Post IPO performance of private equity backed entities: empirical evidence of the Nordic market

Abstract

Initial public offering of private equity backed entities has been a remarkably popular topic among financial scholars. The allure of growth potential and sophisticated corporate structures has gain private equity backed entities a special place in initial public offering theory. Underpricing and underperformance have been central topics on this research. Financial literature has proposed information asymmetries as the central theory explaining these phenomena. Empirical evidence has shown certification as a mechanism to ameliorate information asymmetry. Further research has confirmed the certification power of private equity sponsors by reducing the underpricing and underperformance of sponsored entities. However, there is evidence that suggests different levels of certification among two different classes of private equity backed firms, buyouts and venture capital firms. Based on information asymmetry theory and value adding mechanisms models, we contend that the certification power of buyout and venture capital firms will differ ultimately reflecting on different degrees of underpricing and underperformance. Using standard methodologies we test the different levels of underpricing and underperformance among buyout and venture capital backed firms. We construct a Nordic sample of private equity sponsored entities that became public within a time horizon of ten years between 1998 and 2008. The results show that for the first day of trading venture capital backed firms are overpriced by 1,1%, while buyouts backed firms show underpricing of 8,4%. Concordantly, in the long run venture capital backed firms tend to over perform buyout sponsored entities by an average of 1,3% per month. While underperformance results are in line with prior empirical evidence the underpricing findings seem to be contradictive. Our results pose additional questions regarding the certifying ability of private equity sponsors in addition to the specific characteristic of the Nordic Markets.