

SRI (All)

Total Sample

0

10

20

30

40

50

60

70

80

90

100N

umbe

r of

Inst

itutio

ns

Figure 7.2. Socially Responsible Investment (SRI) Programs by Type of Institution(Current as at 2005 or Planned for 2006-2010)

53


Data

Empirics

Conclusions

Empirical Tests

54


Comparison of Means and Medians

Data

Empirics

Conclusions






55


Difference of Means, Proportions and Medians Tests for SRI

Socially Responsible Private Equity Investment Program (current at 2005 or

planned for 2006 – 2010)

No Socially Responsible Private Equity Investment Program (current at 2005 or

planned for 2006 – 2010) Difference of Means Test

Difference of Medians Test (or

Difference of Proportions Test

for Dummy Variables)

Number of Observations

Mean MedianNumber of

ObservationsMean Median

The Netherlands Domestic Private Equity Investment 19 0.34 0.00 81 0.2353 0.00 0.52 p <= 0.146

European (outside The Netherlands) Private Equity Investment 19 2.39 1.88 81 0.30 0.00 3.55*** p <= 0.000***

US Private Equity Investment 19 1.67 1.13 81 0.12 0.00 3.98*** p <= 0.000***

Asia Private Equity Investment 19 0.16 0.00 81 0.03 0.00 1.92* p <= 0.213

Fund of Funds Private Equity Investment 19 1.35 0.88 81 0.45 0.00 2.35** p <= 0.000***

International Financial Reporting Standards 19 2.63 3.00 81 2.14 2.00 1.89* p <= 0.677

Rank of Attractiveness of Returns to Sustainable Investment 19 2.89 3.00 81 2.40 3.00 1.76* p <= 0.171

Chief Investment Officer Responsibility 19 0.32 0.00 81 0.02 0.00 2.62** 4.21***

Log (Assets) 19 12336.84 6500.00 81 2974.07 800.00 3.10*** p <= 0.001***

Pension Fund 19 0.47 1.00 81 0.58 1.00 -0.82 -0.84

Insurance Company 19 0.32 0.00 81 0.23 0.00 0.72 0.77

Bank 19 0.21 0.00 81 0.19 0.00 0.24 0.2556


Econometric Tests

Data

Empirics

Conclusions

• Logit models of likelihood of SRI PE investment

• OLS and Heckman-corrected models of extent of SRI PE investment

• Full sample and subsample invested in PE

• Consider differences for SRI in other asset classes

57


Table 4.8. Logit Regression Analyses for Sustainable / Socially Responsible Private Equity Investment

Panel A. Full Sample of 100 Dutch Institutions

Model (1) Model (2) Model (3) Model (4) Model (5) Model (6)

Marginal Effect

t-statisticMarginal

Effectt-

statistic

Marginal

Effect

t-statistic

Marginal

Effect

t-statistic

Marginal Effect

t-statistic

Marginal

Effectt-statistic

Constant -0.966 -4.144*** -0.824-

2.821***

-0.741-

2.626***

-0.969-

4.083***

-0.794-

2.421**-0.661 -2.868***

The Netherlands Domestic Private Equity Investment

0.015 0.632

European (outside The Netherlands) Private Equity Investment

0.111 2.180** 0.075 1.710* 0.040 1.818*

US Private Equity Investment 0.262 1.549

Asia Private Equity Investment 0.145 0.998

Fund of Funds Private Equity Investment -0.014 -0.577 -0.069 -1.685* -0.095 -1.303 -0.025 -0.788 -0.042 -1.302 -0.028 -1.322

International Financial Reporting Standards

0.015 0.386 -0.006 -0.172 0.021 0.475 0.034 0.823 0.005 0.178 0.027 1.117

Rank of Attractiveness of Returns to Sustainable Investment

0.046 1.875* 0.020 1.096

Chief Investment Officer Responsibility 0.496 2.044** 0.661 2.423** 0.621 2.190** 0.459 1.893* 0.512 1.414 0.096 0.817

Log (Assets) 0.085 3.454*** 0.0692.591**

*0.049 1.692* 0.080

3.356***

0.056 2.164** 0.044 2.464**

Pension Fund 0.137 1.376 0.130 1.167 0.072 0.590 0.136 1.361 0.097 1.086 0.101 1.348

Insurance Company 0.110 0.798 0.201 1.041 0.173 0.992 0.107 0.793 0.154 0.887 0.088 0.818

Number of Observations 100 100 100 100 100 100

Number Observations where Dependent Variable = 1

19 19 19 19 19 14

Adjusted R2 (pseudo R2 for Model 1) 0.314 0.541 0.530 0.323 0.596 0.393

58


Table 4.8 (Continued)Panel B. Subsample of Private Equity Investments (Models (7) - (10)) and Bivatiate Logit Estimates with Sample Selection (Model (11))

Model (7)Subsample of Institutions

in Private Equity

Model (8)Subsample of Institutions in Private Equity



Model (11)

Step 1: Probability of Investment in Private Equity

Step 2: Probability of Socially Responsible

Private Equity

Marginal Effect t-statistic

Marginal

Effect t-statistic

Marginal

Effectt-

statistic

Marginal

Effectt-

statistic

Marginal

Effectt-

statistic

Marginal

Effect t-statistic

Constant -0.716 -1.155 -2.477 -2.207** -1.349 -1.376 -2.173-

2.103**-3.490

-3.315**

*-4.451 -2.786***

The Netherlands Domestic Investment -0.025 -0.339

European (outside The Netherlands) Investment 0.204 1.764* 0.274 2.039**

US Investment 0.574 2.227**

Asia Investment 0.217 0.680

Fund of Funds Investment -0.113 -1.481 -0.188 -1.950* -0.271-

1.983**-0.173 -1.574

International Financial Reporting Standards -0.088 -0.711 -0.063 -0.392 0.002 0.016 0.011 0.067 -0.380 -1.622


0.375 1.851* 0.207 1.621 0.245 1.837* 0.237 1.955*

Attractiveness of Returns to Private Equity versus Public Equity

0.0133.506**

*

Chief Investment Officer Responsibility 0.470 2.506** 0.404 2.125** 0.450 1.983** 0.700 1.448

Log (Assets) 0.122 1.566 0.211 2.018** 0.060 0.567 0.188 1.944* 0.243 1.587 0.290 2.883***

Pension Fund 0.151 0.528 0.324 0.962 0.037 0.110 0.279 0.920

Insurance Company 0.159 0.579 0.289 1.064 0.194 0.862 0.083 0.256


Adjusted R2 (pseudo R2 for Model 1) 0.193 0.406 0.440 0.296

59


Economic Significance (1)International Investment Focus

Data

Empirics

Conclusions

• Socially responsible investment is approximately 1-2% more common among institutional investors with a 10% greater international investment focus in Europe outside The Netherlands

• Socially responsible private equity investment is approximately 5-6% more common among institutional investors with a 10% greater international investment focus in the United States

60


Economic Significance (2) IFRS

Data

Empirics

Conclusions

• An increase in the ranking of the importance of the International Financial Reporting Standards (IFRS) by 1 (on a scale 1 – 5, where 5 is the most important) increases the likelihood that an institutional investor will adopt a socially responsible investment program by about 1.1%

61


Economic Significance (3) Chief Investment Officer

Data

Empirics

Conclusions

• When a CIO is in charge, a socially responsible private equity investment program is approximately 40-50% more likely to be adopted

62


Economic Significance (4) Control Variables

Data

Empirics

Conclusions

• An increase in the rank of the relative returns to socially responsible investments by 1 (on a scale of 1 to 5, where 1 is the lowest) increases the probability of a socially responsible investment by 1-3%.

• No statistically significant differences in the propensity to carry out socially responsible investments depending on the type of investor (pension fund, insurance company or bank / financial institution), but larger institutions are more likely to do SRI

• Socially responsible investment is approximately 1-3% less common among institutional investors that invest a 10% greater proportion in fund-of-funds

• Similar findings for non-SRI PE investments (next slide)

63


Logit Regression Analyses for Sustainable / Socially Responsible Investment For Non PE Investment

Model (12) Model (13) Model (14) Model (15) Model (16) Model (17)

Marginal Effect

t-statistic

Marginal Effect

t-statistic

Marginal

Effectt-

statisticMarginal

Effectt-

statistic

Marginal

Effectt-

statisticMarginal

Effect t-statistic

Constant -0.819-

2.280**-0.840

-2.142**

-0.622 -1.451 -0.871-

2.361**-1.185

-2.755**

*-1.029 -3.014***

The Netherlands Domestic Investment -0.021 -0.373

European (outside The Netherlands) Investment

0.156 1.975** 0.144 1.698* 0.071 1.598

US Investment 0.412 1.717*

Asia Investment 0.229 0.867

Fund of Funds Investment -0.073 -1.363 -0.173-

2.191**-0.229 -1.809* -0.102 -1.575 -0.157

-1.962**

-0.088 -1.631

International Financial Reporting Standards 0.033 0.504 0.014 0.201 0.021 0.294 0.048 0.688 0.018 0.247 0.113 1.915*


0.121 2.344** 0.027 0.648

Chief Investment Officer Responsibility 0.406 2.327** 0.4763.219**

*0.459

2.957***

0.400 2.252** 0.441 2.415** 0.047 0.233

Log (Assets) 0.071 1.740* 0.066 1.531 0.038 0.776 0.073 1.793* 0.077 1.707* 0.048 1.409

Pension Fund 0.227 1.481 0.269 1.631 0.210 1.195 0.233 1.516 0.203 1.143 0.189 1.313

Insurance Company 0.219 1.341 0.286 1.726* 0.257 1.555 0.220 1.353 0.262 1.480 0.275 1.566


Number of Observations where Dependent Variable = 1

43 43 43 43 43 29

Pseudo R2 0.072 0.124 0.143 0.076 0.167 0.120 64


Data

Empirics

Conclusions

Conclusions(Part III)

65


Conclusions

Data

Empirics

Conclusions






• Similar determinants of SRI for VC/PE as for other asset classes

66


Data

Empirics

Conclusions

Chapter 4 Summary

67


Summary of the 3 Big Picture Issues in Chapter 4

I. What do institutional investors care about when investing in VC/PE funds?

II. How does this affect VC/PE fundraising?

III. When/why are specialized VC/PE fund mandates of interest to institutional investors?

6868

venture capital and private equity fund management, fund raising, and regulation

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