Is there a black-box effect in listed private equity? A study of abnormal returns to exit announcements by listed private equity vehicles

Ida Foseid Dillekås & Helene Heien

Student thesis: Master thesis


Over the past decade the market has witnessed the emergence of a new “branch” of private equity (PE), namely publicly listed private equity (LPE). PE as an industry is notorious for the high level of secrecy surrounding the changes made to portfolio companies, including very little transparency in financial reporting. With the listing of vehicles comes the availability of market prices, more comprehensive rules for disclosure, as well as increased scrutiny from investors, analysts and media. From an academic point of view, the listing of vehicles presents an excellent opportunity to investigate this enigmatic industry, and to explore how investors value this new asset class. It is well known that listed private equity vehicles (LPEVs) commonly trade at a discount to their net asset value. Further, one recent study has found that this gap between market price and true value can be reduced at the time a vehicle announces that it will exit on of its portfolio companies. Yet, the close relationship between these two price aspects has never been explored, leaving an evident gap in literature. A main aim of this study is to thoroughly investigate this relationship, and we do this by considering how factors pertaining to the reduction of information asymmetry between managers of LPEVs and investors affect the variation in returns at exit announcements. Based on a sound theoretical foundation and an explorative review of the previous literature on the pricing of LPE, we develop seven hypotheses, and test them using a sample comprising 24 LPEVS and 188 exit announcements from January 1, 2000 to May 23, 2013. The first hypothesis concerns the existence of abnormal returns at exit announcements, and is tested through an event study. The results of the event study show a significant (at a 10% level) CAAR [0, +1] of 0.428% to the announcement of an exit, supporting our initial hypothesis. The event study is accompanied by a multiple regression analysis, where the CAR [0, +1] of each exit announcement is regressed on 11 explanatory variables reflecting the reputational effects of information sharing. These factors are divided into two distinct categories, where one represents a vehicle’s past performance and the other represents its responsible behaviour. We find support for three out of seven hypotheses. Overall, past performance does not seem to have a sizable effect in our sample, whereas all variables reflecting responsible behaviour are either statistically or economically significant (or both). The results are quite convincing and enable us to present some specific recommendations for the main participants of the LPE industry with the aim of reducing their price discount; (i) keep the inside ownership level below 3%, (ii) pay dividends on a regular basis, (iii) improve openness surrounding portfolio companies, and (iv) join an industry association with the purpose of improving transparency and investor relations at an general industry level.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2013
Number of pages151