Exit Strategies by Private Equity Firms in the Nordic Region
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Norwegian School of Economics Bergen, Fall 2015 Exit Strategies by Private Equity Firms in the Nordic Region An empirical assessment of IPO performance across private equity-backed- and non-backed firms and a qualitative assessment of exit strategies by private equity firms Nini Cornelia Jebsen Anker and Julie Stärk-Johansen Supervisor: Tommy Stamland Master thesis in Financial Economics NORWEGIAN SCHOOL OF ECONOMICS This thesis was written as a part of the Master of Science in Economics and Business Administration at NHH. Please note that neither the institution nor the examiners are responsible − through the approval of this thesis − for the theories and methods used, or results and conclusions drawn in this work. 2 Abstract This study investigates underpricing of private equity (PE)- backed IPOs and the various exit routes available to PE firms. First, we examine whether IPO underpricing differ across PE- backed- and non-backed (NB) firms employing different empirical techniques. Our final dataset consists of 60 PE-backed- and 155 NB IPOs listed on Nordic exchanges (2005-2014). Second, we investigate exit strategies- and (potential) interrelation between entry and exit by PE firms, through interviews with partners from renowned PE firms (Altor, EQT, FSN Capital, Herkules Capital and HitechVision). We found PE-backed IPOs to be significantly less underpriced than NB IPOs, consistent with prior research. Interview respondents attribute our result to i) PE-sponsors may be superior at timing- and promoting IPOs and/or ii) PE-sponsors may strive to maximise the offer price to boost proceeds. Consensus in prior research attributes our finding to PE-sponsors being able to certify true firm value in IPOs. Moreover, we document significantly lower underpricing of venture capital - compared to buyout-backed IPOs. Finally, we find that underpricing increases with the aftermarket volatility (and thereby the risk) related to an issue, independent of PE-backing. Respondents from interviews listed price, transaction risk and divestment efficiency as the most important factors determining choice of exit route. The majority expressed strong preference for trade sales (ceteris paribus) as it enables efficient divestment and commonly provides superior pricing. In contrast, IPO appeared to represent the least favourable exit channel due to inefficient divestment and extensive regulation. However, the respondents underlined that IPOs may represent the preferred exit for particularly successful (and large) portfolio firms, as it “enables participation in future value creation while at the same time taking some “risk off the table”” - Respondent 4. Finally, we find that exit opportunities related to an investment case may have decisive implications for whether PE-sponsors enter or not. 3 Preface This thesis represents the completion of our Master of Science in Financial Economics at the Norwegian School of Economics (NHH). Writing our thesis has been challenging and sometimes frustrating, but above all it has been an entertaining, educational and rewarding journey. Our interest in corporate finance and IPO performance in particular has mainly been stimulated through the inspiring finance courses offered at NHH in addition to first-hand work experience with investment banks. Thus, we were certain that IPO performance would constitute the fundamental theme of our thesis. Furthermore, we both find private equity (PE) interesting as a fundamental understanding of the asset class requires insights from all aspects of our economic education; micro- and macroeconomics, finance, strategy, business administration and -management. Moreover, our interest in PE increased considerably when discovering the outstanding growth it has experienced in the Nordic region (both in terms of fundraising and investments) over the last decade. This makes our study of the Nordic PE industry as topical as ever. In total, we consider the combination of IPO performance and PE as the perfect theme for our study, aligning our interests, work experience and educational background. In addition, we would like to express gratitude to those who have contributed, encouraged and motivated us through the writing process. Their inputs were indispensable for the conclusion of this study. First, we thank our supervisor, Tommy Stamland, for giving us precise, valuable and highly useful feedback during the entire writing process. We are certain his advice enhanced the quality of our analysis. Second, Ulf Persson (Nordic OMX Nasdaq), Truls Evensen (Oslo Børs), Stefan Slemdal (Carnegie Investment Bank) and Dr. Carstein Bienz (Director at NHH’s Argentum Centre for PE) deserve gratitude for providing us with essential data on Nordic IPOs and PE transactions. Third, we would like to thank Jostein Lillestøl (NHH) for useful guidance regarding econometric techniques. Finally, a special appreciation is given to the interview respondents who gave us valuable insights about various aspects of the PE industry and life cycle; Hugo Maurstad (Altor), Gert W. Munthe (Herkules), Anders Misund (EQT), Pål Reed (HitechVision), Ulrik Smith (FSN Capital) and Jan Kjærvik (A.P. Møller Mærsk). Their first-hand experience- and thoughts regarding PE served as an interesting supplement to our empirical analysis. 4 Contents Abstract ................................................................................................................................................... 2 Preface ..................................................................................................................................................... 3 1 Introduction ................................................................................................................................... 10 Background ........................................................................................................................... 10 Research questions ................................................................................................................ 10 Structure ................................................................................................................................ 11 2 Private equity: Structure, history and the Nordic market .............................................................. 12 Structure and organization ..................................................................................................... 12 Life cycle of PE funds ........................................................................................................... 14 Fundraising .................................................................................................................... 14 Investment ..................................................................................................................... 15 Management .................................................................................................................. 15 Divestment (exit) ........................................................................................................... 15 History ................................................................................................................................... 16 The Nordic PE industry ......................................................................................................... 17 3 Underpricing: Theory and literature review .................................................................................. 20 Underpricing of IPOs ............................................................................................................ 21 What explains IPO underpricing? ......................................................................................... 22 Asymmetric information ............................................................................................... 22 Cross-sectional variation of IPO underpricing ...................................................................... 23 Certification hypothesis: Underwriter reputation .......................................................... 23 Ex-ante uncertainty hypothesis ...................................................................................... 24 “Hot” issue markets ....................................................................................................... 24 Participation rates .......................................................................................................... 25 Underpricing of PE-backed IPOs .......................................................................................... 25 Ex-ante uncertainty hypothesis ...................................................................................... 27 Certification by PE-sponsors ......................................................................................... 27 Sponsor-backed IPOs associated with “prestigious” underwriters ................................ 28 Participation rates: VC- and BO-backed IPOs .............................................................. 28 4 Divestments by PE-sponsors: Theory and literature review ......................................................... 29 Why do PE-sponsors take their portfolio firms public? ........................................................ 29 The mechanics of IPOs .................................................................................................. 29 Reasons to go public (in general) .................................................................................. 30 Why PE firms take their