Banks as venture capital general partners

• Grant number: 18/14159-5
• Support Opportunities: Regular Research Grants
• Start date: November 01, 2018
• End date: April 30, 2022
• Field of knowledge: Applied Social Sciences - Administration
• Principal Investigator: Antonio Gledson de Carvalho
• Grantee: Antonio Gledson de Carvalho
• Host Institution: Escola de Administração de Empresas de São Paulo (EAESP). Fundação Getúlio Vargas (FGV). São Paulo , SP, Brazil
• Associated researchers: Humberto Gallucci Netto

Abstract

This project has two goals. The first one is to analyze the differences between venture capital funds (VC or PEVC) managed by banks (bank affiliates) and those managed by independent institutions. Banks as VC general partners invest in companies that commonly require banking services such as loans, underwriting and M&A advice. Fang et al. (2013) and Hellman et al. (2008) conjecture that bank affiliates invest in companies that may become clients of their associated commercial bank. In this case, banks use their PEVC activities to strengthen traditional banking activities.We investigate another conjecture: independent funds seek to co-invest with bank affiliates to grant to their investee access to preferential banking services such as increased capital and loans, and differentiated interest rates. Accordingly, bank affiliates have a superior deal flow because of the easiness with which they can co-invest. In this case, the bank's business activities strengthen its PEVC activities. The main difference between the two conjectures lies in the deal flow. Thus, the first objective of this project is to seek evidence that bank affiliates have a privileged deal flow and are more likely to co-invest.The second objective is to investigate the existence of conflict of interest in the activities of banks as PEVC managers. The Glass-Steagall Act of 1933 forbade commercial banks from acting as investment banks. Thus, commercial banks, although they could manage PEVC funds, could not act as underwriters in issues of shares or debentures. In 1989, the Federal Reserve Bank reinterpreted Section 20 of the Glass-Steagall Act, allowing some prequalified commercial banks to act as underwriters.If banks, as PEVCs general partners, act in the best interest of their clients (limited partners), the possibility created for acting as underwriters should not affect the way banks structure PEVC investments. If, on the other hand, there were a conflict of interest, one would expect that the authorized banks acting as general partners would restructure their PEVC portfolio, directing their investments to companies that in the future would bring underwriting business.Therefore, the second objective of this project is to investigate whether the reinterpretation of the Glass-Steagall Act in 1989 changed the composition of the investment portfolio of PEVC funds managed by prequalified banks to act as underwriters.References: Fang, Lily, Victoria Ivashina e Josh Lerner, 2013. Combining Banks with Private Equity Investing. Review of Financial Studies, 24, 2462-2498.Hellman, Thomas, Laura Lindsey w Manju Puri, 2008. Building Relationships Early: Banks in Venture Capital. Review of Financial Studies, 21, 513-539. (AU)