The private placement of listed companies involves wealth reallocation between original and new stakeholders, and it is also one of the hidden channels for large shareholders to tunnel their interests. It not only infringes on the interests of small and medium shareholders, but also reduces the market efficiency. The existing literature focuses on the main stakeholders of private placement including large shareholders, individual shareholders and institutional investors, neglecting VC shareholders. With the development of VC in China, more and more listed companies have been backed by VC before listing recently. This means that VC is a vital stakeholder in the process of private placement. The underpricing of private placement is analogous to that of the IPO underpricing puzzle. How does VC affect the underpricing of private placement? The answer to this question is critical to prevent the imbalance of interest distribution, improve the efficiency of resource allocation, and protect the interests of small investors.

This paper collects the data of private placement between June 2012 and June 2018 in the ChiNext Board from Wind database. We categorize the samples into three types: private placement with incumbent major shareholders, private placement with outside institutional investors and private placement with both. Then we explore the impact of VC on the three types of private placement and try to analyze the underlying mechanism of the impact. The main finding is that VC can significantly reduce the underpricing rate of private placement. If private placement is with incumbent large shareholders, the supervisory effect of VC investors can alleviate the tunneling of large investors, which is manifested by reducing the earnings management before private placement. If private placement is with outside institutional investors, the certification effect of VC can reduce the information asymmetry for institutional investors, which is manifested by enhancing the information content of the company’s stocks. It also illustrates that the new private placement policy issued by CSRC in February 2017 does not affect the effect of VC on the underpricing rate of private placement.

The conclusion sheds light on alleviating the high underpricing of private placement, including promoting and generalizing the supervision and certification functions of VC. During the lifetime cycle of VC-backed firms, VC investors usually pay more attention to the technology, marketing, profit and growth of enterprises in the early and pre-IPO stage. While after IPO, VC should concentrate on the governance of listed companies in its portfolios, and maximize their value, so as to help to realize its final exit. In addition, this study shows that VC can still play a critical role of supervison and check-and-balance to prevent the grabbing of private benefits for major shareholders during the private placement of listed companies.

The marginal contributions of this paper are mainly as follows: Firstly, this paper sheds light on the role and its mechanism of VC investors in the private placement of listed companies, which enriches the research field of private placement. Secondly, this paper expands the supervision and certification functions of VC into private placement. Thirdly, this paper probes into the implementation effect of the new private placement policy issued by CSRC in February 2017, and finds that the functions of VC are still effective after the implement of the new policy. Therefore, VC plays a complementary role for the new policy.