The Role of Private Equities in Equity Capital Markets: A Short- and Long-term Quantitative Study of European IPOs

Christian Edmund Nielsen & Nicklas Lemminger Jensen

Student thesis: Master thesis

Abstract

The purpose of this master’s thesis is to identify in quantitative terms the role of private equity firms in capital markets. In particular, the impact of private equity firms in the context of initial public offerings. Private equity firms are some of the most prestigious entities in financial markets, and their reputational significance for capital markets is something that cannot be easily put a number to.
This study provides short-term and long-term analyses of the impact of private equity backing of firms deciding to float their shares in some of Europe’s main stock exchanges as a part of their exit strategies. Specifically, this academic research presents a comparison of PE-backed IPOs and non-PE-backed IPOs in Western and Northern Europe over the period 2005- 2012.
In addition, an in-depth analysis of prior literature concerning underpricing and long-term performance of IPOs is provided. The overall notions in them are that underpricing exists, reliable analysis of long-term performance of IPOs is highly dependent on methodological procedure, and that PE-backed IPOs should result in lower levels of underpricing and higher levels of long-term performance when compared to IPOs without PE involvement.
The process in this study consisted on confirming the existence of underpricing as a whole in the given sample, followed by a comparison across both sets of samples. The results pointed out that first-day underpricing is an observable phenomenon in the given scope. Nevertheless, there was no evidence to point out a difference between PE-backed companies and non-PE-backed companies. The short-term performance appeared to be equal regardless of the ownership structure pre-IPO.
Furthermore, the long-term performance analysis focused on returns over a three-year period. This approach resulted in a significantly better performance of PE-backed IPOs over non-PE-backed IPOs. In fact, non-PE-backed IPOs proved to present patterns of underperformance while PE-backed IPOs delivered positive returns.
The results of this academic study do not follow the empirical evidence from past literature in terms of short-term studies. While underpricing is confirmed, the evidence with regards to PEs did not confirm differences in performance when compared to non-PE firms. Additionally, the long-term performance investigation provided proof in line with past academic research, as long-term performance of PE-backed IPOs was better than “normal” IPOs.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2016
Number of pages163