© Cumming & Johan (2013) Investment Duration Cumming & Johan (2013, Chapter 20) 1.

© Cumming & Johan (2013) Investment Duration

Investment Duration

Cumming & Johan (2013, Chapter 20)

1


Chapter Objectives (1 of 2)

Introduction/TheoryData

RegressionsRemarks

Policy

• Investment Duration = Date of First Investment to Date of First Exit• Specifically focus on VC investment duration for two main reasons.

– First, VCs certify the quality of the company that goes public and thereby increases investor confidence that the company seeking public funding is of sound quality. This is particularly the case when the VC has been involved in the company for many years and does not appear to be after a quick exit to take advantage of the market (Megginson and Weiss, 1991). IPOs also tend to perform better where the VC commits not to sell all of their interest in the company after the expiration of the lock-up period (Gompers and Lerner, 1999).

– Second... Next slide

2


Chapter Objectives (2 of 2)


RegressionsRemarks

Policy

– Second, where the VC adds value to the investee, the VC professionalizes the company such that it has in place a system of operations and corporate governance mechanisms that make it an effective candidate to be a successful publicly listed company (Gompers and Lerner, 1999). VC-backed IPOs in the long-run out-perform non VC-backed IPOs (Brav and Gompers, 1997; Gompers and Lerner, 1999). Furthermore, it has been shown that the longer the duration of VC investment, the stronger the performance of the company that lists on a stock exchange (Megginson and Weiss, 1991).

• Theorize factors that affect venture capital investment duration in a straightforward model with the use of graphs.

• Analyze comparable venture capital investment duration datasets from Canada and the United States.

3


Time to VC Exit


RegressionsRemarks

Policy

• Exit when projected marginal costs (PMC) of maintaining the investment (including the opportunity costs) are greater than the projected marginal benefits (PMB)

– First discussed in Cumming and MacIntosh (2001)

4


PMC0

PMVA1

$

Time

Figure 19.1 Time to Venture Capital Exit

Exit1 Exit0

PMVA0

Lower Quality VC: Reduce PMVA Reduce time to Exit

Exit2

Greater Capital for Investment Higher PMC Shorter time to Exit

PMC2

5


Factor Hyp # Effect on PMVA Effect on PMC Impact on VC Investment Duration

Ent, Firm Characteristics

Early Stage of Development H1 High HighAmbiguous in general, but for non-write-

off exits expect longer investment duration

High-Tech H1 High HighAmbiguous in general, but for non-write-

off exits expect longer investment duration

Firm Age at First Investment H2 Low None Shorter

Deal Characteristics

Syndication H3Low for any given single investor (but higher across each investor)

High where conflicts among syndicated VCs and simple coordination costs

Shorter

Deal Size H4 Low High Shorter

Market Conditions

Internet Bubble H5 None High Shorter

High MSCI Returns H5 None High Shorter

Capital for Investment H6 Low High Shorter

New Investment Opp. H7 Low None Shorter

Investor Characteristics

Canadian LSVCC

Corporate VC

H8

H9

Low

Low

None

None

Shorter

Shorter

Table 20.1. Testable Hypotheses

6


Data


RegressionsRemarks

Policy

• 557 Canadian and 1,607 US VC-backed companies over the period 1991-2004.

• Canadian data source: Macdonald and Associates, Limited.• US data source: Venture Economics, Inc. • Canadian VCs achieved

– 5.7% IPOs– 73.8% private exits (acquisitions, secondary sales and buybacks)– 20.5% write-offs

• US VCs achieved– 35.7% IPOs– 54.6% private exits– 9.7% write-offs

Study possible for the first time thanks to the release of Canadian exits data7

© Cumming & Johan (2013) Investment Duration8



-200

0

200

400

600

800

1000

1200

1400

Index Value (Adjusted to Start at 0 on September 1992)

Date

Figure 20.4. Selected Indices 1993 - 2005

Globe LSVCC Peer Index Globe Canadian Small Cap Peer Index

TSE 300 Composite Index / TSX Total Return Index US Venture Economics Index

30-Day Treasury Bill Index 10




Figure 20.7. Number of VC-Backed IPOs in Canada and the US

0

20

40

60

80

100

120

140

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Exit Year

US Canada 13


Empirical Analyses


RegressionsRemarks

Policy

• Hazard models of time from first investment to exit

14


Table 20.5 Panel A.

Hypothesis Number

Model 1: Canada and US Model 2: Canada and US Model 3: Canada and US Model 4: Canada Only Model 5: US Only

Coefficient t-statistic Coefficient t-statistic Coefficient t-statistic Coefficient t-statistic Coefficient t-statistic

Early Stage H1 0.078 0.576 0.052 0.386 0.085 0.592 1.263 1.391 0.195 1.205

Expansion Stage H1 0.372 2.599*** 0.351 2.442** 0.500 3.346*** 0.165 0.184 0.477 2.888***

Life Sciences H1 0.028 0.196 0.076 0.538 -0.256 -0.364 -0.003 -0.023

Other High Tech H1 0.008 0.064 -0.010 -0.084 -0.323 -0.465 0.187 1.452

Firm Age at First VC Investment H2 0.045 1.502 0.048 1.580 0.005 0.162 0.978 3.187*** -0.004 -0.152

Syndication H3 0.127 1.126 0.162 1.431

Log (Deal Size) H4 0.205 5.167*** 0.191 4.869*** 0.115 3.538*** -0.006 -0.021 0.098 2.800***

Bubble Dummy Variable at Investment H5 -0.079 -0.507 -0.081 -0.523 2.227 2.349** 0.442 2.847***

Bubble Dummy Variable at Exit H5 -0.050 -0.409 0.002 0.017 2.489 2.265** 0.285 2.270**

Log (1+Stock Index Returns 3 Months Prior to Exit)

H5 0.918 3.027*** 0.843 2.791*** 0.072 0.235 -1.001 -0.278 -0.210 -0.624

Log(1+Stock Index Returns Over Investment Duration)

H5 -0.189 -2.204*** -0.199 -2.314** -0.321 -4.703*** -9.010 -3.814*** -0.249 -2.628***

Capital Available for Investment H6 0.943 11.693*** 0.922 11.481*** 0.373 4.667*** 1.227 0.616 0.265 3.042***

New Investment Opportunities H7 11.332 7.574*** 11.815 7.944*** 5.720 0.529 9.266 5.382***

Canada H8 1.188 5.908*** 0.417 2.181**

Labour Sponsored Venture Capital Fund

H8 1.171 3.236*** 1.538 2.065**

Corporate Venture Capital Fund H9 0.991 2.299** 0.810 1.103

Diagnostics

Number of Observations 1639 1639 605 32 573

Number of IPOs 605 605 605 32 573

Loglikelihood -3730.153 -3737.602 -3230.448 -49.983 -3006.649

Pseudo R2 0.044 0.042 0.014 0.387 0.021

15


Economic Significance


RegressionsRemarks

Policy

• Canadian VCs exit IPOs at least 51.7% faster than their US counterparts, and this effect is statistically significant at the 1% level.

• LSVCC-originated investments are exited 223% quicker than private independent limited partnerships (Model 2; the economic significance is 366% in Model 4) and this effect is statistically significant at the 1% level in both Models 2 and 4.

16


Remarks


RegressionsRemarks

Policy

• Time to IPO is shorter in Canada

• VCs have a smaller percentage of IPOs in Canada

• LSVCCs in Canada

17


Table 120.6. Exit Frequency and Time To Venture Capital Exit: Comparisons Across Australasia, Canada, Europe and the United States

IPO Private Exits Write-off

Australasia(Cumming et al., 2006)

1989-2001

Average = 2.84 years(23% Exits)

Average= 3.43 years(60% Exits)


Canada(This Chapter)

1991-2004

Average = 2.45 years(5.85% Exits)

Average = 4.11 years (74.22% Exits)


Continental Europe(Cumming, 2013)

1995-2005




Europe(Schwienbacher, 2003)

1990 to 2001

Average=3.7 years for all exit types

(25.3% Exits) (53.9% Exits) (20.8% Exits)

United Kingdom(Nikoskelainen and Wright, 2007)

1995-2004




United States(This Chapter)

1991-2004




United States(Giot and Schwienbacher, 2007)

1980-2003




18


Policy Implications


RegressionsRemarks

Policy

• Reduce role of Government sponsored LSVCCs in Canada

• After [pre-IPO] VC markets are “fixed”, could consider raising IPO listing standards in Canada

19

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