Bank-Affiliated Venture Capital Funds: Portfolio Selection, Strategic Objectives, Performance and Exit

Samuele Murtinu

Review of Corporate Finance, 2024, vol. 4, issue 3–4, 375-416

Abstract: In this article, I propose three new theoretical arguments pertaining to banks operating as investors in venture capital (“VC”) markets (bank-affiliated VC funds, or “BVCs”). First, I propose that BVCs exhibit agency costs in respect of promoting their business lines apart from VC investment. To this end, investment banks which encourage risk taking and developing IPO and acquisition exit opportunities are quite different than commercial banks which promote their lending business. Second, I propose that BVCs are more risk averse than traditional VC investors due their institutional structure and regulatory restrictions. Third, I propose that, while BVCs provide scant value-added advice to investees due to their scale and scope, syndicated investments by BVCs affiliated to commercial and investment banks enhance exit outcomes. I use a large international dataset to test these ideas. The data examined first show that commercial bank-affiliated BVCs (CBVCs) strategically select investees with lower liquidity, which is consistent with commercial banks promoting their non-VC lending business activity via operational debt. Second, BVCs invest in larger syndicates, consistent with their risk aversion. However, while CBVCs invest in safer countries, investment bank-affiliated BVCs (IBVCs) target more geographically distant ventures. The data further show that BVC investees show scant sales and efficiency improvements, consistent with banks’ comparative absence of value-added to investees. However, syndicated investments between CBVCs and IBVCs have the largest positive (negative) impact on the likelihood of IPOs and acquisition (liquidation) exits.

Date: 2024
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