Discussion of "Performance of private to public MBOs: the role of venture capital"

Academic studies in entrepreneurial finance were almost non‐existent until the early 1990s. However, as the importance of financing activity in this sector of the economy has increased, the volume of research in entrepreneurial finance has also been rapidly growing. A search by Social Science Research Network (SSRN) using only the keywords ‘venture capital’ turns up 123 working papers (Denis, 2004). Jelic, Saadouni and Wright (2005)(hereafter JSW), contribute to this growing research field by examining financial performance and venture capital (VC) involvement for a unique dataset of 167 MBOs exiting through initial public offerings (MBO‐IPOs) on the London Stock Exchange for the period 1964–1997. JSW's key results are summarized as follows: 1 In line with the international IPO literature, initial returns of private to public MBOs are positive and highly statistically significant. 2 There is no evidence of a significant underperformance of private to public MBOs in the long run. The results are inconsistent with the findings reported in other IPO studies (Levis, 1993; Khurshad et al., 1999; and Espenlaub et al., 2000) but support JSW's expectation that the sub‐sample of MBO‐IPOs may perform differently from other IPOs. 3 Consistent with recent international evidence (Hamao et al., 2000; and Francis et al., 2001) VC‐backed companies appear to be more underpriced than MBOs without venture capital backing, based on average value‐weighted initial returns. Results remain robust after controlling for sample selection bias. 4 There is no evidence that VC backed MBOs perform better than their non‐VC backed counterparts in the long run, based on both equally‐weighted and value‐weighted long term returns. Findings remain unchanged after controlling for sample selection bias. 5 Contrary to the grandstanding hypothesis, according to which less‐established VC firms take portfolio companies public to signal quality and, thus, raise future funding (Gompers, 1996), JSW report that private to public MBOs backed by more prestigious VCs tend to exit earlier. Moreover, MBO‐IPOs funded by more reputable VCs perform better than those backed by less prestigious VCs. But, in contrast to prior evidence (Gompers, 1996; and Lee and Wahal, 2004), VC reputation does not seem to play an important role in MBO underpricing. I will begin by documenting the contributions of the paper and then continue by discussing some potential new directions for research in entrepreneurial finance.