On the Efficiency of Bank-Affiliated Venture Capital

Abstract

This paper examines the effect of bank-affiliated venture capital (BVC) on portfolio companies across seven Western European countries from 1991 to 2010. First, BVC deals are more likely in larger VC syndicates, and in countries with lower earnings aggressiveness, higher market capitalization, and for local deals and international deals among countries with similar legal systems. These results are robust to three different methodologies that control for non-random ‘double’ unobserved selection between portfolio companies and VC syndicates. Second, syndicates involving BVCs have a large positive impact on portfolio companies' sales value: 47%. When investigating the dynamics of such sales performance improvements, we find a short-term impact that ranges from 34% to 43% – depending on the selected short term window – and a long-term impact ranging between 56% and 63%. In terms of firm efficiency – as measured by means of the asset utilization ratio – the impact of BVC is positive and statistically significant, and it ranges from 6% in the short-term to 9% in the long-term. Data also indicate that BVCs do not have an effect on debt to total assets (DTA) , return on assets (ROA), and 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. This finding may be attributed to the strategic objectives of BVCs: 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. These results are stable across several econometric methods: fixed effects regressions with “leads” to control for selection bias, controls for potential cross-country time-varying unknown selection bias (e.g. reform measures about start-up financing, seed financing and access to finance; data on systemic banking crises), instrumental variables estimates, and Bayesian model averaging procedures. We also design an identification strategy to estimate the net effect that BVCs add to syndicates led by IVCs, finding that the net effect on portfolio companies' sales value is 6% - while there is no statistically significant impact on DTA, liquidity, ROA and efficiency. Finally, by means of multinomial logit regressions we find that syndicates involving BVCs have a large positive impact on the likelihood of positive exits – in the form of IPOs ( 132%) or acquisitions ( 138%) – while there is no statistically significant impact on firm liquidation. We still use the above identification strategy to estimate the net effect that BVCs add to syndicates led by IVCs, and find that the estimated net effect of BVCs on positive exits is 32%. As to firm liquidation, the estimated net effect is 168%.