The Impact of Public Pension Funds and Other Limited Partners on the Governance of Venture Capital Funds

Abstract

We examine whether the reinvestment choices of public pension funds (PPFs) affect the governance of venture capital funds. We start with a hand-collected dataset of litigation against venture capitalists (VCs) that provides significant shocks to the reputation of VCs. We combine that information with detailed data on limited partner investments in VCs provided by LP Source and test whether PPFs respond differently to the litigation shocks compared to other types of limited partners. Our triple-difference framework reveals that VCs who were defendants in lawsuits suffer a significant subsequent decline in investment by university endowments and several other types of institutional investors, but experience an increase in the investment share of PPFs. Pension funds are about three times more likely to re-invest in post-lawsuit funds offered by litigated VCs. The additional pension fund investments thus partially compensate for the shortfall in post-lawsuit fundraising caused by the exodus of other investors. Our results indicate that the investment choices of PPF managers reduce the effectiveness of reputational penalties imposed by other limited partners in venture capital funds.