Long-term Value Creation of Private Equity Firms

Abstract: The long-term value creation of Private Equity firms has been subject to widespread debate, with sponsors experiencing increased public scrutiny. Using a sample of 967 IPOs, this paper examines the aftermarket performance of PE-backed IPOs in the European Union between 2000 and 2010. Comparing the one-, two- and three-year performance of PE-backed and non-backed IPOs, we aim to examine if the former outperform the latter, possibly indicating potential value creation inherent in PE ownership. Furthermore, we aim to study if certain firm characteristics drive stock performance, and whether these tend to be more prevalent amongst PE-backed firms. The evidence suggest that PE-backed IPOs significantly outperform their non-backed counterparts throughout the three years following flotation, whilst also exhibiting superior initial size, EBITDA-margins and OCF ratios. All these characteristics, finally, are found to be positively correlated to aftermarket performance, partially explaining the superior returns experienced by PE-backed firms.