Performances of Brazilian IPOs backed by private equity

Abstract

Private equity funds invest actively. According to the literature, their portfolio companies maintain superior transparency standards and corporate governance practices, such as keeping independent board members and hiring international auditing firms. Private equity funds require either a controlling interest or restrictive clauses to limit managerial action and usually appoint the executives of their portfolio companies. Brazil faced an IPO wave that started in 2004 and peaked in 2007. Many private equity deals went public. The aim of this paper is to investigate whether private equity backed IPOs performed better in the long run (1 year) than non-private equity backed IPOs. We examine the one-year cumulative abnormal returns (CAR) of 108 Brazilian IPOs from January 2004 to June 2008, including 42 PE backed IPOs. We split the sample into two calendar periods: 2004–2006 and 2007–2008, and we find that PE backed IPOs have higher average CAR than non-PE backed IPOs in both periods. However, PE backed IPOs issued during 2007–2008 were not immune to the 2008 world economic crisis and investments in the smallest companies are the ones most severely affected. Regression analysis confirms that PE investment has a positive relation to CAR, but only for IPOs issued in 2004–2006.