1

Does Private Equity Investment Work as a Quality Certification for IPOs in Brazil?
Tavares, P. C. A. (Stern Stewart and Insper Institute of Education and Research)
1

Minardi, A. M. A. F. (Insper Institute of Education and Research)
2


Abstract
Brazil faced an IPO wave in the last four years, and 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 than non-private equity backed firms. We
examined the one year cumulative abnormal returns of 53 Brazilian IPOs from January 2004 to February 2007. Our results
provide evidences that PE investment works as a quality certification for IPOs in Brazil. One possible interpretation is that
Brazilian PE funds have a value creation role in the portfolio companies, preparing them better for public market.

JEL: G24, G34, G14, G15

Keywords: Initial Public Offer, Private Equity, Corporate Governance, Long run IPO performance.


1
Pedro Carvalho Araujo Tavares. Address: Rua do Rocio, 291 cj 91 So Paulo (SP) Brazil 04552-000, Phone number: 55 11 3040-0866 , 55 11
3046-4441, e-mail address: PTavares@SternStewart.com.br
2
Andrea Maria Accioly Fonseca Minardi. Address: R. Quat, 300 So Paulo (SP) Brazil 04546-042, Phone number: 55 11 4504-2417, e-mail
address: Minardi@Insper.org.br
2

I. Introduction
Brazilian financial players, regulators and legislators have adopted many measures to improve the institutional
environment in the last decade. In 2000, BOVESPA created differentiated Stock Listing Segments for Brazilian Companies
with better practices of Corporate Governance: Level I, Level II and New Market; in 2004 it was launched the New
Bankruptcy Law, much closer to Chapter 11; since 2005 Brazilian Supreme Court (STJ) recognized conflict resolution by
Arbitrage Chambers. During this period, Brazil also showed consistent improvement of Economic Indicators. A better
institutional environment and good Economic Indicators allowed Brazil to benefit from the international liquidity since
2004, and the stock market boomed. Table 1 and Figure 1 illustrate the development of stock issues in Brazil. From 2004
to 2007, BOVESPA had 145 public offers: IPOs and follow-ons, totalizing BRL 110.9 billion, compared with the period
between 2002 and 2003 when only 6 stocks were issued, totalizing BRL 6.7 billion. Primary offers accounted for only 7%
of total offers between 2002 and 2003, and more than 49% between 2004 and 2007.
Brazilian Private Equity and Venture Capital funds invested US$1.9 billions between 1999 and 2004 in different
sectors, according to Carvalho, Ribeiro and Furtado (2006). Figure 2 illustrates the PE and VC investments during this
period. The IPO window that was closed in September 2008 allowed many funds to exit through the public market, a
possibility that was practically inexistent before 2004.
Private Equity and Venture Capital funds are investment vehicles managed by General Partners. General Partners are
responsible for raising funds with the Limited Partners, selecting, investing and monitoring the portfolio companies.
Usually the General Partners invest capital in the portfolio companies by buying new shares and maintaining an equity
stake, but sometimes they employ other instruments as convertible debt, calls, puts and warrants. They usually keep their
equity stake in the portfolio companies for a limited time: five to seven years. When the General Partners liquidate their
stake in the portfolio companies they return the invested capital plus profits to the Limited Partners
As the funds have a limited life (usually ten years), PE/VC organizations have to raise new funds from time to time in
order to maintain their business. The average return of the top performing funds is much higher than the lower performing
funds (see Kaplan and Schoar (2005)), and differently than the public market, there is a significant persistence in PE/VC
performance. Therefore, PE/VC track records predict future performance, and a good reputation is essential to raise new
funds. A good performance means a rate of return significantly higher than could be obtained in the public market. In order
to achieve superior performance, General Partners need to have the ability to select promising companies, talented
entrepreneurs and managers to develop or grow business.
3

General Partners appoint main executive positions and board members, pressure portfolio companies to achieve the
business plan growth rates and performance goals, force the company to improve operations and to be efficient. Usually
General Partners align their interests with management interests through performance reward payments, as bonuses, stocks
distributions and stock options. PE/VC investments also facilitate portfolio companies access to Commercial and
Investment Banks and to follow-on rounds investors.
Our objective is to test whether PE backed IPOs perform better than non PE backed IPOs in Brazil. We analyzed the
one-year cumulative abnormal returns (CAR) of 53 IPOs and controlled for offer size, market capitalization, free float,
percentage of primary offers, Book-to-Market ratio, if the offer was BDR (Brazilian Depositary Receipt, implying a lower
property rights protection) and financial leverage. Our results support that PE backed IPOs have significantly higher CARs
than the non PE backed IPOs, and that the presence of Private Equity is positively and significantly related to CAR.
This is a very relevant issue in an emerging market like Brazil. According to Regalado (2008), two thirds of the initial
private offers that occurred in the last 12 months are traded below their IPO prices. As the IPO wave is reasonable recent in
the country, many companies that went public were not prepared to deal with the disclosure and corporate governance
practices required by CVM (the Brazilian Security Exchange Comission) and BOVESPA (Brazilian Stock Exchange). The
presence of Private Equity prior to the IPO can differentiate between the better prepared to the worst prepared ones.
The remaining of the paper is divided as follows. Section II contains a Literature Review, Section III explains data
base and methodological issues, Section IV presents and discusses the results and Section V concludes the paper.

II. Literature Review
Much has been discussed in the Financial Literature about IPO performance. Ritter (1991) analyses the equal weighted
average return in the first trading day and the equal weighted 3-years buy and hold strategy return of 1.526 IPOs between
1975 and 1984. The first trading day average return of the sample is significantly high, and it is called underpricing. The
higher the uncertainty, the higher is the underpricing. The 3-years buy and hold strategys average return is 34.7%. It is
significantly below the buy and hold return of a control sample (61.86%). The control sample consisted of comparable
firms traded in the stock market, selected to pair IPO companies according to size and industry type. Ritter found that the
worst IPO performance is concentrated in younger and growing companies.
4

Loughran and Ritter (1995) found similar results for the 8,455 IPOs or SEOs (Seasoned Equity Offerings) that
occurred between 1970 e 1990. They compared the IPOs and SEOs five-years buy and hold strategy return to a comparable
sample of public stocks. They found that the IPO and SEO sample underperformed when compared to the controlled
sample
Aggarwal, Leal and Hernandez (1993) analyzed IPOs performance in the 80s in the Brazilian, Chilean and Mexican
markets. The 62 Brazilian IPOs had an average underpricing of 78.5%, but the 3 years buy and hold strategy showed an
average return of -47%. Similar results were found in Chile and Mexico. In our paper, the offer price was defined by book
building, an innovation that occurred in the 2000s, and that decreases IPOs underpricing.
Brav and Gompers (1997) and Brav, Geczy and Gompers (2000) analyzed 4,341 and 4,526 IPOs and SEO that
occurred between the 70s and 90s. They found that Venture Capital Backed IPOs (companies that have VC as one of the
significant shareholders) performed much better than non-VC Backed IPOs. Usually non-VC Backed IPOs underperform
the market, but the underperformance measure is reduced a lot if one considers the market weighted average performance
instead of the equal weighted average. The underperformance is particular high in the smallest companies and in the
companies that have lower book to market ratios. One possible explanation for this, according to the authors, is that
smallest companies are more subject to investment sentiment than larger companies.
According to Fama (1998), there is a concentration of IPOs in small and growing companies, and these companies had
low returns in the US after 1963. Therefore, low returns are not specific to IPOs, but a problem that affected small and
growing companies in general. Also, according to the author, the buy and hold abnormal return (BHAR) may give a false
impression about the speed the prices adjust to an specific event, because BHAR can increase along the time even if there
were no abnormal return in the first period (Mitchell and Stafford, 2000).
Gompers and Lerner (2003) analyzed the five year returns of 3,661 IPOs that occurred between 1935 and 1972 (pre-
Nasdaq). They concluded that the IPOs performance measurement is very much dependent on methodology to weight the
average and the equilibrium model. The equal weighted average shows underperformance while the value weighted
average does not. Also, the alpha coefficient (regression constant) is significantly different than zero if the equilibrium
model is the CAPM and is not different than zero if the equilibrium is the three factors Fama and French (1992) model.
Cao and Lerner (2006) analyzed the five year performance of 496 IPOs of reverse leveraged buyouts (RLBOs) and
5,706 non RLBOs IPOs between 1980 and 2002. They found evidences that RLBOs perform better than non RLBOs, and
the result is consistent using both the equal weighted and value weighted average. The most significant abnormal returns
5

appeared in the first, fourth and fifth years after the IPO. The largest RLBOs performed better than the smallest RLBOs,
but in most cases they belong to the largest buyout firms (more assets under management). Largest buyout firms usually are
elder PE organizations, with more experience and better track records than younger organizations.
The literature discusses the value creation role of PE/VC organizations (see Masulis and Thomas (2008)). This role is
one possible explanation for the higher performance of PE/ VC backed IPOs. As discussed by Barry et al. (1990),
managing partners are active investors: typically they maintain one or more seats in the Board, may focus in particular
industries in which they are experts, have strong relationship with high quality executives who are need to manage their
portfolio companies. According to Teitelbaum (2007), some PE/VC organizations hire consultants to improve operations,
develop managerial tools and redesign organizational structures. According to Barry et al. (1990), usually the PE/VC funds
maintain significant equity stake in invested companies after the IPO (19.1% at IPO and 13.6% after the IPO) and keep their
seats in the Board. Because of the nature of its business, PE/VC funds are recurrently bringing companies to IPOs.
Therefore it is important for them that their IPOs perform well in the long run, in order to have credibility for the next ones.
They also have strong relationship with pension funds and good quality underwriters and auditors.
PE/VC backed companies usually have a healthier organizational structure and higher quality governance practices
than the majority of companies that issue stock for the first time. Gioielli and Carvalho (2008) replicated the Morsfield and
Tan (2006) paper for Brazil and analyzed the accounting profit management of 66 Brazilian IPOs that occurred between
2004 and 2007. The profit management consisted of the quarterly net working capital variation controlled by size, sales
growth and financial leverage. They segmented the sample in PE and non PE backed IPOs. The PE backed IPOs did not
show evidence of managing profit in any of the dates comprising the study: before the IPO announcement, during the IPO,
in the lock-up period and after the lock-up.
Saito and Maciel (2006) investigated the underpricing and the aftermarket performance of 27 Brazilian IPOs between
1999 and 2005. According to them, underpricing is related to information asymmetry. The first trading day return was 6%,
and it was positively related to issue size and negatively related to company size (total assets). The market adjusted one-
year performance (17.2%) was positively related to total assets, to the ratio of ordinary shares issued and to the presence of
PE/VC investors.
6

III. Database and Methodology
III.1. Database
There were 145 IPOs and follow-ons between 2004 and 2007 in Brazil. The IPOs are in most part concentrated in 2006
and 2007. Therefore, as we analyzed one-year (262 business days) cumulative abnormal returns (CAR), we ignored IPOs
less than one year old. We analyzed 53 IPOs, corresponding to the issuance of R$30.3 billion, of which R$18.1 billion are
primary offers and R$12.2 billion are secondary offers. Table 2 summarizes the IPOs and Follow-ons occurred between
2004 and 2007.
We have also collected the following information in the IPOs prospects and Economatica:
Offer date: CVM registration date. It is the event day or day zero to estimate CAR.
Offer Size: we estimated offer size by multiplying price per share to the number of issued shares. We ignored shares
issued for the greenshoe option.
Percentage of Primary Offers: the number of primary offer shares divided by the number of total shares offered.
Market Cap: we estimated the market equity value of the company by multiplying the number of shares after the IPO by
the offer stock price.
Free Float: the ratio of total stocks offered to the market to the total existing stocks. We estimated it by dividing the
number of shares offered in the IPO by the total existing shares after the IPO.
Book to Market the ratio between the book value of equity to the market value of equity.
Corporate Governance Level: All the IPOs issued in Brazil from 2004 to 2007 were listed either in Level 2 or New
Market segments of BOVESPA. In our sample we also have BDRs (Brazilian Depositary Receipts) of Brazilian Companies
that issued stocks offshore. More information about Level 2 and New Market segments can be obtained in
www.bovespa.com.br. The dummy variable for corporate governance level had value 1 if the offer was listed in Level 2 or
New Market and value zero if it was a BDR. BDRs provide weaker property protection for investors than Level 2 and New
Market.
Debt to Equity the ratio between the gross debt and the book value of equity in the quarter previous to the IPO event.
Private Equity Investors: we included a dummy variable that had value 1 if there were private equity funds in the list of
shareholders and value zero otherwise.
7

Private Equity Stake: we calculated the portion of total shares hold by private equity funds in each company dividing the
number of shares owned by PE investors by the total of shares before the IPO.
Invested Period: we estimated the length of time (in months) from the day the PE fund invested in the company till the day
the IPO occurred (CVM registration day).
Some observations are worthy to mention:
Natura: BNDESPar (investment arm of the Brazilian Development Bank) converted debentures into stock immediately
before the IPO, capitalizing the company. We treated this case as private equity investment.
Datasul: the company went public in 2006 with no private equity investor at that time. But, according to prospect, Barings
PE fund invested in the company in 1998 and exited in 2004 (6 years), holding during this time 27.95% of total shares. We
classified this company as PE backed.
Saraiva: IP and Dynamo, private equity organizations, made a PIPE (Private Investment in Public Equity) investment in
Saraiva before the SEO. We treated Saraivas SEO as an IPO because the company had very tiny liquidity before the SEO,
and the deal characteristics are the same as PE investments in private companies.
UOL: private equity funds made substantial investments in the company in November 1999. In February 2003 most funds
exited the investment, but Globalvest Investment Fund LLC kept its equity stake. We treated the deal as PE backed.
GP Investments: GP is a private equity organization with BDRs traded in the Brazilian stock market. We treated GP as
private equity backed.
It was not possible to determine the day wich PE funds invested in Saraiva and Positivo.
Table 3 details each IPO according to the information above and Table 4 contains the sample descriptive analysis. The
mean IPO volume is R$571 million and 56% of this value was primary offers. The average sample market cap was
R$1,750 million, with an average free float of 40% and market to book ratio of 0.283. There are two (3.8% of the sample)
BDRs (Brazilian Depositary Receipts) and 26 (49.1%) PE backed IPOs. We can observe that the minimum offer size is
R$163.75 million, approximately US$ 100 million. The underwriters do not accept to market small issues in Brazil for
liquidity problems. Therefore, the IPOs performance in Brazil should be less sensible to size as it is in the United States.
III.2. Methodology
8

III.2.1. Cumulative Abnormal Returns CAR
The stock returns time series were calculated according to the following equation, where LN is the natural logarithm,
P
i,t
is the stock i price in day t and P
i,t-1
is the stock i price in day t-1.

( )
( )
1 ,
,
,

=
t i
t i
t i
P
P
LN R . (1)
We collected the daily closing prices series of sample stocks and IBOVESPA in Economatica and estimated abnormal
returns of stock i in time t (AR
i.t
) according to the equation (2):

t IBOVESPA t i t i
R R AR
, , ,
= . (2)
The cumulative abnormal return of stock i in time T is estimated according to (3):

=
=
T
t
t i T i
AR CAR
0
, ,
. (3)
We estimated the equal weighted sample or subsample CAR according to (4), where n is the number of observations in
the sample or subsample.

n
CAR
CAR
n
i
T i
T

=
=
1
,
,
. (4)
The t-statistic for testing the CAR significance was estimated as suggested by Campbell, Lo e MacKinlay (1997):

| |
2
1
2

T
T
stat
CAR
t

= . (5)
Where:

=
=
n
i
T
T
T
n
1
2
2
2
1
. (6)
t CAR is the average cumulative abnormal return in date T and
T
is the sample abnormal return standard deviation
at time T.
9

We reported the average CAR in the first and in the 262
nd
trading days, in order to measure underpricing and long term
performance respectively.
The total number of observations is 53 IPOs, divided in 26 PE backed and 27 non PE backed.
We tested if the two subsamples (PE backed and non PE backed) had different CAR means according to (7), where x is
the CAR at time T, and are the indexes for the two subsamples.

2
1
2 2

|
|

\
|
+

=




n n
x x
t
x x
stat
. (7)
III.2.2. Regression Model
We analyzed if the presence of PE investors influenced the CAR using a White heterokedasticity consistent regression
model, according to (8).
CARi=+Offer
i
+Primary
i
+MarketCap
i
+Free Float
i
+BTM
i
+Level
i
+DE
i
+PE
i
+
i
(8)
Where CAR is the cumulative abnormal return in one year, PE is the interest variable with value 1 if there is private equity
investment and zero otherwise. The controlling variables are (i) Offer: the logarithm of the offer size; (ii) Primary: the
percentage of primary offer; (iii) Market Cap: the logarithm of Market Capitalization; (iv) Free Float: the free float; (v)
BTM: the book-to-market ratio; (vi) Level: the corporate governance level that has value 1 if the company is listed in Level
2 or New Market and zero if it is a BDR; (vii) DE: the debt-to-equity ratio in the quarter prior to IPO; and is the error
term.
For the PE backed subsample, we also ran the following regression:
CARi=+Offer
i
+Primary
i
+MarketCap
i
+Free Float
i
+BTM
i
+Level
i
+DE
i
+Percentage
i
+ Period
i
+
i
(9)
Where Percentage is the percentage of shares that belong to PE funds and Period is the length of time in months from
the private equity investment until the IPO date.
IV. Results
Figure 3 illustrates the CAR evolution in the whole IPO sample, in the PE subsample and in the non-PE subsample.
Table 5 shows the CAR evolution in time in the whole sample, in the PE subsample, in the non PE subsample, and the t-test
for the mean difference of the two subsamples. We observe an average underpricing (abnormal return in the first day) of
10

6.9%. The PE-backed subsample had a mean underpricing of 6.4% and the non-PE backed subsample of 7.3%. According
to Barry et al (1990), PE/VC investment should reduce the information asymmetry, and should yield inferior underpricing.
Although the PE sub sample had and inferior mean than the non-PE subsample, the difference was not statistically
significant. Saito and Maciel (2006) found similar results.
We can also observe that the PE subsample outperformed the non-PE subsample in the long run. The PE backed IPOs
have an average CAR in the 262
nd
day of 17.6%, while the non-PE backed sample has an average CAR of -7.6%. The PE-
backed CAR mean in the 262
nd
day is significantly higher than the non-PE subsample according to the test in equation (7).
Figure 4 illustrates the CAR evolution by quartiles for the PE (Panel A) and non PE (Panel B) subsamples. We
observe that 75% of the PE subsample had one-year CAR superior than 3.7%, while 75% of the non PE subsample had one-
year CAR superior than -31.6%. The minimum one-year performance in the whole sample (-84.6%) was UOL, that was
classified as a PE backed IPO, but only 5 out of 26 PE backed IPOs had negative one-year CAR, while 18 out of 27 non PE
backed IPOs had negative one-year CAR.
Table 6 contains descriptive statistics of control variables for the PE backed and non PE backed IPOs. We observe that
the average issue size and debt-to-equity ratio of PE backed IPOs are statistically inferior to the non PE IPOs. The PE
backed subsample also has a lower percentage of primary offer, smaller market capitalization and lower book-to-market
ratio, although these three control variables are not statistically different in both subsamples.
Table 7 contains the variables correlation matrix. CAR is significantly positive correlated only with the presence of
private equity. Issue size is positively correlated with the percentage of primary offer and market capitalization and market
capitalization is negatively correlated with free float. Debt-to-equity ratio is negatively correlated with the presence of PE.
Table 8 contains the White Heterokedasticity Consistent regression results for the 53 IPOs. Only the PE and
Governance Level variables were significant to explain CAR, with a positive relation. But when we eliminate the debt-to-
equity variable, only PE explains the one-year CAR.
Table 9 contains the results of regressions only for the PE subsample, and we could not identify any relationship
between CAR and the percentage of private equity investment or CAR and the time the private equity kept the investment
before the IPO.
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V. Conclusion
The 53 IPOs that occurred between 2004 and 2007 showed a significant and positive one-year CAR of 4.7%. When we
divide the sample in two: PE backed and non-PE backed, we found that only that PE subsample had a positive one-year
CAR of 17.6%, while the non-PE subsample had a negative CAR of -7.6%. This result is in accordance with the findings in
Brav and Gompers (1997) and Cao and Lerner (2006).
We also ran a White heterokedasticity consistent regression to test if PE investors influence positively the one-year
CAR, controlling for offer size, percentage of primary offer, market capitalization, free float, book-to-market ratio, level of
corporate governance and debt-to-equity ratio. The presence of PE investors was the only variable that significantly
explained CAR, with a positive relation. Saito and Maciel (2006) investigated the one-year performance of Brazilian IPOs
that occurred between 1999 and 2005. They found evidences that the one-year adjusted performance is significantly
positive correlated to the presence of private equity investment, asset size and the number of common stocks. We did not
test for the number of common stocks, because we investigated the period between 2004 and 2007, when all IPOs (except
the BDRs) were launched either in Level 2 or New Market, with differentiated corporate governance practices. The BDR
has a negatively relationship with CAR, but we had only two observations. We did not find any relationship between
performance and size, and one possible reason is that all IPOs are of relatively large companies (the minimum market
capitalization is R$423.75 million).
We found a very significant evidence that the PE backed IPOs perform better than the non PE backed IPOs. One
possible interpretation of our findings is that the PE backed firms were better prepared to go public because of either (i)
better corporate governance practice, (ii) better management, (iii) alignment between management and shareholders interest
through performance reward payment or (iv) independent and active board members. These reasons would imply that PE
funds have a value creation role in portfolio companies. There was heterogeneity among Private Equity investments
performance, but we did not investigate in this work if one or more of the reasons above explained these differences.
Another possible explanation for the superior performance is that PE funds are able to select the best companies, and did not
necessarily have a value creation role. Both reasons though justify that the PE presence has been working as a quality
certification for IPOs.
One limitation of this study is the small sample size. Another limitation is that, as the IPO wave is very recent in
Brazil, our long run analysis was restricted to one year, and we could not test two or three years horizon as international
papers did.
12


Bibliographic References
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Financial Management, v. 22, n. 1, 42-53.
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public companies, Journal of Financial Economics, v. 27, n. 2, 447-471.
Brav, A., Geczy, C and Gompers, P. A., 2000, Is the Abnormal Return Following Equity Issuances Anomalous?, Journal of
Financial Economics, 56, 209-249.
Brav, A., Gompers, P. A., 1997, Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence
from Venture and Nonventure Capital-Backed Companies, The Journal of Finance, 52, 1791-1821.
Campbell, J., Lo, A. W. and Mackinlay, A. C., 1997, The Econometrics of Financial Markets, Princeton University Press,
New Jersey.
Cao, J. X, Lerner, J., 2006, The Performance of Reverse Leveraged Buyouts, SWEDISH INSTITUTE FOR FINANCIAL
RESEARCH, Conference on The Economics of the Private Equity.
Carvalho, A. G., Ribeiro, L. L. and Furtado, C. V., 2006, A indstria de private equity e venture capital: primeiro censo
brasileiro, Ed. Saraiva, So Paulo (SP).
Fama, E., Market Efficiency, long term returns and behavioral finance, 1998, Journal of Financial Economics. v. 49, n. 3,
283-306.
Fama, E., French, K., 1992, The Cross-Section of Expected Stock Returns. The Journal of Finance, v. 47, n. 2, 427-465.
Gioielli, S. P. and Carvalho, A. G., 2008, The Dynamics of Earnings Management in IPOs and the Role of Venture Capital:
Evidence from Brazil, Working paper.
Gompers, P. A. and Lerner, J., 2003, The Really Long-Run Performance of Initial Public Offerings: The Pre-Nasdaq
Evidence. The Journal of Finance, v. 58. n. 4. 1355-1392.
Kaplan, S. N. and Schoar, A., 2005, Private Equity Performance: Retuns, Persistence, and Capital Flows, The Journal of
Finance, v. 40. n. 4. 1791-1823.
Loughran, T. and Ritter, 1995, The new issues puzzle, The Journal of Finance, v. 50, n. 1. 23-51.
Masulis, R. W. and Thomas, R. S., Does Private Equity Create Wealth? The Effects of Private Equity and Derivatives on
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20.
13

Mitchell, M. L. and Stafford, E., 2000, Managerial Decisions and Long-Term Stock Price Performance, The Journal of
Business, v. 73, n. 3, 287-329.
Morsfield, S. G. and Tan, C. E. L., 2006, Do Venture Capitalists Influence the Decision to Manage Earnings in Initial Public
Offerings?, The Accounting Review, v. 81, n. 5, 1119-1150.
Regalado, A., 2008, Brazil's IPO Rush Hits Rough Patch, The Wall Street Journal Eastern Edition, v. 251, Issue 144,.A1-
A10 June. 20
th
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Saito, R. and Maciel, L. P., 2006, Underpricing of Brazilian IPOs: Empirical Evidence from 1999 to 2005, 30
rd
ANPAD
Meeting, Salvador, Brazil.
Teitelbaum, R.. The KKR Way, 2007, Bloomberg Markets Magazine,. 36-45. Aug.

14

Table 1 Stock Issue Summary (2002-2007)
Offer type Distribution
Year
Total Issues
Volume
(BRL Millions)
IPO
(BRL Millions)
Follow-on
(BRL Millions)
Primary Offer
(BRL Millions)
Secondary Offer
(BRL Millions)
2002 4,987 305 4,681 305 4,681
2003 1,692 0 1,692 150 1,542
2004 7,279 4,154 3,125 3,331 3,948
2005 11,482 6,528 4,954 3,740 7,742
2006 27,685 15,458 12,227 12,891 14,794
2007 64,488 54,659 9,828 34,775 29,712
Source: CVM (Comisso de Valores Mobilirios)

Figure 1 Stock Issues Evolution between 2002 and 2007 (R$ Million)

Source: CVM (Comisso de Valores Mobilirios)



















15

Figure 2 Invested Capital by PE/VC Organizations (US$ Millions)
456
379
281
261 256 253
0
100
200
300
400
500
1999 2000 2001 2002 2003 2004

Source: Carvalho, Ribeiro and Furtado (2006)


Table 2 Summary of Stock Issues between 2004-2007
Offer Type
Number of
Issues
Total Volume
(1)

(R$ Million)
Primary
Offers
(2)

(R$ Million)
Secondary
Offers
(3)

(R$ Million)
Follow on 34 30,135 7,361 22,774
IPOs less than one year old 58 50,545 29,281 21,263
Total IPOs considered in the sample 53 30,254 18,095 12,159
Total 110,934 54,737 56,197
(1) Total Volume corresponds to the sum of all offers before greenshoe.
(2) Primary offers correspond to the volume of primary offers.
(3) Secondary offers correspond to the volume of secondary offers.
Source: authors analysis
16

Table 3 Details of the sample IPOs transactions (Panel A)
Company
Name
IPO Date
Offer Volume
(R$ Million)
% Primary
Offer
Market Cap
(R$ Million)
Free Float
Book to
Market
Corporate
Governance
Level

Debt to
Equity
PE/
non PE
% PEs
PE
Investment
Period
(months)
Natura 25/05/04 678 0% 3,119 21.7% 0.1132 1 0.401 1 2.5% 0
Gol 23/06/04 878 57% 2,075 42.3% 0.0711 1 0.184 1 12.5% 16
ALL 24/06/04 535 50% 1,683 31.8% 0.2006 1 2.168 1 62.4% 74
CPFL 28/09/04 818 83% 7,774 10.5% 0.4785 1 1.664 1 100.0% 78
Grendene 28/10/04 536 0% 3,100 17.3% 0.2400 1 0.194 0
DASA 18/11/04 380 29% 1,056 36.0% 0.1350 1 1.033 1 54.0% 41
Porto Seguro 19/11/04 328 24% 1,392 23.6% 0.6325 1 0 0
Submarino 29/03/05 473 29% 1,064 44.5% 0.0444 1 1 100.0% 74
Localiza 20/05/05 247 0% 718 34.4% 0.4052 1 2.892 1 32.8% 100
TAM 14/06/05 543 70% 2,590 21.0% 0.1111 1 2.012 1 26.9% 97
Lojas Renner 30/06/05 774 30% 787 98.4% 0.2914 1 2.104 0
EDB 12/07/05 1,119 99% 2,905 38.5% 1.2622 1 1.633 0
OHL Brasil 14/07/05 431 31% 1,240 34.8% 0.3594 1 0.694 0
Cyrela 21/09/05 785 65% 2,231 35.2% 0.2820 1 0.581 0
Nossa Caixa 27/10/05 830 0% 3,318 25.0% 0.6348 1 0
Cosan 17/11/05 770 100% 2,889 26.7% 0.2492 1 1.313 0
UOL 15/12/05 555 50% 2,117 26.2% 0.0661 1 0.013 1 0.2% 73
Copasa 07/02/06 723 100% 2,616 27.6% 1.1396 1 0.457 0
Vivax 07/02/06 470 13% 2,705 17.4% 0.1078 1 1.173 1 71.4% 121
Rossi
Residencial
14/02/06 900 72% 1,859 48.4% 0.2420 1 0.48 0
Gafisa 16/02/06 816 61% 2,035 40.1% 0.2205 1 1.056 1 55.0% 98
Company 01/03/06 245 74% 549 44.6% 0.1325 1 1.184 0
Totvs 08/03/06 400 71% 854 46.8% 0.1338 1 0.003 1 16.7% 13
Equatorial 31/03/06 470 40% 951 49.4% 1.6090 1 0,961 1 97.0% 9


17

Table 3 Details of the sample IPOs transactions (Panel B)
Company
Name
IPO Date
Offer Volume
(R$ Million)
% Primary
Offer
Market Cap
(R$ Million)
Free Float
Book to
Market
Corporate
Governance
Level
Debt to
Equity
PE/
non PE
% PEs
PE
Investment
Period
(months)
Saraiva 07/04/06 183 36% 629 29.0% 0.2595 1 0.100 1 11.4% n.d.
American
Bank Note
26/04/06 480 0% 850 56.5% 0.1988 1 0 0
CSU 28/04/06 341 29% 874 39.0% 0.0500 1 1.705 1 26.0% 105
Brasil Agro 28/04/06 518 100% 519 99.8% 1.0000 1 0 1 24.8% 7
Lupatech 12/05/06 429 36% 1,004 42.8% 0.0968 1 0.435 1 63.9% 32
GP
Investments
31/05/06 645 100% 1,060 60.8% 0.4505 0 0.306 1 100.0% 40
Datasul 01/06/06 317 48% 522 60.8% 0.0994 1 1 101
MMX 21/07/06 1,029 100% 3,010 34.2% 0.0064 1 14.336 0
Abyara 26/07/06 164 100% 424 38.6% 0.0128 1 0.953 1 26.0% 100
Medial 21/09/06 655 59% 1,398 46.9% 0.0423 1 0.364 0
Klabin Segall 06/10/06 485 70% 864 56.1% 0.1247 1 0.583 0
Santos Brasil 12/10/06 843 99% 2,927 28.8% 0.1000 1 1 69.2% 107
M. Dias
Branco
17/10/06 362 0% 2,411 15.0% 0.3571 1 0.722 0
Brascan 20/10/06 1,056 77% 2,828 37.3% 0.0731 1 2.731 0
Profarma 25/10/06 349 77% 776 44.9% 0.1756 1 2.055 0
Terna 26/10/06 557 67% 614 90.8% 0.6629 1 1.348 0
Brasil
EcoDiesel
10/11/06 379 100% 1,516 25.0% 0.0017 1 25.525 0
Odontoprev 30/11/06 454 36% 690 65.8% 0.0429 1 0 1 62.3% 99
Positivo 08/12/06 567 21% 2,063 27.5% 0.1013 1 0.099 1 0.0% n.d.
So Carlos
Empreend.
13/12/06 469 73% 1,184 39.6% 0.1990 1 1.007 1 14.1% 95
Lopes Brasil 15/12/06 413 0% 960 43.0% 0.0043 1 0.498 0
Dufry Brasil 19/12/06 739 0% 1,745 42.4% 0.6524 0 1 19.3% 9
PDG Realty 25/01/07 630 67% 1,537 41.0% 0.0579 1 0.439 1 100.0% 37
CCDI 30/01/07 522 92% 1,639 31.9% 0.0359 1 0.241 0
Rodobens 30/01/07 390 100% 889 43.9% 0.1077 1 0.919 0
Tecnisa 31/01/07 791 75% 1,891 41.9% 0.1131 1 1.091 0
Iguatemi 06/02/07 477 100% 1,757 27.1% 0.2077 1 0.266 0
So Martinho 09/02/07 368 56% 2,205 16.7% 0.4905 1 0
GVT 15/02/07 936 100% 2,142 43.7% 0.1350 1 16.148 0

18

Table 4 IPO Samples Descriptive Statistics (2004 2007)

Offer
Volume
(R$ Million)
% Primary
Offers
Market Cap
(R$ Million)
Free Float
Book to
Market
Corporate
Governance
Level
PE/
non PE

Debt to
Equity
Mean 570.84 55.9% 1,746.22 39.9% 0.283 0.038 0.491 1.980
Median 522.00 60.6% 1,536.87 38.6% 0.135 0 0 0.722
Maximum 1,119.47 100.0% 7,773.96 99.8% 1.609 1 1 25.525
Minimum 163.75 0.0% 423.75 10.5% 0.002 0 0 0
Standard
Deviation
228.85 34.7% 1,192.89 18.5% 0.335 0.192 0.505 4.570

Source: Offer prospects and authors analysis

Figure 3 Cumulative Abnormal Return
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100103 106109 112115118 121124 127130133 136139 142145 148151154 157160 163166169 172175 178181184 187190 193196 199202205 208211 214217220 223226 229232235 238241 244247 250253256 259262
All Sample PE Backed Non-PE Backed


19

Table 5 CAR evolution data

CAR Whole Sample PE Backed IPOs
Non-PE Backed
IPOs
Mean difference
t-statisitic
6.9% 6.4% 7.3%
First day
(3.179)*** (2.143)** (2.325)**
(-0.395)
9.2% 14.8% 3.7%
Six months
(4.245)*** (4.970)*** (1.197)
(1.373)
4.8% 17.6% -7.6%
One year
(2.198)** (5.890)*** (-2.430)**
(2.151)**
Maximum Value 12.4% 21.4% 8.4%
Day of the maximum CAR 180 186 8
Minimum Value 4.5% 2.9% -7.6%
Day of the minimum CAR 32 10 262
*, ** and *** mean statistically significant at the 10%, 5% e 1% level respectively
20

Figure 4 Quartile Analysis of CAR evolution

Panel A PE subsample
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100103 106109112 115118121 124127130 133136139 142145148 151154 157160163 166169172 175178181 184187190 193196199 202205208 211214217 220223226 229232235 238241244 247250253 256259262
Maximum 3rd Quartile Average Median 1st Quartile Minimum



Panel B non PE subsample
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100103 106109112 115118121 124127130 133136139 142145148 151154 157160163 166169172 175178181 184187190 193196199 202205208 211214217 220223226 229232235 238241244 247250253 256259262
Maximum 3rd Quartile Average Median 1st Quartile Minimum

21


Table 6 Descriptive Statisitics of Control Variables for the PE backed IPOs and non-PE backed IPOs. (2004
2007)

Panel A Non-Private Equity Backed IPOs
Statistics
Offer Volume
(R$ Million)
% Primary
Offer
Market
Capitalization
(R$ Million)
Free Float
Book to
Market
Debt to Equity
Mean 618.18 61.7% 1,801.25 39.8% 0.304 2.979
Median 536.43 72.2% 1,757.36 37.3% 0.208 0.722
Maximum 1,119.47 100.0% 3,318.11 98.4% 1.262 25.525
Minimun 244.87 0.0% 548.92 15.0% 0.002 0.000
Standard Deviation 251.26 37.2% 867.16 19.4% 0.321 6.100
N. Observations 27 27 27 27 27 25

Panel B Private Equity Backed IPOs
Statistics
Offer Volume
(R$ Million)
% Primary
Offer
Market
Capitalization
(R$ Million)
Free Float
Book to
Market
Debt to Equity
Mean 521.68 49.8% 1,689.07 39.9% 0.262 0.846
Median 495.67 49.8% 1,124.03 39.3% 0.112 0.696
Maximum 878.14 100.0% 7,773.96 99.8% 1.609 2.892
Minimun 163.75 0.0% 423.75 10.5% 0.013 0.000
Standard Deviation 195.82 31.4% 1,473,46 18.0% 0.355 0.821
N. Observations 26 26 26 26 26 22

Panel C t-statistics of Mean Differences
Statistics
Offer Volume
(R$ Million)
% Primary
Offer
Market
Capitalization
(R$ Million)
Free Float
Book to
Market
Debt to Equity
t-statistics (1.563)* (1.263) (0.336) (-0.023) (0.446) (1.731)**

*, ** and *** mean statistically significant at the 10%, 5% e 1% level respectively

22

Table 7 Variables Correlation Matrix
CAR OFFER % PRIM
MKT
CAP
FREE
FLOAT
BTM LEVEL PE D/E
CAR 1
OFFER -0.067 1
% PRIM -0.016 0.287*** 1
MARKETCAP -0.142 0.677*** 0.070 1
FREEFLOAT 0.151 0.078 0.139 -0.638*** 1
BTM 0.087 0.131 0.112 -0.001 0.210 1
LEVEL 0.165 0.073 0.183 -0.072 0.161 0.076 1
PE 0.319*** -0.228 -0.201 -0.108 -0.057 -0.020 0.157 1
D/E 0.012 0.116 0.316*** 0.149 -0.107 -0.166 -0.055 -0.235*** 1
*, ** and *** mean statistically significant at the 10%, 5% e 1% sigificant level respectively
Table 8 White Heterokedasticity Consistent Regression results to investigate whether PE explains IPOs
performance (2004 to 2007)
COEFFICIENTS (1) (2) (3) (4)
Constant
-0.168
(-0.125)
-0.087
(-0.068)
-0.076
(-0.941)
-0.076
(-0.950)
Offer
-0.070
(-0.172)
-0.110
(-0.306)

Primary
-0.043
(-0.181)
-0.028
(-0.153)

Market Cap
0.039
(0.106)
0.068
(0.197)

Free Float
0.471
(0.474)
0.511
(0.542)

BTM
0.109
(0.703)
0.097
(0.714)

Level
0.303
(2.080)**
0.072
(0.330)
0.126
(0.589)

DE
0.014
(0.608)

PE
0.303
(2.326)**
0.239
(2.020)**
0.242
(1.979)**
0.252
(2.151)**
R
2
0.158 0.119 0.086 0.083
Adjusted R
2
-0.019 -0.018 0.050 0.065
F-statistic 0.892 0.867 2.359* 4.636*
Akaike Criterion 1.465 1.351 1.199 1.165
Schwarz criterion 1.819 1.649 1.311 1.239
Durbin-Watson 1.720 1.564 1.603 1.604
N. Observations 47 53 53 53
t-statistics into parenthesis.
*, ** and *** mean statistically significant at the 10%, 5% e 1% level respectively

23

Table 9 Regression Results for the PE backed IPOs (2004 to 2007)
COEFFICIENTS (1) (2) (3)
Constant
0.712
(0.348)
0.089
(0.389)
0.094
(0.528)
Offer
-0.399
(-0.688)

Primary
-0.100
(-0.208)

Market Cap
0.207
(0.468)

Free Float
0.844
(0.667)

BTM
-0.127
(-0.551)

Level
0.433
(1.592)
0.093
(0.532)

DE
0.152
(0.669)

PE
0.147
(0.371)
0.185
(0.661)
0.191
(0.672)
Period
-0.000
(-0.003)
-0.000
(-0.029)
-0.000
(-0.043)
R
2
0.154 0.027 0.024
Adjusted R
2
-0.480 -0.112 -0.065
F-statistic 0.244 0.193 0.266
Akaike Criterion 1.939 1.467 1.391
Schwarz criterion 2.435 1.662 1.537
Durbin-Watson 1,534 1.004 1.020
N. Observations 22 25 25
t-statistics into parenthesis.
*, ** and *** mean statistically significant at the 10%, 5% e 1% level respectively