The underpricing and the performance of Nordic private equity-backed IPOs

This study examines the pricing of initial public offerings (IPOs) and the long-term performance of the IPOs on the Nordic market. Therefore, the study focuses in particular on the impact of the ownership, the pricing and long-term performance of IPOs. There are a number of reasons for a company to go public, such as acquiring equity to finance growth, to create liquidity, or to realize all or part of the owners’ current holdings. The last mentioned is a common reason for private equity (PE) companies to exit their portfolio companies. Private equity investment stands for a situation where a PE-company invests capital to the target company in return for a stake of the company. Private equity can be roughly divided into two parts. Buyout investors invest in a majority stake or buy an entire company, after which they begin to develop the company to make it more valuable, while minority investors invest in a minority stake to finance early stage growth and offer their own expertise to the growing the company and helping them to create contacts among the business world. This study examines 236 new IPOs during 2005-2016, which have been divided into private equity-backed and non-sponsored companies at the time of listing. The reason why the Nordic market is currently a very interesting market is the significant increase of private equity investments in the recent years. For this reason, this study will increase the understanding of the Nordic IPO market and the impact of private equity investors on a company’s pricing and long-term performance. The IPOs performance have been compared to the MSCI Nordic Index. The results show that new IPOs are underpriced during the first trading day, which is consistent with IPOs in other similar developed markets. There are many reasons for underpricing, such as asymmetrical information, behavioral factors and attracting new investors. The results also show evidence of higher underpricing during hot periods compared to other periods. In the long-term, buyout-backed IPOs performed significantly better on average than other companies using the BHAR method and F-test. On the other hand, venture capitalist-backed IPOs are the only group which performed poorly, leading to significant underperformance in the long-term. Furthermore, buyout- and non-sponsored IPOs outperformed compared to the benchmark index in the long-term. Similar findings of buyout-backed IPOs’ long-term success have been reported in previous studies and the same pattern applies in the Nordic level