XXV Edition

1-2 December 2016"

Bank-Affiliated Venture Capital: Portfolio Selection and Impact on Performance, Capital Structure and Exit

Murtinu Samuele, University of Groningen
Cumming Douglas J., York University

The strategic objectives of bank-affiliated venture capitalists (BVCs) are to enhance demand of debt capital from portfolio companies that need liquidity to invest and grow at a stable pace and that would borrow additional debt in the future from the parent bank of the BVC fund. Also, BVCs have a strong incentive to facilitate IPO exits through affiliated investment banks. We test these propositions on the effect of BVCs on portfolio companies across seven Western European countries from 1991 to 2010. The data indicate, first, that BVC deals are more likely in larger syndicates led by independent venture capitalists (IVCs), and in countries with lower earnings aggressiveness, higher market capitalization, and for local deals and international deals among countries with similar legal systems. Second, syndicates involving BVCs have a negligible impact on portfolio company’s sales value and asset utilization ratio, while the impact on return on assets is negative and statistically significant (-48%), and this result holds both in the short and in the long run. Third, in terms of portfolio companies’ capital structure, data indicate that while BVCs do not have an effect on debt to total assets (DTA), they do have a negative effect on firm liquidity – as proxied by net cash flows to total assets – which is larger in the short-term (between -21% and -23%) than in the long-term. We also show a selection effect of BVCs in terms of portfolio companies’ liquidity: prior to receiving VC funding it is 25% lower than that of non-VC-backed firms. Finally, we find that syndicates involving BVCs have a large positive impact on the likelihood of positive exits – in the form of IPOs or acquisitions – while there is no statistically significant impact on firm liquidation.

Area: New challenges for the future of Italian and European banks (Rivista Bancaria Award)

Keywords: bank, venture capital, syndication, Europe, matching, performance

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