Exit strategies by private equity firms in the nordic region : An empirical assessment of IPO performance across private equity-backed- and non-backed firms and a qualitative assessment of exit strategies by private equity firms

Abstract

This study investigates underpricing of private equity (PE)- backed IPOs and the various exit routes available to PE firms. First, we examine whether IPO underpricing differ across PEbacked- and non-backed (NB) firms employing different empirical techniques. Our final dataset consists of 60 PE-backed- and 155 NB IPOs listed on Nordic exchanges (2005-2014). Second, we investigate exit strategies- and (potential) interrelation between entry and exit by PE firms, through interviews with partners from renowned PE firms (Altor, EQT, FSN Capital, Herkules Capital and HitechVision). We found PE-backed IPOs to be significantly less underpriced than NB IPOs, consistent with prior research. Interview respondents attribute our result to i) PE-sponsors may be superior at timing- and promoting IPOs and/or ii) PE-sponsors may strive to maximise the offer price to boost proceeds. Consensus in prior research attributes our finding to PE-sponsors being able to certify true firm value in IPOs. Moreover, we document significantly lower underpricing of venture capital - compared to buyout-backed IPOs. Finally, we find that underpricing increases with the aftermarket volatility (and thereby the risk) related to an issue, independent of PE-backing. Respondents from interviews listed price, transaction risk and divestment efficiency as the most important factors determining choice of exit route. The majority expressed strong preference for trade sales (ceteris paribus) as it enables efficient divestment and commonly provides superior pricing. In contrast, IPO appeared to represent the least favourable exit channel due to inefficient divestment and extensive regulation. However, the respondents underlined that IPOs may represent the preferred exit for particularly successful (and large) portfolio firms, as it “enables participation in future value creation while at the same time taking some “risk off the table”” - Respondent 4. Finally, we find that exit opportunities related to an investment case may have decisive implications for whether PE-sponsors enter or not.