Are Private Equity Backed Initial Public Offerings Any Different? Timing, Information Asymmetry and Post-IPO Survival

Abstract

The IPO market provides an interesting setting for examining the behavior of private equity (PE) sponsors due to the higher information asymmetries it involves compared to other exit strategies. Contrary to the hypothesis that PE sponsors are more professional than other insiders in using the IPO market to expropriate investors, I do not find significant differences between PE-backed IPOs and comparable IPOs of stand-alone companies. PE sponsors do not target their IPOs in “hot” periods any more than would managers of stand-alone companies, nor are they more prone to rush their companies into premature IPOs. They also do not inflate valuations and are not more likely to seek to sell firms with poor prospects (“unload lemons”) onto the market. Studying the post-IPO period, I find that IPOs that take place in hot periods are significantly more likely to delist due to default, but this result is not any stronger for PE-backed IPOs. Throughout paper, I make a distinction between buyout-backed and venture-backed IPOs, uncovering some interesting differences but also similarities of the two. The paper provides evidence to contradict media criticism of PE sponsors. It can also have important policy implications regarding the PE regulatory framework. Finally, this work comes as a timely contribution given the increasing importance of PE in the IPO market.