Larger Syndicates Research Articles

Organizational homophily of family firms: The case of family corporate venture capital

ABSTRACT Through the lens of organizational homophily, our study analyzes the network behavior of family firms in the high-risk context of family corporate venture capital (CVC). Specifically, we examine family corporate venture capitalists’ patterns in syndicate partner relationships using a global sample of 3,130 coinvestments from 2007 to 2022. We find that family corporate venture capitalists are more likely than their nonfamily counterparts to coinvest with syndicate partners who possess a similar wealth of experience in terms of overall investment experience, industry experience, and specialization. Family corporate venture capitalists follow the expected homophilic behavior of family firms when selecting nonfamily partners. This phenomenon is less pronounced in larger syndicates wherein individual syndicate partners may have less influence and there may be looser bonds between coinvestors. Our study contributes to research on family firms’ venturing and social capital as well as on CVC syndication.

Overallocation and secondary market outcomes in corporate bond offerings

Bond underwriters, lacking “Greenshoe options” and formal systems to track “flipping” activity, have fewer tools than equity underwriters to manage secondary market order flow uncertainty. We show that bond underwriters respond by selectively “overallocating” some issues to attain net short positions. Overallocations are economically substantive, facilitate the syndicate's price stabilization efforts, and are largely offset in the days after issuance. These issues on average experience more net selling by institutional investors and, despite large syndicate purchases, appreciate less in the secondary market. Thus, overallocation is an observable indicator that underwriters anticipate weakness in net secondary market demand.

The internationalization of business angel networks: do syndicates increase cross-border investment returns?

ABSTRACT This paper investigates the performance effects of cross-border business angel investments. Examining 815 investments on a business angel investment platform, we find an inverted U-shaped relationship between (geographic and cultural) distance and investment returns. We further show that business angels in large syndicates are less sensitive to the costs of both geographic and cultural distance and earn consistently higher returns. Our study contributes to the literature on business angel internationalization and highlights the role of co-investment networks: network resources allow business angels to mitigate transaction costs associated with cross-border investments and improve their investment returns.

Making Long Distance Work: Increasing Investment Returns of International Business Angel Syndicates (WITHDRAWN)

This paper investigates the performance effects of international business angel investments in early-stage ventures. Building on theoretical arguments relating to transaction costs of international investments, we disentangle the costs and benefits of geographic and cultural distance in early stage investing. With a unique dataset of 797 investment decisions made via an international angel investment platform, we find an inverted U-shaped relationship between distance and investment returns. We further show that this relationship is moderated by business angel syndication such that in large syndicates, investors earn consistently higher returns and are less sensitive to the costs of both geographic and cultural distance. With these findings, we provide a new perspective to the discussion on cross-border venture investments, contribute to the emerging literature on international angel investment platforms, and develop the mechanisms of transaction cost theory in a new setting.

Families in Corporate Venture Capital

We show that families are an engine of venturing activities: 1/3 of corporate venture capital (CVC) deals in the US from 2000 to 2017 originated from family firms. Family CVC is associated with more syndication, larger syndicates, and more proximate investment in terms of geography and industry - especially for informationally-opaque ventures and CVC’s parent organizations led by family CEOs. Ventures backed by family CVC exhibit a higher likelihood of successful exit, better market performance, and more valuable innovation post-IPO. Family CVC also generates more value for parents’ shareholders than non-family CVC. Finally, family CVC better withstands a financial crisis.

Rhino Horn: Are There Viable Alternatives?

The number of rhinos being poached on private and national game reserves in Africa annually is unsustainable. The demand for rhino horn is having a detrimental effect on rhino populations with extirpations occurring throughout Africa. Traditional Chinese medicine and commercial art material are at the forefront of the problem with large syndicates poaching rhino and selling this product on the illegal black market in Asia, with high sales being documented in Vietnam. Alternative methods need to be considered and implemented to prevent extinction of an iconic megafauna species which has the potential to alter the biodiversity system in the Savannah regions if this species disappears in situ. Dehorning, legalising the trade (both nationally and internationally) and education are key areas which need to be addressed. However, it is vital to note that these alternatives only have the potential to be successful if implemented together and with the support from the traders, the consumers, but also from the government. It is imperative that all governments enforce current legislation on the trade and provide monetary and conservation backing to those individuals protecting their current rhino populations.

The persistent effect of initial success: Evidence from venture capital

We use investment-level data to study performance persistence in venture capital (VC). Consistent with prior studies, we find that each additional initial public offering (IPO) among a VC firm’s first ten investments predicts as much as an 8% higher IPO rate on its subsequent investments, though this effect erodes with time. In exploring its sources, we document several additional facts: successful outcomes stem in large part from investing in the right places at the right times; VC firms do not persist in their ability to choose the right places and times to invest; but early success does lead to investing in later rounds and in larger syndicates. This pattern of results seems most consistent with the idea that initial success improves access to deal flow. That preferential access raises the quality of subsequent investments, perpetuating performance differences in initial investments.

A BIT of investor protection: How Bilateral Investment Treaties impact the terms of syndicated loans

Abstract We study the impact of government expropriation risk on the terms of cross-border syndicated loans. By comparing loans by foreign lenders from countries covered by Bilateral Investment Treaties (BITs) to loans from non-covered countries, we isolate and quantify the impact of strengthening property rights against government expropriation on loans. We find that stronger property rights lead to a lower cost of debt, larger loans, larger syndicates, less collateral, and fewer covenants. Results are stronger in countries with a history of government expropriations and robust to methodologies accounting for the endogenous nature of BITs and for the simultaneous determination of loan terms. Our findings persist after the inclusion of other metrics of institutional quality, such as legal origin identifiers and an index of creditor rights.

Allocation Discretion, Information Sharing and Underwriter Syndication

The competitiveness of the IPO underwriting market suffers from the concentration of restricted mandates in the hands of a limited number of underwriters with good reputations. Academic research has focused extensively on the relationship between underpricing and the influence of an individual underwriter. However, we have only scant research on the effect of IPO syndication on underpricing. Nevertheless, most IPOs are managed by underwriters operating as an IPO syndicate. Here, we contribute to an analysis of underwriting syndicates by examining 329 IPOs issued in the Indian IPO market in the period 2000-10 that were made subject to either a discretionary or a proportionate allocation regime. We find that the underwriting market in India is highly concentrated and is dominated by a few large and reputable underwriters who have ongoing relationships amongst themselves to manage IPOs. This highlights a potential entry barrier for new underwriters. We find that underwriters form large syndicates when the issue size is large. Also, we do not find any evidence that the motivation for underwriters to form a syndicate is due to market risk sharing or price manipulation. We conclude that underwriters syndicate to share the inventory risk of an IPO. When allocation discretion is regulated, and the risk of managing an IPO is high, we observe that the size of an underwriting syndicate is smaller. However, the results support the role of institutional subscription acting as a mediating factor for reputable underwriters to syndicate. Able to share the risk in this way, the syndicate partnership benefits the issuer with lower underpricing. Overall, we conclude that regulatory intervention is positive for market welfare due to lower underpricing. We also find that in the absence of allocation discretion, syndication by reputable underwriters acts as an effective medium of discretion for higher information and risk sharing.

The Choice of Exit: Influence of Private Equity Investors and Buyout Entry

The choice of exit method is an inevitable decision faced by entrepreneurs and private equity (PE) investors. The existing literature addresses four categories of factors which influence this choice of exit method between initial public offering (IPO) and acquisition: industry-related factors, market-timing variables, deal-specific factors and demand-for-funds factors. We extend the literature by introducing a new category of factors, ‘PE investor characteristics’, and test if this category has a significant effect on the choice of exit method. We also test if the type of entry has an influence on the exit method. We find that PE investor characteristics play an important role in the choice of exit method. The existence of a large syndicate of PE investors in the same firm increases the probability of an IPO exit, but the presence of a foreign PE investor reduces this probability. Moreover, unlike in developed markets, the cost of debt does not affect the choice of exit method in India. We further consider specific exit methods such as strategic sale, financial sale and buyback and find consistent results. We find that in buyout transactions, the probability of an IPO exit is less than that of a strategic sale. Finally, we present a unique finding that the probability of a buyback as opposed to an IPO is higher if a firm is in the real estate sector.

Syndicate Size and the Choice of Covenants in Debt Contracts

ABSTRACT I investigate whether and how syndicate size influences the type of covenants used in debt contracts. Prior theory and evidence suggest renegotiation considerations from coordination difficulties in large syndicates and intertemporal transfers due to relationship lending in small syndicates are factors in the design of covenants. I find that for large syndicates, borrowers and lenders avoid the use of flexibility-reducing covenants that are more likely to impact negatively on value-enhancing corporate policies in good states of the world. This effect becomes stronger when the borrower has fewer outside financing options. Additionally, I find contracts with large syndicates are more likely to have more covenant slack, include performance pricing provisions, have tailored capital expenditure covenants, and principally rely on covenants that are directly linked to the current performance of the borrower. Collectively, these results imply that syndicate size and related renegotiation considerations affect how accounting information is used in debt contracts. JEL Classifications: G32; G21; C78; L14.

Breaking In Together: How Venture Capital Firms Enter New Markets

We examine the patterns of partnership formation of new market domain entrants in the U.S. venture capital (VC) industry. Drawing on the principle of exclusivity in partner selection under uncertainty, we extend it to the analysis of new entrants’ partnership formation in VC investment. In contrast to most prior dyad-level studies, we focus on the syndicate-level analysis as better reflecting partnership formation patterns. Our empirical analyses reveal that new market entrants syndicate predominantly with other new entrants, even controlling for their prior ties. Syndicates of a higher percentage of new entrants tend to invest in more mature start-ups, rounds of smaller amount, larger syndicates, and avoid the turbulent environment of popular market domains. The study highlights the interplay of partner selection preferences, environmental uncertainty, and transaction settings in partnership formation of new market entrants. It also shed lights on the differences of de novo entrants and de alio entrants in these interplays.

Do Bank Networks Influence LBO Financing?

We investigate whether syndication networks among banks influence the financing of leveraged buyouts (LBO). We find that lead banks serve as important intermediaries between the supply (banks in an LBO loan syndicate) and demand (targets and private equity (PE) firms) sides of LBO financing. They rely on their syndication network to reduce information asymmetries between the parties involved, especially when prior bank-borrower relationships are weak or non-existent. Banks that are more central within their network are more likely to be chosen as lead arrangers since they are able to form larger syndicates and provide more debt. In addition, more central banks are preferred as lead arrangers because their influential network position allows them to finance LBOs under terms that are favorable to both targets and PE firms. After controlling for the simultaneous determination of LBO financing terms, we find that a one-standard-deviation increase in bank centrality reduces LBO loan spreads by an average of 22 basis points, representing a 1.65% increase in PE equity returns for an average loan size of $363 million. These findings suggest that bank networks play a crucial role in facilitating LBO financing and that borrowers are able to perceive the relative position of banks within these syndication networks.

Loan Ownership and Liquidity in the Secondary Loan Market

We find some support for theories predicting that the presence of informed investors adversely affects liquidity: When arrangers retain a share in the loan this impacts negatively liquidity. We find strong evidence that investor diversity is beneficial to liquidity: Loans with larger syndicates; syndicates with higher investor turnover, more investor types, and lower investor-types’ loan share concentration have lower bid-ask spreads. These findings are robust and do not appear to be driven by investors’ borrower/loan selection. We find that not all investors contribute positively to loan liquidity. While an increase in the number of hedge funds in a syndicate lowers the loan’s bid-ask spread, an increase in the number of banks in the syndicate has the opposite effect, consistent with existing beliefs that asset managers are active traders but banks follow buy-and-hold investment strategies.

The Persistent Effect of Initial Success: Evidence from Venture Capital

We use investment-level data to study performance persistence in venture capital (VC). Consistent with prior studies, we find that each additional IPO among a VC firm's first ten investments predicts as much as an 8% higher IPO rate on its subsequent investments, though this effect erodes with time. In exploring its sources, we document several additional facts: successful outcomes stem in large part from investing in the right places at the right times; VC firms do not persist in their ability to choose the right places and times to invest; but early success does lead to investing in later rounds and in larger syndicates. This pattern of results seems most consistent with the idea that initial success improves access to deal flow. That preferential access raises the quality of subsequent investments, perpetuating performance differences in initial investments.

A Spark from the Public Sector: Co-Lending by Government-Owned and Private-Sector Lenders

Co-lending by private-sector and government-owned lenders accounts for nearly one-tenth of all syndicated-loan funding to corporate borrowers over the three decades spanning 1980 to 2010. I find evidence that private-sector institutions co-lend with government-owned lenders to benefit from better legal protection and implicit debt guarantees. This leads to loans with lower spreads, longer maturities, larger syndicates, less collateral, and a greater participation of foreign lenders, particularly for borrowers headquartered in countries with weak property rights. Yet, firms that receive loans from a mixed syndicate comprised of both private and government-owned lenders show a decline in profitability and valuation in subsequent years, which suggests that governmentowned lenders fail to efficiently allocate funding.

THE SIZE OF UNDERWRITING SYNDICATES AND UNDERPRICING IN IPOS

ABSTRACT This paper examines the relationship between the number of firms in an underwriting syndicate and the degree of underpricing in an initial public offering (IPO) of common stock. The results indicate that the syndication of IPOs is consistent with cost minimization by financial intermediaries and show why IPOs managed by larger syndicates should be associated with less underpricing. Keywords underwriting syndicate, IPO, underpricing

A Spark from the Public Sector: Co-Lending by Government-Owned and Private-Sector Lenders

Co-lending by private-sector and government-owned lenders accounts for nearly one-tenth of all syndicated-loan funding to corporate borrowers over the three decades spanning 1980 to 2010. I find evidence that private-sector institutions co-lend with government-owned lenders to benefit from better legal protection and implicit debt guarantees. This leads to loans with lower spreads, longer maturities, larger syndicates, less collateral, and a greater participation of foreign lenders, particularly for borrowers headquartered in countries with weak property rights. Yet, firms that receive loans from a mixed syndicate comprised of both private and government-owned lenders show a decline in profitability and valuation in subsequent years, which suggests that governmentowned lenders fail to efficiently allocate funding.

A BIT of Investor Protection: How Bilateral Investment Treaties Impact the Terms of Syndicated Loans

We study the impact of property rights on the terms of cross-border syndicated loans. By comparing loans by foreign lenders from countries covered by bilateral investment treaties (BITs) to loans from non-covered countries, we isolate and quantify the impact of property rights against government expropriation on loans. We find that stronger property rights lead to a lower cost of debt, larger loans, larger syndicates, less collateral, and fewer covenants. Our results are stronger in countries with a history of government expropriations and robust to methodologies accounting for the endogenous nature of BITs and for the simultaneous determination of loan terms.

Private Equity Exits: Effect of Syndicate Size, Foreign Certification and Buyout Entry on Type of Exit

The choice of exit outcome between IPO and acquisition is an inevitable decision faced by entrepreneurs and private equity investors. Hence, it is important to determine what factors influence this choice of exit outcome. The existing literature addresses four categories of factors which influence this choice: industry-related factors, market-timing variables, deal-specific factors and demand for funds factors. However, in the presence of private equity investors, this decision becomes more complicated. Thus, we extend the literature by introducing a new category of factors, ‘private equity investor characteristics’ and test if this category has a significant effect on the choice of exit mechanism. We also test if type of entry has an influence on type of exit. This paper also contributes to the literature by being the first to examine the choice of PE exit in an emerging market like India. We find that private equity investor characteristics play an important role in the choice of exit mechanism. The existence of a large syndicate of private equity investors in the same firm increases the probability of an IPO exit but the presence of a foreign private equity investor reduces this probability. Moreover, unlike in the US, the cost of debt does not affect the choice of exit mechanism in India. We further consider detailed exit outcomes like strategic sale, financial sale and buyback and find consistent results. We also find that the type of entry has an influence on type of exit. Specifically, we find that in buyout transactions, the probability of an IPO exit is less than that of a strategic sale. Finally, we present a unique finding that the probability of a buyback as opposed to an IPO is higher if a firm is in the real estate sector.