Underpricing and Long-Term Performance of Private Equity-Backed IPOs in the U.S. : An empirical study of the underpricing and long-term performance of private equity- and venture capital-backed IPOs in the U.S. stock market from 2000-2022

Abstract

This thesis aims to investigate the underpricing and long-term performance of private equity-backed initial public offerings (IPOs) relative to non-sponsored IPOs. We use a sample of 2.509 IPOs on the New York Stock Exchange and Nasdaq over a time period from January 2000 to December 2022. In our study, we examine the underpricing across time periods, sizes, industries, and exchanges for the different sponsor types. Furthermore, we look at factors that may explain underpricing using a cross-sectional regression model. The empirical analysis finds no support for the claim that private equity (PE)- and venture capital (VC)-backed IPOs exhibit less underpricing than their non-sponsored counterparts, on average. Our analysis only revealed one statistically significant finding: larger market capitalizations appear to be associated with increased underpricing. We hypothesize that the tendency for more aggressive underpricing in larger IPOs may be a strategy utilized to offset the higher costs associated with information acquisitions, which are inherently greater in larger offerings. Furthermore, we investigate the long-term performance using cumulative abnormal returns (CAR), buy-and-hold returns (BHR), and a cross-sectional regression model. Benchmarked against the Nasdaq and NYSE composites, we find some statistical evidence supporting our hypothesis that private equity-backed IPOs outperform non-sponsored IPOs. The regressions indicate that PE-backed IPOs demonstrate abnormal positive returns on a sixmonth basis, VC-backed IPOs at the three- and five-year marks, while non-sponsored ones exhibit significant underperformance on a three- and five-year basis. Moreover, we find that a listing in a hot market has a statistically negative effect on long-term performance, across all time horizons and with all types of sponsorships. Our findings indicate a higher proportion of PE-backed IPOs during hot market periods, and that the proportion of hot market IPOs increases with market capitalization. These larger PE-backed IPOs typically perform worse in the long term, suggesting that PE-firms may be exploiting hot markets, particularly during full exits. This aligns with the windows-of-opportunity theory.