The Impact of Public Pension Funds and Other Limited Partners on the Governance of Venture Capital Funds
33 Pages Posted: 18 Dec 2017 Last revised: 17 Jan 2018
Date Written: December 16, 2017
We examine whether the reinvestment choices of public pension funds 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 public pension funds 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, but experience an increase in the investment share of public pension funds. 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 public pension fund managers reduce the effectiveness of monitoring efforts by other limited partners in venture capital funds.
Keywords: venture capital, litigation, limited partners, public pension funds, differences-in-differences
JEL Classification: G24, G33
Suggested Citation: Suggested Citation