Mutual Funds as Venture Capitalists? Evidence from Unicorns

by Sergey Chernenko, Josh Lerner, and Yao Zeng

Overview — Larger mutual funds and those having more stable funding are more likely to invest in privately held startups known as unicorns. Mutual funds are less involved in corporate governance, especially boards of directors, but have more protections when it comes to liquidating their stakes.

Author Abstract

Using novel contract-level data, we study the recent trend in open-end mutual funds investing in unicorns—highly valued, privately held start-ups—and the consequences of these investments for corporate governance provisions. Larger funds and those with more stable funding are more likely to invest in unicorns. Compared to venture capital groups (VCs), mutual funds have weaker cash flow rights and are less involved in terms of corporate governance, being particularly underrepresented on boards of directors. Having to carefully manage their own liquidity pushes mutual funds to require stronger redemption rights, suggesting contractual choices consistent with mutual funds’ short-term capital sources.

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