This paper examines value creation by private equity-backed IPOs. It gives detailed insights on a mostly US-based research topic analyzing 134 German IPOs from 2002 to 2018, of which 49 were identified as PE-backed, and contributes empirical evidence on the discussion of private equity value creation.
The empirical results provide detailed information on whether private equity financing can be a suitable financing source for companies by comparing and analyzing the performance differences between IPOs of companies with and without private equity sponsors. Furthermore, the paper provides empirical evidence on the IPO phenomena of underpricing and negative long-term performance for Germany, differentiating itself from former studies in terms of a broader time horizon and an extensive return calculation methodology.
Since the locust swarms debate initiated by SPD politician Franz Müntefering, private equity investors have had to struggle with an extremely bad reputation in Germany. Unpopular measures such as company divestures or mass redundancies to achieve set turnover and return targets reinforce the negative image of financial investors. Accordingly, investor and business magnate Warren Buffet criticized that businesses under private equity control become a piece of merchandise.
Nonetheless, the private equity industry continues to boom, reaching new records in terms of global business volume and transactions. Under these circumstances and new evolving discussions, it is essential to take a close look at the business model of private equity firms and to analyze potential short- and long-term value creation in their portfolio companies.
Table of Contents
1 Introduction
1.1 Growing importance of private equity
1.2 Problem statement and objectives
1.3 Delimitations
1.4 Structure
2 Private equity business model
2.1 Definition of terms
2.2 Value chain of a private equity process
2.3 IPO as an exit strategy
2.4 Private equity landscape in Germany
3 Theoretical background of IPO phenomena
3.1 Underpricing
3.1.1 Empirical findings on underpricing
3.1.2 Explanatory approaches for underpricing
3.2 Long-term aftermarket performance
3.2.1 Empirical findings on aftermarket performance
3.2.2 Explanatory approaches for negative aftermarket performance
4 Empirical strategy
4.1 Data overview
4.1.1 Data collection
4.1.2 Sample selection
4.1.3 Sample characteristics
4.2 Methodology
4.2.1 Underpricing methodology
4.2.2 Long-term performance methodology
4.3 Results and analysis
4.3.1 Underpricing results
4.3.2 Long-term performance results
5 Conclusion
Research Objectives and Key Topics
This thesis examines the role of private equity (PE) firms in the value creation of portfolio companies by analyzing two IPO phenomena: underpricing and long-term aftermarket performance in the German market. The primary research question is whether German PE-backed IPOs demonstrate different performance patterns compared to non-sponsor-backed IPOs, thereby providing empirical evidence on the efficacy of PE value creation.
- Comparison of performance between PE-backed and non-sponsor-backed IPOs.
- Analysis of IPO underpricing levels in Germany between 2002 and 2018.
- Investigation of long-term aftermarket stock performance over a three-year horizon.
- Application of regression analyses to identify factors influencing underpricing.
- Evaluation of theoretical models, including certification, signaling, and behavioral finance.
Auszug aus dem Buch
1.1 Growing importance of private equity
Ever since the biblical comparison of locust swarms with private equity (PE) by the German politician Franz Müntefering, which has sparked a national debate that continues to this day, PE must deal with a bad reputation in Germany. The locust debate has dominated the public opinion on PE in the past, and their business model is still widely discussed. They are criticized as short-term investors, neither able nor willing to create long-term value in their companies. Since these PE firms are mostly pure financial investors, their success often depends only on the proceeds from the sale of the corresponding portfolio companies. The sustainable development of the company in question is of secondary importance. They are therefore excoriated for taking unpopular measures such as breaking up of companies or mass redundancies to achieve the sales and profit targets set. Accordingly, investor and business magnate Warren Buffet criticized that businesses under PE control become “a piece of merchandise”.
The relevance of the topic becomes even more apparent when one considers the latest trend within the PE industry. After a slowdown of the PE business following the financial crisis in 2008 and 2009, it has reached a new record in global deal volume of $1.4 trillion with more than 9,000 transactions in 2018. PE firm Apollo Global Management raised gigantic $24.6 billion of capital in 2017 for the largest fund in PE history. European PE firms, however, are in no way inferior with new mega funds in the pipeline as CVC Capital Partners targets to raise Europe’s largest PE fund at more than €18 billion for next year. Under these circumstances and new evolving discussions, it is essential to deal with the PE business model and take a look into potential short- and long-term value creation of PE firms in their portfolio companies.
Summary of Chapters
1 Introduction: Provides the motivation for the study, defines the research problem regarding PE value creation, outlines the objectives, and details the thesis structure.
2 Private equity business model: Describes the PE business model, its value chain from deal flow to exit, and provides an overview of the PE landscape in Germany.
3 Theoretical background of IPO phenomena: Reviews existing literature on IPO underpricing and long-term performance, discussing various explanatory hypotheses.
4 Empirical strategy: Details the data collection, sample selection process, methodology for calculating returns, and presents the regression results and analysis.
5 Conclusion: Summarizes the key findings of the empirical analysis, discusses limitations, and suggests topics for future research.
Keywords
Private Equity, Initial Public Offering, IPO, Underpricing, Long-term performance, Germany, Value creation, Buy-and-hold abnormal return, Cumulative abnormal return, Signaling hypothesis, Certification theory, Financial sponsor, Stock market, Capital market, Regression analysis.
Frequently Asked Questions
What is the core focus of this bachelor thesis?
The thesis investigates the impact of private equity backing on the performance of companies at the time of their Initial Public Offering (IPO) in Germany, specifically focusing on the phenomena of underpricing and long-term aftermarket returns.
What are the central thematic areas covered in the work?
The work covers the private equity business model, IPO pricing theories (such as adverse selection and signaling), methodologies for calculating stock market returns, and empirical performance analysis of both PE-backed and non-sponsor-backed companies.
What is the primary research question?
The core research question asks how German PE-backed IPOs differ from non-sponsor-backed IPOs in terms of initial underpricing and long-term performance, and whether these results imply that PE firms create more value.
Which scientific methods are utilized for the analysis?
The thesis uses quantitative empirical research methods, including raw and market-adjusted initial return calculations, regression analysis to test independent variables, and non-parametric tests like the Wilcoxon signed-rank and Mann-Whitney U-tests.
What topics are addressed in the main body of the thesis?
The main body systematically examines the PE business model, explains the two IPO anomalies through existing theoretical frameworks, details the empirical strategy and data selection, and presents the results of the performance calculations.
Which keywords best characterize this academic work?
Key terms include Private Equity, IPO, Underpricing, Long-term performance, Signaling hypothesis, Certification theory, and German stock market.
How is "underpricing" defined in the context of this study?
Underpricing is defined as the situation where the closing stock price on the first trading day is significantly higher than the initial issue price, representing a waiver of potential proceeds for the issuer.
What conclusion does the author reach regarding the certification role of PE firms?
While the descriptive statistics show differences, the regression analyses find no statistically significant evidence that PE-backed IPOs are consistently less underpriced than their non-sponsor counterparts, leading to the rejection of the certification hypothesis for the analyzed sample.
- Quote paper
- Matthias Hetzenecker (Author), 2019, Value creation by private equity-backed IPOs. Underpricing and long-term performance in Germany, Munich, GRIN Verlag, https://www.grin.com/document/958269
