Private Equity,Buy‐outs and Insolvency Risk

Private equity restructuring using debt has been criticized for increasing financial distress and bankruptcy especially following the financial crisis. We build a unique dataset comprising the population of over 9 million firm‐year observations and 153,000 insolvencies during the period 1995–2010. We compare the insolvency hazard of the spectrum of buy‐out types within the corporate population over time and investigate the risk profile of the companies pre‐buy‐out. Controlling for size, age, sector and macro‐economic conditions, private‐equity backed buy‐outs are no more prone to insolvency than non‐buy‐outs or other types of management buy‐ins. Moreover, leverage is not the characteristic that distinguishes failed buy‐outs from those surviving.     

Growth Capital‐Backed IPOs

Growth capital investing is the financing of growing businesses that are investing in tangible assets and the acquisition of other companies. Growth capital is common in retailing, restaurant chains, and health care management, and represents 12% of all venture capital (VC)‐backed initial public offerings (IPOs). Since 1980, investing in growth capital‐backed IPOs has produced mean three‐year style‐adjusted buy‐and‐hold returns of +25.2%, in contrast to style‐adjusted returns of approximately zero for other VC‐backed and buyout‐backed IPOs. One‐third of growth capital‐backed IPOs are rollups and these have produced much higher returns for investors than rollups without a financial sponsor.     

Monitoring or colluding: the role of venture capital investors in the IPO process

We argue and provide evidence that instead of playing a monitoring role, venture capital (VC) investors collude with controlling shareholders in the IPO process of Chinese non‐state‐owned enterprises (non‐SOEs). We show that VC‐backed IPOs’ applications are more likely to be approved by regulators, especially in firms with excess control rights, but have worse post‐IPO performance. Through investing in firms with excess control rights, VC investors are able to make higher exit returns. We further document that VC investors’ role in the IPO process is stronger when they have political connections, hold higher ownership, and when they make pre‐IPO investment.     

Venture capital‐backed and commitments test entity initial public offerings on the ASX

This paper examines initial returns to venture capital (VC) backed and non‐VC‐backed IPO companies on the Australian Securities Exchange (ASX). We find support for the theoretical predictions of Rossetto (2008), by providing empirical evidence that VC‐backed CTE IPOs exhibit greater wealth losses to pre‐IPO investors compared to non‐VC‐backed CTE IPOs during hot issue markets. We also find that greater retained ownership increases IPO underpricing. In the subsample of IPOs with below the median level of retained ownership IPOs, VC‐backed CTE IPOs and VC‐backed, non‐CTE IPOs have significantly higher levels of underpricing and wealth loss compared to non‐VC‐backed, non‐CTE IPOs.     

Venture capital reputation and investment performance

I propose a new measure of venture capital (VC) firm reputation and analyze its performance implications on private companies. Controlling for portfolio company quality and other VC-specific factors including experience, connectedness, syndication, industry competition, exit conditions, and investment environment, I find companies backed by more reputable VCs by initial public offering (IPO) capitalization share (based on cumulative market capitalization of IPOs backed by the VC), are more likely to exit successfully, access public markets faster, and have higher asset productivity at IPOs. Further tests suggest VCs’ IPO Capitalization share effectively captures both VC screening and monitoring expertise. My findings have financial implications for limited partners and entrepreneurs regarding their VC-sorting activities.     

An empirical analysis of Mexican and US closed-end mutual fund IPOs

We examine 135 Mexican closed-end fund IPOs and 370 Mexican non-fund IPOs that issued between 1994 and 2003 along with 217 contemporaneous US fund IPOs and document three primary results. First, we find that Mexican IPOs in the aggregate experience no significant underpricing, unlike their US IPO counterparts. Both Mexican and US IPOs experience significantly negative long-run performance. Second, Mexican closed-end fund IPOs experience positive long-run performance, significantly better than Mexican non-fund IPOs which experience negative long-run performance. Unlike Mexican fund IPOs, US fund IPOs experience negative long-run performance. Third, we find that both Mexican and US debt-backed closed-end fund IPOs significantly outperform equity-backed closed-end IPOs. In Mexico, debt-backed funds experience positive abnormal returns, compared to negative abnormal returns for Mexican equity-backed funds, US debt-backed funds, and US equity-backed funds.     

The Wealth Effect of Demutualization: Evidence From the U.S. Property-Liability and Life Insurance Industries

This study examines the wealth effect of demutualization initial public offerings (IPOs) by investigating underpricing and postconversion long‐run stock performance. Our results suggest that there is more “money left on the table” for demutualized insurers than for non‐demutualized insurers. We show that higher underpricing for demutualized firms can be explained by greater market demand, market sentiment, and the size of the offering. Further, contrary to previous research reporting an average underperformance of industrial IPOs, we show that demutualization IPOs outperform non‐IPO firms with comparable size and book‐to‐market ratios and non‐demutualized insurers. We present evidence that the outperformance in stock returns is mainly attributable to improvement in post‐demutualization operating performance and demand at the time of the IPOs. The combined results of underpricing and long‐term performance suggest that the wealth of policyholders who choose stock rather than cash or policy credits is not harmed by demutualization. Stockholders who purchase demutualized company shares either during or after the IPO have earned superior returns. Our findings are consistent with the efficiency improvement hypothesis.     

Performance of Private to Public MBOs: The Role of Venture Capital

Abstract:   Using a unique dataset, we examine financial performance, and venture capital involvement in 167 MBOs exiting through IPOs (MBO‐IPOs) on the London Stock Exchange, during the period 1964 –1997. VC backed MBOs seem to be more underpriced than MBOs without venture capital backing, based on average value‐weighted returns. MBOs backed by highly reputable VCs tend to be older companies, and exit earlier than MBOs backed by less reputable VCs. The results contradict 'certification' and 'grandstanding' hypotheses supported by US data ( Megginson and Weiss, 1991 ; and Gompers, 1996 , respectively). We found no evidence of either significant underperformance, or that VC backed MBOs perform better than their non‐VC backed counterparts in the long run. However, MBOs backed by highly reputable venture capital firms seem to be better long‐term investments as compared to those backed by less prestigious venture capitalist firms. The results remain robust after using different methods to measure performance, and after controlling for sample selectivity bias.     

Private Equity and Portfolio Companies: Lessons from the Global Financial Crisis

Critics of private equity have warned that the high leverage often used in PE‐backed companies could contribute to the fragility of the financial system during economic crises. The proliferation of poorly structured transactions during booms could increase the vulnerability of the economy to downturns. The alternative hypothesis is that PE, with its operating capabilities, expertise in financial restructuring, and massive capital raised but not invested (“dry powder”), could increase the resilience of PE‐backed companies. In their study of PE‐backed buyouts in the U.K.—which requires and thereby makes accessible more information about private companies than, say, in the U.S.—the authors report finding that, during the 2008 global financial crisis, PE‐backed companies decreased their overall investments significantly less than comparable, non‐PE firms. Moreover, such PE‐backed firms also experienced greater equity and debt inflows, higher asset growth, and increased market share. These effects were especially notable among smaller, riskier PE‐backed firms with less access to capital, and also for those firms backed by PE firms with more dry powder at the crisis onset. In a survey of the partners and staff of some 750 PE firms, the authors also present compelling evidence that PEs firms play active financial and operating roles in preserving or restoring the profitability and value of their portfolio companies.     

Europe's Second Markets for Small Companies

European stock exchanges have repeatedly opened second markets to list small companies. We explain the motivation for the creation of these second markets, and the reasons why many of them have failed. We find that the average long‐run performance of initial public offerings (IPOs) on second markets is dramatically worse than for main market IPOs. However, the second markets have provided firms with the opportunity to raise funds at the IPO and in follow‐on offerings. The relative success of London's AIM, which is an exchange‐regulated market with minimal regulations, has led other European stock exchanges to establish similar non‐EU regulated second markets. Most of the IPOs on these exchange‐regulated markets are offered exclusively to institutional investors, and are equivalent to private placements. These IPOs, which frequently raise only a few million euros, rarely develop liquid trading.     

Biomarker of Quality? Venture‐backed Biotech IPOs and Insider Participation

Corporate financial managers of biotech firms need long‐term financing to reach key milestones, and that requires a long‐ term capital structure. They must balance a mix of investors with different objectives and different investment horizons that includes traditional venture capitalists and also hedge funds and mutual funds. This study helps practitioners understand the complex role of exit decisions, as venture capitalists seek better exit strategies and performance. IPOs are financing but not “exit” moves. In addition to certifying firm value, insider purchasing of shares in the IPO offering has two major consequences. First, venture capitalists reallocate large sums of capital from early‐stage to late‐stage deals that are expected to have lower risk (but also lower expected return) and shorter time to exit. Second, the speed at which VCs exit after the IPO depends on the firm ownership structure after the IPO and the stock liquidity. Going public with a significant participation by venture capitalists will probably increase the post‐IPO ownership and decrease the free float of the stock, implying a delay of the exit and the realization of the capital gains from the investments. Although this study has focused exclusively on the biotechnology industry, insider participation is not unique to it. Biotech's venture brethren in the software and technology industries also have insider participation in IPOs. During 2003–2015, approximately 41 venture‐backed firms outside of the biotechnology sector had insider participation.     

The Pricing of Equity Carve-Outs

This article examines the pricing of stock for 251 equity carve‐outs during the 1986–1995 period. We document a mean initial‐day return of 5.83% and a mean one‐week return of 5.43%. Among carve‐outs, the initial underpricing is lower for issues represented by high prestige investment bankers and those that have a lower offer price. In comparison with 251 initial public offering (IPO) firms matched by size and book‐to‐market ratio of equity, carveouts exhibit significantly lower initial‐day returns, but their buy‐and‐hold returns for sixmonth and one‐year periods are not significantly different from IPOs. The IPO firms have a three‐year return of 28.82% which is significantly higher than the 21.07% return for the carve‐out firms.     

Long‐term Performance of Greek IPOs

We analyse the long‐run performance of 254 Greek IPOs that were listed during the period 1994–2002, computing buy‐and‐hold abnormal returns (BHAR) and cumulative abnormal returns (CAR) over 36 months of secondary market performance. The empirical results differ from international evidence and reveal long‐term overperformance that continues for a substantial interval after listing. Measuring these returns in calendar time, we find statistical significance with several of the benchmarks employed. We also find that long‐term overperformance is a feature of the mass of IPOs conducted during a pronounced IPO wave. Cross‐sectional regressions of long‐run performance disclose several significant factors. The study demonstrates that although Greek IPOs overperform the market for a longer period, underperformance eventually emerges, in line with much international evidence. Our interpretation is that the persistence of overperformance over a significant interval is due to excessive supply of issues during the ‘hot IPO period’. Results associated with pricing during the ‘hot IPO period’ indicate positive short‐ (1‐year), medium‐ (2‐year) and negative long‐term (3‐year) performance.     

Corporate governance, insider ownership and operating performance of Australian initial public offerings

We examine ownership structures and corporate governance attributes of 313 Australian initial public offerings (IPOs) between 1976 and 1993 and their relation with up to 5 years of post‐listing operating performance, adjusted for similar (non‐IPO) firms. Consistent with prior share price‐based evidence, we find that the operating performance of Australian IPOs typically deteriorates over the first 4 post‐listing years. Any evidence of a positive association between insider ownership and firm performance is confined to the fourth and fifth years after the IPO. Evidence of a positive relation between institutional ownership and performance is restricted to the latter part of our 5‐year post‐listing window. Board composition (i.e. outsider versus insider control) is not associated with operating performance, although there is some evidence that independent board leadership is associated with better operating performance.     

Irrevocable Commitments,Going Private and Private Equity

This paper adds to growing interest in public to private buy‐outs and mechanisms to ensure bid success. Using a unique, hand‐collected dataset of 155 public to private buy‐outs we provide one of the first examinations of the determinants of irrevocable commitments. Irrevocable commitments involve undertakings given by existing shareholders to agree to sell their shares to the bidder before the bid to take the company private is announced. We find that, for management buy‐outs, the level of irrevocable commitments is increased by the bid premium, the reputation of the private equity backer and board shareholdings. The level of irrevocable commitments is reduced by rumours of a takeover bid and bid value. We therefore find evidence that management and private equity firms' activity prior to the bid's announcement can have an important impact on the process of going private.     

Private equity portfolio company performance during the global recession

We assess the recent economic and financial performance of U.K. private equity (PE) backed buyouts. Our empirical evidence, which is based on thousands of transactions, reveals that PE-backed buyouts achieved superior economic and financial performance in the period before and during the recent global recession, relative to comparable firms that did not experience such transactions. Our regression results imply positive differentials of 5–15% in productivity and approximately 3–5% in profitability for buyout firms, relative to non-buyout firms. Another key finding is that revenue and employment growth for PE- backed firms were positive during the sample period.     

A Comparison of Underwriting Costs of Initial Public Offerings by Investment and Commercial Banks

We examine differences in underwriting costs between commercial‐bank‐Section‐20‐underwritten initial public offerings (IPOs) and investment‐bank‐underwritten IPOs. Our results suggest that total underwriting costs (gross margin plus underpricing) are significantly lower for commercial bank IPOs. The lower cost for commercial bank IPOs is attributable to less severe underpricing for these issues. Gross margin costs generally do not differ between commercial bank and investment bank issues. Furthermore, we find that the long‐run stock price performance for commercial bank issues is superior to that of investment bank issues. That is, lower underpricing for Section 20 issues may not be a short‐run phenomenon. Rather, there appears to be a favorable outcome for investors in the long run for holding IPOs underwritten by Section 20 commercial banks. These results are inconsistent with the conflict of interest hypothesis often associated with merging commercial and investment bank functions in one organization.     

The Performance of Private Equity‐Backed IPOs

My paper examines the aftermarket performance of private equity‐backed initial public offerings (IPOs) and compares it to the performances of equivalent samples of venture capital‐backed and other nonsponsored issues on the London Stock Exchange during the period 1992‐2005. The evidence suggests marked differences across the three groups in terms of market size, industry classification, first‐day returns, and key operating characteristics at the time of flotation. In fact, private equity‐backed IPOs are larger firms in terms of sales and assets, more profitable, and relatively modest first‐day returns. In the three years following the public listing, they display better operating and market performance when compared to other IPOs and the market as a whole.     

The Operating Performance of Newly Privatised Firms in Central European Transition Economies

This study examines the operating performance of privatised firms in three Central European Transition Economies between 1990 and 1998. Overall, we find no evidence of a significant improvement in operating performance for the first six years after privatisation. Contrary to the increasing empirical evidence for non‐transition economies, our privatised firms experience no improvement in profitability, capital investments, efficiency, and output, a significant drop in employment, as well as a significant increase in leverage. The most important determinants of the performance changes following privatisation were country effects, timing of the privatisation sales, industry classification, and state ownership after privatisation. Our findings are consistent with the empirical evidence that the transition process proved to be more difficult than expected and that, although necessary, privatisations do not necessarily produce equal efficiency gains in transition economies ( Megginson, 2005 ; Havrylyshyn and McGettigan, 1999 ).     

IPO Pricing,Block Sales,and Long‐Term Performance

Block sales following IPOs are related to the IPOs' value relative to an estimate of intrinsic value, opening‐trade return, and IPO size. Overvalued IPOs experience more block sales than undervalued IPOs. IPOs with high block sales outperform IPOs with low block sales from 20 days after IPO through lockup expiration; however, IPOs with high block sales underperform IPOs with low block sales from lockup expiration through the third year after the IPO. The results indicate that block traders are advantaged relative to other traders; whether the advantage is based on superior information or superior valuation capabilities is unknown.