Private Equity-Backed Initial Public Offerings - Share Allocation and Secondary Distribution Overhang

Abstract: We examine short-run underpricing and long-run performance differences between private equity-backed and non-private equity-backed initial public offerings by evaluating 101 transactions between 2000 and 2014 in the Nordic countries (Sweden, Denmark, Norway and Finland), whereby 45 offerings were private equity-backed. Initially, we explore the mere existence of short-run underpricing and long-run underperformance for all initial public offerings. Subsequently, we investigate the actuality of any short-run underpricing and long-run performance dissimilarities between private equity-backed and non-private equity-backed offerings and explain the documented performance difference by examining how secondary distribution overhang affects the long-run performance of private equity-backed offerings. Furthermore, we explore share allocation differences between private equity-backed and non-private equity-backed offerings. We employ shareholder return focus throughout the research, which instigates equal weighted and value weighted buy-and-hold abnormal returns with event time convention. We document that private equity-backed offerings are less underpriced than non-private equity-backed offerings and institutional investors receive higher share allocation for private equity-backed offerings. Initial public offerings exhibit long-run underperformance, whereas private equity-backed offerings demonstrate lower long-run underperformance than non-private equity-backed offerings, with positive abnormal returns over five years. Private equity-backed offerings underperform non-private equity-backed offerings before first secondary distribution and outperform non-private equity-backed offerings after the final secondary distribution, which suggests secondary distribution overhang.