Investment Patterns of Informal Investors in the Alberta Private Equity Market*

This study identifies three main types of informal investors in private equity markets: relationship investors, opportunity‐based investors, and angel investors. We find evidence that the first two investor types are a major total source of capital and they prefer to invest smaller amounts close to home and in the context of existing relationships. With respect to angel investors, we find evidence of stratification in their desired investment amount which is consistent with a model where their investments evolve though a life cycle of investing. We also find evidence that changes to capital market regulations that allow for lower investment amounts by this type of investor increase the amount of capital available for early‐stage firms.     

Angels and non-angels: Are there differences?

The market for informal venture capital is an elusive and nearly invisible source of financing for entrepreneurial ventures. This market consists of a diverse set of high net worth individuals (business angels) who invest a portion of their assets in high-risk, high-return entrepreneurial ventures. The emerging consensus of the characteristics of the individual investor is that of a well-educated,middle-aged individual with considerable business experience and a substantial net worth. These informal investors appear to prefer investing in the early start-up stage of the venture and, if given a choice, prefer that their investments be located close to home. One consequence of this consensus is the tendency to assume that the traits of these business angels are as tightly clustered around the norm as are the traits of venture capital funds. They are not. In terms of their competence in the many areas of venture investing, these Individual investors range from the successful, cashed-out entrepreneur on the one hand to individuals with little or no experience with venture investing on the other. At the same time, little is known about the characteristics of high net worth individuals who never ventured where angels dare to tread, or about these non-angels' propensity to join the fold. Thus, this study seeks to fill the void by examining the characteristics of high net worth individuals regardless of their investment history or their interest in venture investing.An analysis of the data reveals three groups of high net worth Individuals: business angels with experience investing in entrepreneurial ventures, interested potential investors with no venture investment history but who express a desire to enter the venture investment market, and uninterested potential investors who under no circumstances would consider investing in entrepreneurial ventures as part of their investment strategy. Business angels and potential investors (both the interested and non-interested segment) share similar views about the economic significance of the entrepreneur and the difficulty in securing the equity capital for development of the venture. As the issues move from the general to the specific, divergence in investment attitudes takes place among the two groups, but this divergence is in terms of magnitude or intensity, rather than in contrasting or opposing views of the process. The potential investor tends to view investing in entrepreneurial ventures on a smaller scale than the active investor, especially in terms of the dollar amount committed to any one investment. While the business angel is more interested than the potential investor across all stages of financing, the interest for both groups increases as the type of financing progresses from the seed stage to expansion financing. In contrast, the potential investor is more likely to seek diversification as a motivation for venture investing than their angel counterparts.The potential investor pool is segmented into those potential investors who appear willing to take on the role of business angels and those individuals who have no desire to participate in the venture market. For the interested group to increase their interest in providing venture capital, these potential investors want assistance in monitoring the performance of the venture investment, followed by assistance in pricing and structuring. Both of these resources relate more to the technical aspects of venture investing and Indicate that these are the areas where the potential investor is least likely to have expertise. Other resources, such as finding and evaluating the investment opportunity, appear to represent less of a stimulus for the potential investor. In many respects, interested potential investors act like business angels across several dimensions. Both consider the later stages of the development of the venture as the preferred stage to invest. The business angel and interested potential investor prefer investments to be located relatively close to their primary residence and share similar views on the amount of the investment portfolio to allocate to venture investing. Where the interested potential investor and business angel clearly differ is on the scale of the commitment and the motivation for investing. The potential investor will commit a smaller dollar amount to any one venture, is more inclined to participate with other investors, and is more apt to see venture investing as a diversification strategy than is the seasoned business angel.     

Investment with a Conscience: Examining the Impact of Pro-Social Attitudes and Perceived Financial Performance on Socially Responsible Investment Behavior

This article addresses the growing industry of retail socially responsible investment (SRI) profiled mutual funds. Very few previous studies have examined the final consumer of SRI profiled mutual funds. Therefore, the purpose of this study was to, in an exploratory manner, examine the impact of a number of pro-social, financial performance, and socio-demographic variables on SRI behavior in order to explain why investors choose to invest different proportions of their investment portfolio in SRI profiled funds. An ordinal logistic regression analysis on 528 private investors revealed that two of the three pro-social variables had a positive impact on how much the consumer invested in SRI profiled funds. Moreover, there was proof of a non-altruistic motive for investing in SRI as consumers who perceive that financial return of SRI is equal or better than “regular” mutual funds, invested a greater proportion of their portfolio in SRI profiled mutual funds. Furthermore, the results showed that women and better-educated investors were more likely to invest a greater proportion of their investment portfolio in SRI. Overall, the findings indicate that both financial perceptions and pro-social attitudes are connected to consumer investment in SRI.     

The performance of socially responsible equity mutual funds: Evidence from Sweden

This paper presents a comprehensive analysis of socially responsible (SR) funds in Sweden by assessing fund managers' abilities and performances across different market states. These issues are analyzed at the aggregate and individual fund levels. The paper also presents several new statistical tests that allow more precise inferences about differences in performance and the variability in fund returns arising from different benchmarks. In general, SR and conventional funds perform similarly to the market. At the aggregate level, SR funds investing in Sweden and Europe perform similarly to conventional funds, while those investing globally tend to underperform. This underperformance seems to be linked with poor selectivity abilities of global SR fund managers. For individual funds, the performance of both types of funds is more similar. Most funds perform similarly in crisis periods compared to non‐crisis periods. Overall, our results are consistent with a mature market for SR investing and support the view that the similar performance of SR and conventional funds is associated with the mainstreaming of SR investment in Sweden. These findings encourage SR investing both by socially conscious investors, who wish to align their social values with their investment decisions, as well as by conventional investors, who will not be penalized by investing in these funds. We also call attention to the difficulties investors face when trying to identify funds with high social standards, considering that there is scarce information on the extent to which each fund (SR or conventional) holds stocks that comply with ethical and social criteria.     

Measuring Investors’ Socially Responsible Preferences in Mutual Funds

The aim of this study is to analyze investor behavior towards socially responsible mutual funds. The analysis is based on an experimental study where a sample of individuals takes investment decisions under different parameters of information about the investment alternatives and expected returns. In the experiment, each participant decides how to distribute an investment budget between two funds, returns on which are uncertain and change over time. Two treatments are conducted, each providing a different degree of information on the socially responsible (SR) character of one of the two investment alternatives. The results obtained suggest that although individuals’ criteria for investment are essentially guided by returns and diversification, participants invest significantly more in a fund when they are explicitly informed about its SR nature. In particular, participants who declare being concerned about SR actually invest significantly more in the SR alternative. Furthermore, the level of SR faithfulness among a small group of investors is such that they invest the main share of their budget in the SR fund, even when the return differential is highly unfavorable. Providing clear information about the SR characteristics of an investment is crucial to help investors express their preferences.     

Do Socially Responsible Fund Managers Really Invest Differently?

To date, research into socially responsible investment (SRI), and in particular the socially responsible investment funds industry, has focused on whether investing in SRI assets has any differential impact on investor returns. Prior findings generally suggest that, on a risk-adjusted basis, there is no difference in performance between SRI and conventional funds. This result has led to questions about whether SRI funds are really any different from conventional funds. This paper examines whether the portfolio allocation across industry sectors and the stock-picking ability of SRI managers are different when compared to conventional fund managers. The study finds that SRI funds exhibit different industry betas consistent with different portfolio positions, but that these differences vary from year to year. It is also found that there is little difference in stock-picking ability between the two groups of fund managers.     

Think Global, Invest Responsible: Why the Private Equity Industry Goes Green

The growth of socially responsible investment (SRI) on public financial markets has drawn considerable academic attention over the last decade. Discarding from the previous literature, this article sets up to analyze the Private Equity channel, which is shown to have the potentiality to foster sustainable practices in unlisted companies. The fast integration of the environmental, social and governance issues by mainstream Private Equity investors is unveiled and appears to have benefited from the maturation of SRI on public financial markets and the impetus of large conventional actors. Hypotheses on the characteristics and drivers of this movement are proposed and tested on a unique database covering the French Private Equity industry in 2011. Empirical findings support that Private Equity socially responsible investing is characterized by investor engagement and strategically driven by a need for new value creation sources, increased risk management and differentiation. In particular, results show that independent funds, which need to attract investors, are more likely than captive funds to develop socially responsible practices. Evolution of the movement and future research paths are proposed.     

How Can a Ratings-based Method for Assessing Corporate Social Responsibility (CSR) Provide an Incentive to Firms Excluded from Socially Responsible Investment Indices to Invest in CSR?

Socially Responsible Investment (SRI) indices play a major role in the stock markets. A connection between doing good and doing well in business is implied. Leading indices, such as the Domini Social Index and others, exemplify the movement toward investing in socially responsible corporations. However, the question remains: Does the ratings-based methodology for assessing corporate social responsibility (CSR) provide an incentive to firms excluded from SRI indices to invest in CSR? Not in its current format. The ratings-based methodology employed by SRI indices in their selection processes excludes many corporations by creating limited-membership lists. This received ratings-based structure is yet to offer an incentive for most of the excluded corporations to invest in improving their levels of CSR. We, therefore, ask under what circumstances a ratings-based method for assessing CSR could provide an incentive to firms excluded from SRI indices to invest in CSR. In this article, we attempt to offer a theoretical reply to this question. We show that when all firms are publicly ranked according to SRI index parameters, such indices can indeed create a market incentive for increased investment by firms in improving their performance in the area of social responsibility. We further show that this incentive tapers off as the amount of investment required exceeds a certain point or if the amount of payback on that investment fails to reach a certain threshold.     

Fund Loyalty Among Socially Responsible Investors: The Importance of the Economic and Ethical Domains

The corporate social responsibility literature has emphasized the importance of both economic and ethical domains of corporate behavior. Analyzing unprecedented survey data from investors in a socially responsible (SR) mutual fund, this article considers how economic and ethical concerns shape shareholder investment behavior. In particular, this article analyzes levels of investor fund loyalty, defined as the continued investment in a mutual fund despite the belief that one is earning a lower return on investment. Building upon existing research that shows SR fund assets are more stable than conventional fund assets, this article leverages within respondent comparisons to clarify that dual investors (i.e., those who invest in both SR and conventional funds) are more loyal to their SR fund than to their conventional fund. This suggests that a corporation’s ethical behavior attracts more patient investment capital, an important consideration for any corporation that is deciding to what degree it should engage in corporate social responsibility. In addition, this article empirically demonstrates that economic motivations reduce SR fund loyalty and that ethical motivations induce SR fund loyalty. This evidence that ethical motivation is associated with fund loyalty advances research on morality in the market by yielding empirical evidence to a largely theoretical debate.     

The Impact of Socially Responsible Investment on Human Resource Management: A Conceptual Framework

Socially responsible investment (SRI) has increasingly assumed a major role in global equity markets. In this article we argue that the continued growth in investors seeking to align their ethical concerns with their investment strategies may influence the way in which the employment relationship is managed in publicly-listed corporations. After tracing the historical development of SRI, its implications for the conduct of human resource management (HRM) are examined. We conclude by analysing a number of the key problems associated with investor confidence in SRI funds and present a range of suggested techniques for improving screening methodologies.     

The Impact of Internet Commerce on Do-It-Yourself Investing in the IT Sector

ABSTRACT

Recent advances in networking, telecommunications, and the Internet have greatly decreased the problem of information asymmetry for the small investor. Previously, brokerage firms maintained tight control over information thus “encouraging” the investor to partake of their services. The removal of this structural impediment has empowered small investors to take greater control of their personal financial affairs. For those interested in self-directed investing in the growing IT sector, Direct Stock Purchase programs (DSPs), Dividend Reinvestment programs (DRIPs), American Depository Receipts (ADRs), and IT Sector Mutual Funds offer many attractive benefits to shareholders and corporations alike. These investment programs of IT-related firms are examined here.     

How venture capital firms differ

Four potential sources of differences between venture capital (VC) firms were examined—venture stage of interest, amount of assistance provided by the VC, VC firm size, and geographic region where located. Through a questionnaire, 149 venture capitalists provided data about their firms, about what they look for in evaluating an investment, and about how they work with a portfolio company following an investment.Firms were divided into four groups based on venture stage of interest. The earlier the investment stage, the greater the interest in potential investments built upon proprietary products, product uniqueness, and high growth markets. Late-stage investors were more interested in demonstrated market acceptance.There were no differences by stage regarding the desired qualities of management. However, after the investment was made, earlier stage investors attached more importance to spending their time evaluating and recruiting managers. Earlier stage investors sought ventures with higher potential returns—a 42% hurdle rate of return for the earliest stage investor versus 33% for the late-stage investor.Late-stage investors spent more time evaluating a potential investment. However, after the investment was made, there was little difference in the amount of time spent assisting the portfolio company. There were, however, differences in the significance that VCs attached to particular post-investment activities. Firms were split into three groups based upon the amount of time the VC spent with a portfolio company after an investment was made as lead investor. The most active group averaged over 35 hours per month per investment, and the least active group averaged less than seven hours.The difference in assistance provided was not strongly tied to differences in investment stage of interest. There were major differences in the importance the VCs attached to their post-investment activities. Not surprisingly, high involvement VCs viewed their activities as more important.Based upon the amount of capital they managed, firms were also split into three groups. Average fund size varied from 278 to 12 million dollars. The larger firms had more professionals and managed more money per professional. The large firms provided the least, and the medium-sized firms the most, assistance to portfolio companies. Large firms also made larger individual investments. Even though they invested over half their funds in late-stage investments whereas smaller firms focused on the earlier stages, the large firms were still a major source of early stage financing.There were no differences between geographic regions in the proportion of investments where the venture capital firm served as lead investor. There were, however, major regional differences in investment stages of interest. Also differences were observed between regions that were not a result of differing size and investment stage.     

Institutional Investors on Boards: Does Their Behavior Influence Corporate Finance?

We examine whether the behavior of institutional investors representatives on boards leads to observable differences in corporate finance. We find that directors representing pressure-sensitive investors (i.e., banks and insurance companies) prefer lower financial leverage whereas pressure-resistant directors (i.e., mutual funds and pension funds) show no particular preference. When analyzed separately, directors appointed by banks and insurance firms have different attitudes. Bank representatives on boards increase both the financial leverage and the banking debt. This result suggests that some types of institutional directors provide financial resources to the firms on whose board they sit, supporting the view that boards manage the uncertainty associated with strategic decision making and provide firms with preferential access to resources and financial expertise. This research has interesting academic and policy implications for the debate over the proper degree of institutional involvement in corporate governance. Different institutional investors have different agendas and incentives for corporate governance, and, therefore, both researchers and policy makers should no longer consider institutional investors as a whole. In addition, our paper calls for new research on the causes and implications of institutional investor involvement in the corporate governance of nonfinancial firms. This new research could require new insights on the dynamics within the boards and on the interplay among the knowledge, incentives and attitudes of quite different directors.     

Assessing mission drift at venture capital impact investors

In this article, we consider a recent trend whereby private equity available from venture capital (VC) firms is being deployed toward mission‐driven initiatives in the form of impact investing. Acting as hybrid organizations, these impact investors aim to achieve financial results while also targeting companies and funds to achieve social impact. However, potential mission drift in these VCs, which we define as a decoupling between the investments made (means) and intended aims (ends), might become detrimental to the simultaneous financial and social goals of such firms. Based on a content analysis of mission statements, we assess mission drift and the hybridization level of VC impact investors by examining their missions (ends/goals) and their investment practices (means) through the criteria of social and financial logic. After examining eight impact‐oriented VC investors and their investments in 164 companies, we find mission drift manifest as a disparity between the means and ends in half of the VC impact investors in our sample. We discuss these findings and make suggestions for further studies.     

Non-Discrimination in Human Resources Management as a Moral Obligation

The purpose of socially responsible investing (SRI) is to: (1) allow investors to reflect their personal values and ethics in their choices, and (2) encourage companies to improve their ethical, social, and environmental performance. In order to achieve these ends, the means SRI fund managers employ include the use of negative screening, or the exclusion of companies involved in “sinful” industries. We argue that there are problems with this methodology, both at a theoretical and at a practical level. As a consequence, current SRI offerings cannot accurately reflect the values and ethical beliefs they propose to represent. Moreover, the use of a?priori criteria is potentially misleading, as we show by discussing examples of glue and wine making. Applying this flawed approach SRI funds fail to influence the direction of the firms they deem most in need of re-directing. Rather than engaging in the simple a?priori assumption that some industries are “saints” while others are “sinners” (Freeman, 2007) we suggest a new framework upon which the SRI screening methodology could be grounded. Embracing the philosophical tradition of American pragmatism, we suggest that SRI methodology could be improved by engaging in an analysis based on (1) the actual impacts of the company’s products and services, (2) the company’s relationships with its specific, real stakeholders, and (3) the contingent environment (social, economic, political, legal, and cultural) in which the business operates.     

Exploring Factors that Influence Social Retail Investors’ Decisions: Evidence from Desjardins Fund

Most studies on the choices, motivations and behavior of investors consist of segmentations focused on socio-demographic characteristics such as age, income, education level, etc. Such approaches seem to simplify, even mutilate, reality by aggregating data about observable variables and considering investors as homogeneous groups. These perspectives are inspired by a scientific approach that consists of separating in order to better understand the observed phenomena. By considering individual as a “homo economicus”, that is to say, a rational and autonomous individual who makes decisions motivated by material gains, these studies fail to recognize all the complexity that shapes human behavior. This paper argues that to understand the behavior and choices of investors in regards to socially responsible investing (SRI), we must consider social investors as complex individuals. In addition, we should take into account influence that the institution may exercise throughout the role of advisors and SRI promotion strategies. Our research builds on a multidimensional approach that explores to what extent demographic, environmental, social and governance (ESG) issues, the trade-offs between financial return and social values, the attitudes and the role of the institution (throughout the role of the advisor and SRI promotion strategies) influence the decisions of individual social investors. Moreover, it adopts a more open approach by exploring the characteristics and behaviors of individual social investors in relation to those of conventional investors. Our research provides evidence from the Desjardins Fund. Qualitative and quantitative data gathered by Desjardins from online surveys are subjected to bivariate and multivariate analyses and are complimented by ten semi-structured interviews with managers, analysts, and advisors who provided further insight into SRI investment behavior and choice. The results show that while demographic characteristics still remain important in understanding the behavior and attitudes of social investors, it is their social values, ESG issues, financial return considerations and the role played by the institution in mediating investment decisions that are significantly associated with SRI portfolios. Our research highlights the complexity surrounding the phenomenon of SRI and has several implications both in terms of theory and practice.     

Selection of Socially Responsible Portfolios Using Hedonic Prices

This paper presents a novel framework for selecting socially responsible investment (SRI) portfolios. The Hedonic Price Method (HPM) is applied to obtain an evaluation of SRI criteria that is integrated into a multi-objective mathematical programming model. The HPM breaks away from the traditional view that goods are the direct object of utility; on the contrary, it assumes that utility is derived from the properties or characteristics of the goods themselves. As far as the investment decision is concerned, we assume that socially responsible investmentmutual funds (SRI funds) constitute heterogeneous goods. Our approach allows us to obtain a portfolio, the financial performance of which is similar to that which the investor would have reached if he or she had not taken into account social, ethical, and environmental considerations when making his or her investment decisions. This is achieved by designing a two-stage multi-objective mathematical programming procedure. In the first stage, we achieve the maximum level of financial satisfaction that the investor can receive. In the second stage, the portfolio with the best financial–social behavior is built. For the purpose of this second stage, the first stage portfolio is used as a benchmark for the financial performance of a socially responsible portfolio. To apply this methodology, we use portfolios composed of socially responsible and conventional mutual funds domiciled in Spain.     

Institutional investor activism on socially responsible investment: effects and expectations

Concentrated attention on institutional investors' activism has been perceived in the last few decades and further intensified in the post-Enron era. A new area of particular significance that has emerged is institutional investors' growing awareness and practice of socially responsible investment (SRI). This article starts by reviewing the importance of institutional investor activism and the historical implication of SRI. Significantly, various elements that give rise to the growth of SRI in the modern business world are considered in detail. It is recognized that, although current empirical evidence suggests ambiguous effects of SRI, the positive impact of institutional investors' activism on SRI is likely to have been undermined due to the underdevelopment of evaluation systems, and SRI should stand out as a good investment option for its joint financial and societal concerns. Nevertheless, obstructions still exist in the exercise of investor activism and the pursuit of SRI strategy, which implies that, at least in the near future, SRI strategy will remain as a minor investment trend for institutional investors in Anglo-American countries. Additional regulatory methods and awarding schemes are, therefore, expected to motivate institutional investors' activism on SRI, and subsequently to promote global sustainability.     

How new is socially responsible investment?

Much recent comment has been concerned with a perceived distinction between socially responsible investment (SRI) and the older style of ethical investment, which operates on the basis of exclusion criteria. However, the distinction between SRI and ethical investment is not as clear‐cut as some reports have implied, in that some of the longer‐established funds have SRI characteristics. An example is the CIS's Environ Trust, established in 1990, the operation of which has recently assisted the CIS in the adoption of SRI schemes for all its funds. The application of SRI introduces to mainstream funds the principle of engagement with companies. Investment is then based on the selection of 'best practice' companies rather than on criteria of exclusion. This suggests that there is scope for applying the experience of specialised ethical funds to the encouragement of greater social awareness by large shareholders in general.     

The Financial Performance of a Socially Responsible Investment Over Time and a Possible Link with Corporate Social Responsibility

This paper empirically examines the financial performance of a UK unit trust that was initially “conventional” and later adopted socially responsible investment (SRI) principles (ethical investment principles). Comparison is made with three similar conventional funds whose investment objectives remained unchanged. Analysis techniques employed in previous studies find similar results: mean risk-adjusted performance is unchanged by the switch to SRI, with no evidence of over-or under-performance relative to the benchmark market index by any of the four funds. More interestingly, changes in variability of returns over time are also modelled using generalised autoregressive conditional heteroscedasticity models, not previously applied to SRI funds so far as is known. Results show a temporary increase in variability of returns, followed by a return to previous levels after around 4 years. Evidence shows the increased variability to be associated with the adoption of SRI rather than with a change in fund management. Possible explanations for the subsequent reduction in variability include the spread of corporate social responsibility activities by firms and learning by fund managers. In addition to reporting on a previously unobserved phenomenon, this paper raises questions for further research.