June 22, 2009

Study: Private Equity-Backed IPOs Not Shareholder Friendly

Recently, The Corporate Library and the IRRC Institute teamed up to study whether private equity buyout firms institute more shareholder-friendly corporate governance structures in their IPO companies than non PE-backed IPO companies. The study – “What Is the Impact of Private Equity Buyout Fund Ownership on IPO Companies’ Corporate Governance?” – examined the ownership, board characteristics, takeover defenses and compensation policies of 90 companies that went public during 2004-06 (48 were PE-backed; 42 were not). [By the way, we recently blogged on about governance trends for all types of IPOs.]

The study found that PE-backed IPOs do not have superior corporate governance procedures as compared to non PE-backed IPOs. On the contrary, the study found that the PE-backed IPOs exhibit – in a higher proportion than average – a number of features that have the potential to benefit executives at the expense of shareholders, including takeover defenses and boards whose independence may be compromised.

But before you decide to stop investing in PE-backed IPOs, consider that this study did not review any performance metrics of these companies and, as pointed out in this DealBook blog, PE firms are themselves large shareholders after the IPO and are therefore incentivized to ensure the long-term success of the company. For more on the study, see Larry Ribstein’s Ideoblog and The Corporate Library’s Blog.