1. © Cumming & Johan (2013)Fund Management Venture Capital and Private Equity Fund Management, Fund Raising, and Regulation Cumming & Johan (2013, Chapter 4) 1

2. © Cumming & Johan (2013)Fund Management 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

3. © Cumming & Johan (2013)Fund Management Chapter 4. Part I What do institutional investors care about? 3

4. © Cumming & Johan (2013)Fund Management Illustrative Data: Dutch Institutional Investment in PE worldwide, 2004 Sources of Funds Return Expectations Regulation Matters Risk, Return, Performance Statistics Data Capital Commitments vs Drawdowns Modes of Investment Globalization Growth & Institutional Investor Concerns Figure 4.3. Current allocation to private equity Yes 29% No 71% 4

5. © Cumming & Johan (2013)Fund Management Capital Commitments / Assets Sources of Funds Return Expectations Regulation Matters Risk, Return, Performance Statistics Data Capital Commitments vs Drawdowns Modes of Investment Globalization Growth & Institutional Investor Concerns 5

6. © Cumming & Johan (2013)Fund Management Drawdowns, not Commitments – Important re Desired Exposure Sources of Funds Return Expectations Regulation Matters Risk, Return, Performance Statistics Data Capital Commitments vs Drawdowns Modes of Investment Globalization Growth & Institutional Investor Concerns 6

7. © Cumming & Johan (2013)Fund Management Modes of Investment Sources of Funds Return Expectations Regulation Matters Risk, Return, Performance Statistics Data Capital Commitments vs Drawdowns Modes of Investment Globalization Growth & Institutional Investor Concerns Figure 4.6. Current private equity allocation by type of investment Direct Company Investment 20% Direct Fund Investment 40% Fund of Funds Investment 40% 7

8. © Cumming & Johan (2013)Fund Management A Global Market Sources of Funds Return Expectations Regulation Matters Risk, Return, Performance Statistics Data Capital Commitments vs Drawdowns Modes of Investment Globalization Growth & Institutional Investor Concerns Figure 4.7. Current private equity allocation by region of investment The Netherlands 22% Europe Excluding The Netherlands 46% U.S. 27% Asia 3% R.o.W. 2% 8

9. © Cumming & Johan (2013)Fund Management Mode of Investment Depends on Internationalization Sources of Funds Return Expectations Regulation Matters Risk, Return, Performance Statistics Data Capital Commitments vs Drawdowns Modes of Investment Globalization Growth & Institutional Investor Concerns 9 Figure 4.8. Country breakdown by type of investment 31% 9% 6% 0% 40% 44% 36% 50% 53% 28% 48% 58% 50% 47% 0% 10% 20% 30% 40% 50% 60% 70% The NetherlandsEurope Excluding The Netherlands U.S.AsiaR.o.W. Direct company investments Direct fund investments Fund of funds investments

10. © Cumming & Johan (2013)Fund Management Growth in PE Investment Sources of Funds Return Expectations Regulation Matters Risk, Return, Performance Statistics Data Capital Commitments vs Drawdowns Modes of Investment Globalization Growth & Institutional Investor Concerns Figure 4.9. Future allocation to private equity (planned for 2006-2010) No 65% Yes 35% 10

11. © Cumming & Johan (2013)Fund Management What Institutional Investors Care About Sources of Funds Return Expectations Regulation Matters Risk, Return, Performance Statistics Data Capital Commitments vs Drawdowns Modes of Investment Globalization Growth & Institutional Investor Concerns Figure 4.10. Attractiveness of private equity segments within 2006-2010 1.4 2.0 2.2 3.3 3.5 3.9 4.1 12345 Others Non-financial objectives Corporate objectives Risk diversification Reaching a yearly positive return over the entire period of the commitment Balanced portfolio (looking at correlation of private equity to other asset classes) Increase of the relative return Portfolio diversification Unimportant Important 11

12. © Cumming & Johan (2013)Fund Management Return Expectations Sources of Funds Return Expectations Regulation Matters Risk, Return, Performance Statistics Targeted Returns Absolute Return Expectations Relative Return Expectations Return Benchmarks Performance 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 Average10315 Median10300 Minimum5100 Maximum201000 12

13. © Cumming & Johan (2013)Fund Management Absolute Return Expectations Sources of Funds Return Expectations Regulation Matters Risk, Return, Performance Statistics Targeted Returns Absolute Return Expectations Relative Return Expectations Return Benchmarks Performance Figures 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% 468101214161820 Targeted Absolute Return % Percentage of Respondents 13

14. © Cumming & Johan (2013)Fund Management Relative Return Expectations Sources of Funds Return Expectations Regulation Matters Risk, Return, Performance Statistics Targeted Returns Absolute Return Expectations Relative Return Expectations Return Benchmarks Performance Figures 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% 1002003004005006007008009001000 Expected Private Equity Returns - Expected Public Equity Returns (in Basis Points) Percentage of Respondents 14

15. © Cumming & Johan (2013)Fund Management Return Benchmarks Sources of Funds Return Expectations Regulation Matters Risk, Return, Performance Statistics Targeted Returns Absolute Return Expectations Relative Return Expectations Return Benchmarks Performance Figures Figure 4.13. Private equity benchmarks 0% 4% 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 Fund Manager Euro Stoxx Others MSCI World Thompson Financial / Venture Economics Benchmark Reports 15

16. © Cumming & Johan (2013)Fund Management Regulation Matters - US Experience Sources of Funds Return Expectations Regulation Matters Risk, Return, Performance Statistics US Experience Dutch Experience 16

17. © Cumming & Johan (2013)Fund Management Regulation Matters - Dutch Experience Sources of Funds Return Expectations Regulation Matters Risk, Return, Performance Statistics US Experience Dutch 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 12345 Others Reform of Dutch bankruptcy laws in the period from 1997 to 1999 Implementation of Basel II The new International Financial Reporting Standards (IFRS) The proposed new "Financieel Toetsingkader" (FTK) in 2006 by the Pensioen & Verzekeringskamer Unimportant Important 17

18. © Cumming & Johan (2013)Fund Management Institutional Investor Experience Sources of Funds Return Expectations Regulation Matters Risk, Return, Performance Statistics Institutional Investor Experience Investment Criteria Risks / Hurdles Opportunities Performance Figure 4.17. Experience among managers specifically assigned responsibility for private equity 0.6 2.9 3.0 4.8 10.9 024681012 Department head's average number of private equity exits Department head's average years operational industry experience Average number of persons responsible for private equity Department head's average years relevant private equity industry experience Department head's average years experience in banking, insurance or investment management 18

19. © Cumming & Johan (2013)Fund Management Direct PE Fund Investment Criteria Sources of Funds Return Expectations Regulation Matters Risk, Return, Performance Statistics Institutional Investor Experience Investment Criteria Risks / Hurdles Opportunities Performance 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 3.7 3.8 4.0 4.1 4.2 4.4 12345 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 Unimportant Important 19

20. © Cumming & Johan (2013)Fund Management Fund-of-Funds Investment Criteria Sources of Funds Return Expectations Regulation Matters Risk, Return, Performance Statistics Institutional Investor Experience Investment Criteria Risks / Hurdles Opportunities Performance Figure 4.19. Important selection criteria for investments in fund of funds 1.3 3.0 3.2 3.3 3.8 4.0 4.1 4.2 4.3 4.4 4.5 12345 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 Unimportant Important 20

21. © Cumming & Johan (2013)Fund Management Perceived Risks / Hurdles Sources of Funds Return Expectations Regulation Matters Risk, Return, Performance Statistics Institutional Investor Experience Investment Criteria Risks / Hurdles Opportunities Performance Figure 4.20. Risks and hurdles associated with private equity investment 1.2 3.1 3.2 3.3 3.4 3.5 3.7 12345 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 assetsEffort to convinve internal committees (e.g., board of directors) Lack of own know-how Risk of default Lack of performance transparency Illiquidity Unimportant Important 21

22. © Cumming & Johan (2013)Fund Management What to do to mitigate risks? Sources of Funds Return Expectations Regulation Matters Risk, Return, Performance Statistics Institutional Investor Experience Investment Criteria Risks / Hurdles Opportunities Performance Figure 4.21. Important approaches to reduce the risk of private equity investment 1.2 2.8 3.2 3.3 3.4 3.6 3.7 4.0 12345 Others Working together with advisors Development of internal know how Diversification through different financing stages (VC, Buyout) Diversification through international investments Diversification through investment in funds of funds Diversification through different industries Diversification through investments in funds Diversification through the number of investments Unimportant Important 22

23. © Cumming & Johan (2013)Fund Management Perceived Investment Opportunities Sources of Funds Return Expectations Regulation Matters Risk, Return, Performance Statistics Institutional Investor Experience Investment Criteria Risks / Hurdles Opportunities Performance Figure 4.22. Attractiveness of different private equity segments within 2006-2010 1.1 2.5 2.6 2.7 2.8 3.1 12345 Others Sustainable/Socially and Environmental Responsible Private Equity Dutch Venture Capital Investments Asian Venture Capital Investments Asian Development/Growth/Buyout Investments Acquisition of Secondary Positions U.S. venture capital investmebts Investments in Emerging Markets U.S. Development/Growth/Buyout Investments Dutch Development/Growth/Buyout Investments European Venture Capital Investments European Development/Growth/Buyout Investments 23

24. © Cumming & Johan (2013)Fund Management Summary Sources of Funds Return Expectations Regulation Matters Risk, Return, Performance Statistics 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

25. © Cumming & Johan (2013)Fund Management Chapter 4. Part II Fundraising: Economic and Institutional Effects 25

26. © Cumming & Johan (2013)Fund Management 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

27. © Cumming & Johan (2013)Fund Management 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

28. © Cumming & Johan (2013)Fund Management Institutional Investor 1 Venture Capital Funds Entrepreneurial Firms Fundraising Returns Supply of Investments Demand for Investments Intermediation Issues for Fundraising Different Types: -Pension -Insurance -Bank And Different Countries Pension Plan Members (you and I) Regulated (FTK, IFRS, BASEL II) (helps different types & from different regions) Scantly Regulated (e.g., no reporting standards) (discourages institutional investors) Institutional Investor 2 28

29. © Cumming & Johan (2013)Fund Management 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

30. © Cumming & Johan (2013)Fund Management 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 facilitated a.Investment in private equity? b.International private equity investment? c.The type of private equity investment (direct company, direct fund, fund or fund)? 30

31. © Cumming & Johan (2013)Fund Management 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

32. © Cumming & Johan (2013)Fund Management Data Empirical Tests Conclusions Sponsors for hand collecting data: AEI Brookings / Sciences Po Adveq 32

33. © Cumming & Johan (2013)Fund Management Data Empirical 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

34. © Cumming & Johan (2013)Fund Management 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 Fund56 € 2,942.8610.35286.11 Insurance Company25 € 5,008.008.14287.50 Bank / Financial Services19 € 9,752.6313.17440.00 All Types of Institutional Investors100 € 4,753.0010.40314.81 34

35. © Cumming & Johan (2013)Fund Management Table 4.3. (Continued) Panel B. Asset Allocations (Percentage of Assets Invested in Different Asset Classes)...Current (as at 2005) Type of Financial Institution Publicly Traded EquitiesBonds Cash / Currencie s Index Funds Private Equity Other Types of Alternative Investments Oth er Pension Fund33.3850.894.321.601.177.431.21 Insurance Company23.8055.729.560.480.736.233.48 Bank / Financial Services27.3248.435.110.581.3616.051.16 All Types of Institutional Investors29.8351.635.781.131.098.771.77 …Planned (for the period 2006-2010) Type of Financial Institution Publicly Traded EquitiesBonds Cash / Curren cies Index Fund s Private Equity Other Types of Alternative Investments Oth er Pension Fund31.5151.732.861.971.679.530.73 Insurance Company24.7159.022.522.160.628.372.60 Bank / Financial Services24.9547.592.681.051.8621.340.53 All Types of Institutional Investors28.5652.772.741.851.4411.481.16 35

36. © Cumming & Johan (2013)Fund Management Table 4.3 (Continued) Panel C. Private Equity Investments...Current (as at 2005) Type of Financial Institution Number of Institutions Investing in Private Equity (All Regions) Percentage of Private Equity Investment s in The Netherland s Percentage of Private Equity Investment s in Europe outside The Netherlan ds Percentag e of Private Equity Investmen ts in the U.S. Percentag e of Private Equity Investmen ts in Asia Percentage of Private Equity Investment s in Rest of World Percentage of Direct Company Investment s Percentag e of Direct Fund Investmen ts Percentag e of Fund of Fund Investme nts Pension Fund1423.0043.4325.714.863.008.5741.8649.57 Insurance Company726.7149.4323.860.00 23.5752.8623.57 Bank / Financial Services813.3844.7528.130.63 36.8819.0031.63 All Types of Institutional Investors2921.2445.2425.932.521.6220.0038.2138.34 …Planned (for the period 2006-2010) Type of Financial Institution Number of Institutions Investing in Private Equity (All Regions) Percentage of Private Equity Investment s in The Netherland s Percentage of Private Equity Investment s in Europe outside The Netherlan ds Percentag e of Private Equity Investmen ts in the U.S. Percentag e of Private Equity Investmen ts in Asia Percentage of Private Equity Investment s in Rest of World Percentage of Direct Company Investment s Percentag e of Direct Fund Investmen ts Percentag e of Fund of Fund Investme nts Pension Fund1913.0052.4228.583.212.796.3236.5857.11 Insurance Company835.0040.0023.751.250.0032.2531.5036.25 Bank / Financial Services810.6340.6335.000.63 31.8823.1332.50 All Types of Institutional Investors3517.4946.8928.942.171.6618.0932.3446.71 36

37. © Cumming & Johan (2013)Fund Management Data Empirical Tests Conclusions Empirical Tests 37

38. © Cumming & Johan (2013)Fund Management Comparison of Means and Medians Data Empirical 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

39. © Cumming & Johan (2013)Fund Management 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 Test Number of Observati ons MeanMedian Number of Observati ons Mean Media n Assets (million Euros)351011420006518665003.70*** p <= 0.000*** Rank of Importance of Dearth of Legal Restrictions 352.773653.023-1.55 p <= 0.014** FTK (2006)353.404652.1725.77*** p <= 0.003*** IFRS (2005)352.713651.9723.68***p <= 0.546 Basel II (2004)352.202651.2514.58*** p <= 0.008*** Expected Return on Private Equity in Excess of Public Equity (Basis Points) 35252.572506548.62505.91*** p <= 0.000*** 39

40. © Cumming & Johan (2013)Fund Management Econometric Tests Data Empirical 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

41. © Cumming & Johan (2013)Fund Management 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 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 Effectt-statistic Marginal Effectt-statisticCoefficientt-statistic Coefficie ntt-statisticCoefficientt-statistic Constant-2.468-3.483***-0.897-2.564**-5.914-11.766***-5.759-11.524***-3.731-5.594*** Log (Assets)0.1993.231***0.0881.794*0.1322.414**0.1212.442**0.0260.409 Log (Excess Expected Return on PE) 0.0581.732*0.1002.806***0.0291.991**0.0221.428-0.020-0.429 Pension Fund0.5132.921***0.1360.9920.4722.660***0.2931.3060.7553.120*** Insurance Company0.3781.2810.0990.5560.0650.364-0.057-0.275-0.295-1.061 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 FTK0.1992.108** 0.2142.616*** 0.2222.257** FTK Relative Rank 0.0592.730*** 0.1065.956*** IFRS0.0460.466 0.0891.109 -0.031-0.355 Basel II0.3702.601*** 0.2462.587*** 0.1521.333 Pseudo R 2 (Adjusted R 2 for Models (3) - (5)) 0.6050.5470.4690.4710.248 41

42. © Cumming & Johan (2013)Fund Management Data Empirical Tests Conclusions (Part II) 42

43. © Cumming & Johan (2013)Fund Management Comparative Dearth of PE Regulations Data Empirical 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

44. © Cumming & Johan (2013)Fund Management IFRS, FTK and Basel II Data Empirical 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

45. © Cumming & Johan (2013)Fund Management Chapter 4. Part III Specialized Fund Mandates: SRI 45

46. © Cumming & Johan (2013)Fund Management 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

47. © Cumming & Johan (2013)Fund Management Institutional Investor 1 Venture Capital Funds Entrepreneurial Firms Fundraising Returns Supply of Investments Demand for Investments Venture Capital Intermediation Different Types: -Pension -Insurance -Bank And Different Countries Pension Plan Members (you and I) Regulated (e.g., IFRS) Scantly Regulated (e.g., no reporting standards) (discourages institutional investors) Institutional Investor 2 47

48. © Cumming & Johan (2013)Fund Management Questions 1.When do institutional investors make SRI investments into PE/VC funds? 2.Does SRI in VC/PE depend on a.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

49. © Cumming & Johan (2013)Fund Management 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

50. © Cumming & Johan (2013)Fund Management 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

51. © Cumming & Johan (2013)Fund Management Data Empirics Conclusions Sponsors for hand collecting data: AEI Brookings / Sciences Po Adveq 51

52. © Cumming & Johan (2013)Fund Management 52

53. © Cumming & Johan (2013)Fund Management 53

54. © Cumming & Johan (2013)Fund Management Data Empirics Conclusions Empirical Tests 54

55. © Cumming & Johan (2013)Fund Management Comparison of Means and Medians Data Empirics Conclusions 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) 55

56. © Cumming & Johan (2013)Fund Management 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 MeanMedian Number of Observations MeanMedian The Netherlands Domestic Private Equity Investment190.340.00810.23530.000.52 p <= 0.146 European (outside The Netherlands) Private Equity Investment192.391.88810.300.003.55***p <= 0.000*** US Private Equity Investment191.671.13810.120.003.98***p <= 0.000*** Asia Private Equity Investment190.160.00810.030.001.92*p <= 0.213 Fund of Funds Private Equity Investment191.350.88810.450.002.35**p <= 0.000*** International Financial Reporting Standards192.633.00812.142.001.89*p <= 0.677 Rank of Attractiveness of Returns to Sustainable Investment192.893.00812.403.001.76* p <= 0.171 Chief Investment Officer Responsibility190.320.00810.020.002.62**4.21*** Log (Assets)1912336.846500.00812974.07800.003.10***p <= 0.001*** Pension Fund190.471.00810.581.00-0.82-0.84 Insurance Company190.320.00810.230.000.720.77 Bank190.210.00810.190.000.240.25 56

57. © Cumming & Johan (2013)Fund Management 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

58. © Cumming & Johan (2013)Fund Management 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-statistic Marginal Effect t- statistic Margin al Effect t- statistic Margin al Effect t- statistic Marginal Effect t- statistic Margin al Effect t-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 0.0150.632 European (outside The Netherlands) Private Equity Investment 0.1112.180** 0.0751.710*0.0401.818* US Private Equity Investment 0.2621.549 Asia Private Equity Investment 0.1450.998 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 Standards0.0150.386-0.006-0.1720.0210.4750.0340.8230.0050.1780.0271.117 Rank of Attractiveness of Returns to Sustainable Investment 0.0461.875*0.0201.096 Chief Investment Officer Responsibility0.4962.044**0.6612.423**0.6212.190**0.4591.893*0.5121.4140.0960.817 Log (Assets)0.0853.454***0.069 2.591** * 0.0491.692*0.080 3.356** * 0.0562.164**0.0442.464** Pension Fund0.1371.3760.1301.1670.0720.5900.1361.3610.0971.0860.1011.348 Insurance Company0.1100.7980.2011.0410.1730.9920.1070.7930.1540.8870.0880.818 Number of Observations100 Number Observations where Dependent Variable = 1 19 14 Adjusted R 2 (pseudo R 2 for Model 1)0.3140.5410.5300.3230.5960.393 58

59. © Cumming & Johan (2013)Fund Management 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 (9) Subsample of Institutions in Private Equity Model (10) 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 Effectt-statistic Margi nal Effectt-statistic Margin al Effect t- statistic Margin al Effect t- statistic Margin al Effect t- statistic Margin al Effectt-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 0.2041.764* 0.2742.039** US Investment 0.5742.227** Asia Investment 0.2170.680 Fund of Funds Investment-0.113-1.481-0.188-1.950*-0.271 - 1.983** -0.173-1.574 International Financial Reporting Standards-0.088-0.711-0.063-0.3920.0020.0160.0110.067 -0.380-1.622 Rank of Attractiveness of Returns to Sustainable Investment 0.3751.851*0.2071.6210.2451.837*0.2371.955* Attractiveness of Returns to Private Equity versus Public Equity 0.013 3.506** * Chief Investment Officer Responsibility 0.4702.506**0.4042.125**0.4501.983** 0.7001.448 Log (Assets)0.1221.5660.2112.018**0.0600.5670.1881.944*0.2431.5870.2902.883*** Pension Fund0.1510.5280.3240.9620.0370.1100.2790.920 Insurance Company0.1590.5790.2891.0640.1940.8620.0830.256 Number of Observations35 10035 Adjusted R 2 (pseudo R 2 for Model 1)0.1930.4060.4400.296 59

60. © Cumming & Johan (2013)Fund Management 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

61. © Cumming & Johan (2013)Fund Management 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

62. © Cumming & Johan (2013)Fund Management 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

63. © Cumming & Johan (2013)Fund Management 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

64. © Cumming & Johan (2013)Fund Management 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 Margin al Effect t- statistic Marginal Effect t- statistic Margin al Effect t- statistic Marginal Effectt-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 0.1561.975** 0.1441.698*0.0711.598 US Investment 0.4121.717* Asia Investment 0.2290.867 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 Standards0.0330.5040.0140.2010.0210.2940.0480.6880.0180.2470.1131.915* Rank of Attractiveness of Returns to Sustainable Investment 0.1212.344**0.0270.648 Chief Investment Officer Responsibility0.4062.327**0.476 3.219** * 0.459 2.957** * 0.4002.252**0.4412.415**0.0470.233 Log (Assets)0.0711.740*0.0661.5310.0380.7760.0731.793*0.0771.707*0.0481.409 Pension Fund0.2271.4810.2691.6310.2101.1950.2331.5160.2031.1430.1891.313 Insurance Company0.2191.3410.2861.726*0.2571.5550.2201.3530.2621.4800.2751.566 Number of Observations100 Number of Observations where Dependent Variable = 1 43 29 Pseudo R 2 0.0720.1240.1430.0760.1670.120 64

65. © Cumming & Johan (2013)Fund Management Data Empirics Conclusions (Part III) 65

66. © Cumming & Johan (2013)Fund Management Conclusions Data Empirics Conclusions 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 66

67. © Cumming & Johan (2013)Fund Management Data Empirics Conclusions Chapter 4 Summary 67

68. © Cumming & Johan (2013)Fund Management 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? 68