The Exit of Private Equity after IPOs: Evidence from Secondary Equity Offerings

In this paper I analyze the effects of public secondary equity offerings by private equity sponsors at portfolio firms that have become publicly traded entities via initial public offerings. Such secondary offerings were rare prior to 2000, but in recent years have become an increasingly common form of financial activity. I analyze a large sample of these offerings within the framework of corporate finance theory, taking into account that they allow a private equity sponsor to sell off a large, controlling block of common stock to dispersed investors. I draw conclusions about the effects of these secondary offerings on shareholder wealth and the implications for the firms subsequent operating performance (profitability). I find that there is a significant decline in portfolio firm value at announcements of secondary offerings by private equity, and that such offerings are not a precursor of future underperformance. Instead, I find that there is greater share liquidity and higher industry-adjusted performance after these secondary offerings. Moreover, the proportion of portfolio firms that subsequently become bankrupt is significantly less than that of benchmark firms. I find that there is no significant effect of the size of the secondary offering on the magnitude of the change in share price, but the reputation of private equity sponsors has a significant effect on the share price reaction. Overall, the evidence from these secondary equity offerings suggests that private equity successfully prepares portfolio firms for exit from private equity control, implying that the market can expect that the stand-alone public firm will operate effectively after the change in ownership structure associated with the exit of private equity.