Socially Responsible Institutional Investment in Private Equity

This article studies institutional investor allocations to the socially responsible asset class. We propose two elements influence socially responsible institutional investment in private equity: internal organizational structure, and internationalization. We study socially responsible investments from Dutch institutional investments into private equity funds, and compare socially responsible investment across different asset classes and different types of institutional investors (banks, insurance companies, and pension funds). The data indicate socially responsible investment in private equity is 40–50% more common when the decision to implement such an investment plan is centralised with a single chief investment officer. Socially responsible investment in private equity is also more common among institutional investors with a greater international investment focus, and less common among fund-of-fund private equity investments.     

利率市场化与资产证券化兴起：来自美国经验的启示

资产证券化是20世纪最重要的金融产品创新之一,历经四十余年发展资产证券化产品日渐成熟．规模可与公司债市场匹敌。通过系统梳理美国资产证券化市场的发展脉络可以看出：资产证券化是美国支持房地产融资、解决贷款资金来源的盘活存量之道;利率市场化是资产证券化兴起的催化剂：信托法律关系的创新完善是美国资产证券化大规模发展的必要条件;投资银行持续创新产品设计使其更能为投资者接受。这为中国金融市场的发展提供了参考。     

Mode of entry mode into a foreign market: the case of U.S. mutual funds in Canada

U.S. mutual fund companies offer funds in Canada through two channels: foreign direct investment or trade in advisement services. The total value of U.S.-controlled funds amounts to 18% of the Canadian equity fund market. This paper investigates how the fund-level and firm-level characteristics affect the channel used to enter the Canadian market. Empirical results indicate that the funds offered through FDI are not especially successful in the U.S. market but are associated with dominant companies, whereas the funds offered through trade in advisement services are highly successful in the U.S. market and are from companies with relatively few successful funds.     

Support for Investor Activism among U.K. Ethical Investors

An important goal of ethical investment is to influence companies to improve their ethical and environmental performance. The principal means that many ethical funds employ is passive market signalling, which may not, on its own, have a significant effect. A much more promising approach may be active engagement. This paper reports on a questionnaire study of a sample of 1146 ethical investors in order to assess whether U.K. ethical investors would support more activist ethical investment and whether they would be prepared to invest in companies which are failing ethically in order to do so. The results show general support for the current practice of passive signalling accompanied by "soft" engagement in the form of lobbying and the development of dialogue in order to improve corporate practice. The "harder" options of investing in companies that err in order to change them is, however, favoured by consistent minorities.     

Publicly traded venture capital funds: implications for institutional “fund of funds” investors

Institutional investors supply the bulk of the funds which are used by venture capital investment firms in financing emerging growth companies. These investors typically place their funds in a number of venture capital firms, thus achieving diversification across a range of investment philosophy, geography, management, industry, investment life cycle stage and type of security. Essentially, each institutional investor manages a “fund of funds,” attempting through the principles of portfolio theory to reduce the risk of participating in the venture capital business while retaining the up-side potential which was the original source of attraction to the business. Because most venture capital investment firms are privately held limited partnerships, it is very difficult to measure risk adjusted rates of return on these funds on a continuous basis.In this paper, we use the set of twelve publicly traded venture capital firms as a proxy to develop insight regarding the risk reduction effect of investment in a portfolio of venture capital funds, i.e., a fund of funds. Measurements of weekly total returns for the shares of these funds are compared with similar returns on a set of comparably sized “maximum capital gain” mutual funds and the daily return of the S&P 500 Index. A comparison of returns on an individual fund basis, as well as a correlation of daily returns of these individual funds, were made. In order to adjust for any systematic bias resulting from the “thin market” characteristic of the securities of the firms being observed, the Scholes-Williams beta estimation technique was used to reduce the effects of nonsynchronous trading.The results indicate that superior returns are realized on such portfolios when compared with portfolios of growth-oriented mutual funds and with the S&P 500 Index. This is the case whether the portfolios are equally weighted (i.e., “naive”) or constructed to be mean-variant efficient, ex ante, according to the capital asset pricing model. When compared individually, more of the venture funds dominated the S&P Market Index than did the mutual funds and by much larger margins. When combined in portfolios, the venture capital funds demonstrated very low beta coefficients and very low covariance of returns among portfolio components when compared with portfolios of mutual funds. To aid in interpreting these results, we analyzed the discounts and premia from net asset value on the funds involved and compared them to Thompson's findings regarding the contribution of such differences to abnormal returns. We found that observed excess returns greatly exceed the level which would be explained by these differences.The implications of these results for the practitioner are significant. They essentially tell us that, while investment in individual venture capital deals is considered to have high risk relative to potential return, combinations of deals (i.e., venture capital portfolios) were shown to produce superior risk adjusted returns in the market place. Further, these results show that further combining these portfolios into larger portfolios (i.e., “funds of funds”) provides even greater excess returns over the market index, thus plausibly explaining the “fund of funds” approach to venture capital investment taken by many institutional investors.While the funds studied are relatively small and are either small business investment companies or business development companies, they serve as a useful proxy for the organized venture capital industry, despite the fact that the bulk of the funds in the industry are institutionally funded, private, closely held limited partnerships which do not trade continuously in an open market. These results demonstrate to investors the magnitude of the differences in risk adjusted total return between publicly traded venture capital funds and growth oriented mutual funds on an individual fund basis. They also demonstrate to investors the power of the “fund of funds” approach to institutional involvement in the venture capital business. Because such an approach produces better risk adjusted investment results for the institutional investor, it seems to justify a greater flow of capital into the business from more risk averse institutional investment sources. This may mean greater access to institutional funds for those seeking to form new venture capital funds. For entrepreneurs seeking venture capital funds for their young companies, it may also mean a lower potential cost of capital for the financing of business venturing. From the viewpoint of public policy makers interested in facilitating the funding of business venturing, it may provide insight regarding regulatory issues surrounding taxation and the barriers and incentives which affect venture capital investment.     

Chinese venture investments in the United States, 2010–2017

This article contributes to the understanding of Chinese venture investors in the United States by comprehensively measuring the amount and type of venture investments coming to the United States from China. Venture activity is examined by focusing on the number of investments made by venture capital funds, both U.S.‐ and China‐based that include Chinese corporations undertaking corporate venture capital (CVC). Chinese participation in venture funding of United States emerging companies increased from 21 investments in 2010 to 407 in 2016 and 2017. Venture capital funds account for 78% of the investment activity, with Chinese CVC undertaking 22% of the investments. We contribute to the literature of CVC by providing definitions of three specific types of investing firms: corporate funds, strategic investors, and strategic partnerships. In addition, we provide data and examine the motivations of Chinese firms forming strategic partnerships with United States startups.     

The Corporate Social Responsibility of Pharmaceutical Product Recalls: An Empirical Examination of U.S. and U.K. Markets

The pressure on companies to practice corporate social responsibility (CSR) has gained momentum in recent times as a means of sustaining competitive advantage in business. The pharmaceutical industry has been acutely affected by this trend. While pharmaceutical product recalls have become rampant and increased dramatically in recent years, no comprehensive study has been conducted to study the effects of announcements of recalls on the shareholder returns of pharmaceutical companies. As product recalls could significantly damage a company’s reputation, profitability and brand integrity, this paper investigates the effect on shareholder wealth and the extent to which the adoption of CSR practices by pharmaceutical companies in the United Kingdom (U.K.) and the United States (U.S.), the two largest markets for pharmaceutical products in the world, affected market reactions surrounding product recall announcements. The analysis of product recall announcements from 1998 to 2004 compiled from The Pharmaceutical Journal and U.S. Food and Drug Administration enforcement reports revealed marked differences in the way market participants in the two countries responded to news of product recalls. U.S. investors penalised firms according to the severity of product defects while U.K. investors were indifferent. While U.K. investors rewarded product recalls by firms which were not usually CSR-active, U.S. investors punished non-CSR active firms that performed recalls. These observations could pose strategic challenges to pharmaceutical firms operating in both countries. Jeremy Cheah is an Assistant Professor of Finance at Nottingham University Business School, Malaysia Campus. His research interests lie in the area of applied corporate finance and investment management. Wen Li Chan was an Advocate and Solicitor in Kuala Lumpur, Malaysia before assuming the post of University Teacher in Information Systems and Strategy at Nottingham University Business School, Malaysia Campus. She is currently investigating the roles and implications of information on firm valuation, particularly in the area of corporate cyber-litigation and corporate social responsibility. Corinne Chieng is a Corporate Executive at Star Publications (M) Berhad, Malaysia. She has previously worked as a tax consultant at Arthur Andersen Malaysia. Her research interests include the financial implications of corporate social responsibility on the valuation of firms.     

The comparative role of iShares and country funds in internationally diversified portfolios

This paper examines the performance and diversification gains provided by iShares versus closed-end country funds over the period 1996 through 2006. Findings include: (1) iShares reveal weaker effects from U.S. market exposure than do country funds; (2) U.S. investors react similarly to foreign currency risk associated with iShares and country funds; (3) the average risk-adjusted performance of passively managed iShares is better than that of their respective actively managed country funds; and (4) iShares provide U.S. investors greater diversification gains than do country funds, that is, U.S. investors should prefer iShares to country funds when diversifying portfolios internationally.     

Firm boundaries,incentives, and fund performance: Evidence from a private pension fund system

The private pension fund system in Turkey presents a unique institutional structure where bank holding companies can own both private pension companies and asset management firms. More often than not, pension companies delegate their operational mandates to the asset management arm of the same bank. This practice exposes the retail investor to a double agency problem and raises questions about conflicts of interest and fiduciary duty. Our analysis reveals that the funds set up and managed under the same bank holding company perform worse on a risk-adjusted basis than the funds with an arm's length relationship between the pension company and the asset manager. We show that this relative underperformance is not simply a bank effect; bank-affiliated pension companies and asset managers do just as well, if not better than their peers, when they are not operating under the same roof. Unfortunately, this inefficient institutional structure is not eliminated by market discipline because these funds attract more flows from retail investors, and the underperformance is not discernible in raw returns.     

Rule 144A: Why Foreign Companies Are “Taking the Plunge” into the US. Private Placement Market

172e SEC'S new Rule 144A will encourage foreign issuers to sell their securities in the US., and US. institutional investors can expect a greater variety of foreign investment alternatives than ever before. But some US. companies seeking to raise funds through private securities offerings may eventually need to contend with the additional competition for US. investment dollars created by the foreign oferings. It's all part of what is fast becoming an international market for capital.     

Optimal close-to-home biases in asset allocation

This article studies optimal portfolio decisions with (long-term) liabilities for small open economy based investors, including the optimality of currency hedging (Walker (2008a). Chile is the home country of the representative investor, but results are likely to hold more generally. The problem is set up as in [Sharpe & Tint, 1990] and [Hoevenaars et al., 2007]. Hedging the liabilities and the consumption currency may imply optimal close-to-home biases, defined as overweighting asset classes which are highly correlated with local ones. The implementation challenges include: developing a methodology to estimate expected returns in local (real) currency; estimating the covariance matrix allowing for serial and crossed-serial correlations; and checking the results' robustness using a resampling method. The findings are: (i) portfolios always have optimal close-to-home biases, beyond the investment in local fixed income to hedge liabilities; (ii) currency hedging reduces investment in close-to-home asset classes, (iii) but has ambiguous effects on welfare — detected with the resampling method; (iv) currency hedged long-term US bonds are useful for hedging local interest rate risk; and (v) liabilities give access to high risk-return portfolios, not affecting otherwise the overall shape of the efficient regions. This article can be useful to investors based on small open economies, including pension funds, insurance companies, sovereign wealth funds and Central Banks.     

Spanish mutual fund fees and less sophisticated investors: examination and ethical implications

Some mutual funds not only apply the usual asset management and custodial fees, but also front loads and redemption fees as a kind of 'toll charge' payable on entering and/or leaving the fund. The aim of this work is to examine the implications of the different loads and fees applied to mutual fund investors in the Spanish market. The results show that there is a relationship between the various charges and fees. The fact that load fund companies charge higher management and custody fees proves the potential of the fund companies to impose higher fees on a segment of the clientele. The investors in load funds, which tend to be large in number of shareholders and belonging to banks and savings banks, are small investors who show a low cost sensitivity. A lower level of financial sophistication may be the reason for the apparent lower price awareness. The problem is that the investors in load funds are not financially compensated for the extra cost represented by the front-load and redemption fees. The only beneficiary seems to be the financial institution itself. On this view, the survival of load funds seems to depend on the lack of financial sophistication of their clientele, combined with market inefficiencies. It is worth asking about the ethics of a situation of market segmentation that allows managing institutions to benefit from the segment of the least sophisticated investors.     

Managers, investors, and crises: mutual fund strategies in emerging markets

We examine the trading strategies of mutual funds in emerging markets. We develop a method for disentangling the behavior of fund managers from that of underlying investors. For both managers and investors, we strongly reject the null hypothesis of no momentum trading: mutual funds systematically sell losers and buy winners. Selling current losers and buying current winners is stronger during crises, and equally strong for managers and investors. Selling past losers and buying past winners is stronger for managers. Managers and investors also practice contagion trading—they sell (buy) assets from one country when asset prices fall (rise) in another.     

The role of Islamic asset classes in the diversified portfolios: Mean variance spanning test

This study investigates both conventional and Islamic investors' problems as to whether the inclusion of Islamic and conventional asset classes may expand the frontier of their respective portfolios. Our sample covers the global U.S. portfolios and Malaysian portfolios with multiple asset classes, as well as the portfolios with a specific asset class in several regions. This study uses the recent mean variance spanning test in multiple regimes, which not only accounts for tail risk but also identifies the source of value added (tangency portfolio or global minimum variance).For intra-asset allocation, our findings tend to show that both Islamic and conventional fund managers of a specific asset class can benefit from conventional and Islamic asset classes, respectively, in several regimes. For inter-asset allocation, conventional institutional investors cannot obtain any value added from Islamic asset classes. On the contrary, the U.S. Islamic institutional investors can expand their tangency portfolio by investing in U.S. TIPSs and REITs, and reduce their global minimum variance by allocating in U.S. high-yield bonds. Moreover, the Malaysian Islamic institutional investors can obtain risk reduction by investing in conventional bonds only in the high term premium regime. For the remaining asset classes, the opportunity sets are sufficient for Islamic investors to invest complying with Shariah rules. We provide some policy implications for the global Islamic financial industry.     

The advent of private equity in Latin America

As an investment banker in London, the author witnessed the massive run-up in Latin American public equities during the early 1990s and began to consider the potential for adapting the European model of development capital to Latin America. The author and a small number of other investors began looking beyond the public equity boom, recognizing that the biggest returns had already been made by local entrepreneurs who had entered the market early. Following in the steps of the local entrepreneurs who had been investing in and turning around local companies for years, the author and other investors established investment funds and sought out privately owned Latin American companies that were either poorly capitalized or mismanaged. In a matter of four years, foreign and indigenous pools of funds dedicated to private, unquoted investments in Latin America has grown from near zero to an estimated $1.5 billion. And the pool continues to grow. The author tracks this investment phenomenon and assesses the prospects for these and future Latin American funds, in light of the economic and political stabilization of many Latin American countries and the ambitious infrastructure development programs across the region.     

Growth patterns of the European venture capital industry

Although the European venture capital industry has become nearly as important as its American counterpart, little research has been done to describe its nature and importance. This study gives in the first place an overview of the importance of the venture capital industry in the major European countries. Thereafter, we look for funding and investment patterns in the different European countries. We hypothesize that there is a difference between countries in which the venture capital industry is just emerging, and those where the venture capital industry is since long established.The data are mainly, but not solely, taken from the yearly statistics of the European Venture Capital Association (EVCA) and cover the period 1984–1989. The characteristics we look at are: (1) the sources of the funds flowing into the industry, broken down with respect to investor type and geographical location of the investor; and (2) the investments, broken down with respect to investment stage (using the EVCA definitions of the different stages), geographical location, degree of syndication, and industrial sector of the investee companies. In Europe as a whole, the most important group of investors are the banks (28%), the pension funds (17%), and the insurance companies (12%). Banks dominate the Swiss industry (48%); corporate investors dominate the German, Swedish, and Portuguese industries, whereas these are nearly completely absent in Denmark (2%), Ireland (4%), and the United Kingdom (5%). Eighty percent of all venture capital funds are raised domestically, 7% in another European country, and the remaining 13% in a non-European country.Almost half of the European investments (44%) are made in the expansion stage; management buy-outs (MBOs) account for another 36%. Only 14% is invested in seed or start-up companies, much less than the 30% in the U.S. Half of the venture capital investments in the United Kingdom are buy-outs. The highest start-up investment activity takes place in Austria and Spain. On average, more than half (54%) of the invested amount in Europe is syndicated, but only 6% internationally, while 10% is invested internationally.We also search for similarities and dissimilarities in the characteristics of the sources of funds and of the investments. The hypothesis is that a growth pattern can be distinguished, determining the maturity of the venture capital industry in a particular country. The characteristics that we think would discriminate most among the different industry stages are the importance of government agencies, pension funds, and insurance companies (sources of funds); of start-up, later stages, or MBO investments; and the percentage of international and syndicated investments. Cluster analyses show that there is a growth pattern, but it is less clear than expected. Characteristics of mature industries are a bigger size, relative to the gross national product of the country, the presence of pension funds and insurance companies as investors in the industry, the syndication of the deals, and the absence of the government as an investor, in the 1980s, investments in management buy-outs are mainly done by the mature industries. No pattern can be distinguished for the investments in early or later stages.The major implication from this study is the fact that the European venture capital industry cannot be approached as a single, undifferentiated industry. Each country has its own structures, institutions, and policies, which make the venture capital industries in the different countries have unique characteristics. Moreover, the European venture capital industry has different characteristics than the American industry; this has to be taken into account when comparing both industries.     

Venture capital in transition: A Monte-Carlo simulation of changes in investment patterns

This article examines the nature of the investment process which has historically generated high returns for venture capital funds, and the impact on fund returns of perceived changes in management practice and the structure of the industry. The article outlines some policy implications for fund managers, investors, and the general management of corporations.The authors have investigated the investment process and the changes in the nature of the process through the use of a Monte-Carlo simulation model. Information gathered from interviews with fund managers and the available published data on venture fund performance (including proprietary surveys) was used to develop and calibrate the model. The model replicates the relatively high average fund returns and distribution of returns for funds through the early 1980s. The model simulates a multistaged investment process which draws on a pool of investment opportunities which have a log normal distribution of returns and a low (zero) average return. The model readily permits the exploration of the impact of management and industry practices on fund returns.The conditions identified by the authors, which led to high rates of return on the part of venture capital funds, include:

• 1.1) multistaged investment or commitment of funds on an incremental basis with evaluation of venture performance before commitment of additional fund;
• 2.2) objective evaluation of venture performance with the clear distinguishing of winners from losers;
• 3.3) parlaying funds or having the confidence to commit further funds to ventures identified as winners;
• 4.4) persistence of returns from one round to the next, which implies that valuable information is gained from previous rounds of investment in the same venture;
• 5.5) long-term holding of investment portfolios for a period sufficient for geometric averaging of compound returns to cause the winners to “take over” or raise portfolio returns.

Taken together, these conditions have permitted venture capital funds to historically realize strong average returns with a few of them realizing extraordinary returns.The article also explores the consequences of what some believe is happening in the industry: a trend toward holding investments for shorter periods, increased competition both for investments and later in the product-market arena, and a growing lack of loyalty between investors and investees. All of these conditions and their indirect consequences were shown by the model to negatively impact the limited partners in the venture capital funds while general partners, given the structure of fees and the distribution of investment returns, generally realized a reasonable to extraordinary return. The article outlines a number of management and investment policy implications for investors and fund managers.     

机构投资者投资风格变动与上市公司绩效

根据我国2006-2008年之间存续的基金数据分析,发现不同投资风格类别的机构投资者所持股的上市公司表现出显著的差异。无论从短期还是长期来看,由投资风格保持不变的机构投资者持股的上市公司业绩更好。与以往文献不同的是本研究不仅验证了机构投资者已经发挥了积极的治理作用,同时还为深入理解机构投资者内部组成的差异提供了经验证据,这对理论界、投资者和政府监管部门具有参考价值。     

An Empirical Examination of Institutional Investor Preferences for Corporate Social Performance

This study investigates the pattern of institutional shareholding in the U.K. and its relationship with socially responsible behavior by companies within a sample of over 500 UK companies. We estimate a set of ownership models that distinguish between long- and short-term investors and their largest components and which incorporate both aggregated and disaggregated measures of corporate social performance (CSP). The results suggest that long-term institutional investment is positively related to CSP providing further support for earlier studies by Johnson and Greening (1999, Academy of Management Journal 42, 564–576) and Graves and Waddock (1994, Academy of Management Journal 37, 1034–1046). Disaggregation of CSP into its constituent components suggests that the pattern of institutional investment is also related to the form which CSP takes. Investigation of the impact of investment screens on the selection of stocks suggests that long-term institutional investors select primarily through exclusion, rejecting those firms which have the worst CSP.