The Value of Privacy and the Choice of Limited Partners by Venture Capitalists

Abstract

We study how information disclosure concerns shape the choice of limited partners by venture capital firms. Late-2002 court rulings stopped public investors from providing confidentiality to private equity firms. The best-performing venture capital firms, but not other firms, responded by excluding public investors from their new funds. We argue that this effect is caused by excess investor demand resulting from an inability to scale the VC model. To preserve relationships, many public investors agreed to receive less information: rules forcing disclosure by principals led agents to hide information from their principals.

Keywords: limited partners, FOIA, venture capital, public pensions

JEL Classification: G11, G24, O31