Toward a New Era for the Barbarians? A Study of Performance and Value Creation in Private Equity-backed Initial Public Offerings

Johannes Buster Kaae Pilegaard & Katrine B√łgelund Vendelbo

Student thesis: Master thesis


Using a sample of 318 private equity-backed (PE-backed) IPOs, listed for flotation on US stock exchanges between 1997 and 2014, this study presents a tripartite analysis of the value creation mechanisms employed by the sponsors and ensuing performance implications, utilizing the portfolio firm as the unit of analysis. Firstly, we examine the aftermarket and operating performance for the three years following the listing, adopting a matched control group of non-backed firms to reduce selection bias. Secondly, we perform a comparative analysis of the use of various value creation levers for firms acquired prior to versus after the financial crisis with particular emphasis on the gravitation toward increased use of operational engineering. Finally, we estimate a multiple regression model, relying on OLS methodology, to examine which operational mechanisms are associated with portfolio firm performance, and inquire into the contingencies which may moderate the main effects. By computing Buy-and-Hold Abnormal Returns, we detect signs of superior performance for PEbacked IPOs relative to both the market and non-backed peers. In terms of operating performance, we find that PE-backed IPOs enjoy greater efficiency while exhibiting weak to no signs of superior profitability, posing a puzzle. The performance largely appears robust to the financial crisis with some signs that PE-backing counteracts the documented negative impact of the latter on IPO firm profitability. While we find that conventional governance levers of control and monitoring seem to sustain their relevance after the crisis, we find evidence in favor of a shift in the prototypical PE model toward heavier reliance on mechanisms aimed at operational and strategic improvements, particularly the injection of industry expertise and use of add-on investments. Confirming the difficulty in drawing generalizations as to which factors contribute to portfolio firm performance, we find that the impact of operational mechanisms is circumscribed by several contingencies and furthermore differs across performance measures. Particularly, while sponsor specialization seems especially conducive to firm efficiency in secondary buyouts, the market appears to penalize this combination. Moreover, we find that industry expertise appears of greater importance for firms acquired after the crisis, cementing the need for sponsors to move above and beyond mere financial and governance engineering. Hence, we contribute to existing literature by updating the body of knowledge on PE-backed IPO performance from a contemporary perspective while providing a novel, systematic inquiry into the change in the archetypical approach to value creation employed by PE. Finally, we shed new light upon the prevalence and importance of sponsor resource heterogeneity, which we believe will constitute an imperative determinant and driver of performance at the portfolio firm level going forward.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2019
Number of pages171
SupervisorsAleksandra Gregoric