Value creation by private equity-backed IPOs. Underpricing and long-term performance in Germany

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.

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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.