Initial Returns and Long-Run Performance of Private Equity-backed IPOs in the UK: The Post-Y2K Experience

Abstract: This paper studies a sample of 257 initial public offerings (IPO) that occurred in the period from 2001 to 2011, differentiated into sub-samples of 32 venture capital-backed (VC), 55 buyout-backed (BO), and 170 non-backed (NB) share issuances undertaken on the London Stock Exchange's (LSE) Main Market and Alternative Investment Market. We separately analyze initial first-day returns, commonly referred to as underpricing, as well as long-run after-market performance using an event study setting with a horizon of 36 months. Our research identifies significant levels of underpricing in UK IPOs. Underpricing varies considerably between different IPO cycles. Moreover, periods of increased IPO activity, so called 'hot-issue' markets, exhibit higher levels of underpricing. Evidence suggests pronounced differences in long-run stock price performance between the three IPO sub-groups independent of the benchmark used to adjust returns. Underlying the analysis is an in-depth case-by-case IPO type separation, in turn based on the collection of extensive data on private equity (PE) portfolio companies' key firm and offering characteristics. As related literature has as of yet only rarely carried out sample selection with comparable elaborateness, we highlight the importance of the distinction between VC- and BO-backing and its implications for post-IPO performance analysis.