1. Discussion by Jens Martin, University of Amsterdam
Discussion: Long goodbyes: Why do private equity funds hold onto public equity after IPOs? By T. Jenkinson, H. Jones, C. Rauch and R. Stuecke
Discussion by Jens Martin, University of Amsterdam

2. Basic Question How does Private Equity exit? Very interesting question
Traditional argument:
Sale to strategic buyer
Sale to financial buyer
IPO
Very interesting question
Exhibits another facet of moral hazard in the PE sector

3. Exit choices of PE for a portfolio company
IPO
Private Firm
Direct acquisition

4. Selling shares of the public company
Exit choices of PE for a portfolio company
Acquisition
IPO
Selling shares of the public company
Private Firm
Delisting
Direct acquisition
Two points in time: ipo timing and pseudo market timing

5. Conflict of interest: Timeline of private equity funds
commitments by investors
cash flows back to investors
1 year
10 years
2 years
marketing
investment
exit
extension
GP earns management fee on committed capital
GP earns management fee on invested capital
follow-on fund
IMPORTANT FACT: GPs almost never return capital to investors. Why? GP have a big incentive to invest all the capital committed by investors:
Earn fees
Makes it easier to raise the next fund
GP starts marketing of a new fund

6. Other conflict of interests:
Where in the fund life do we see which behavior?
Grandstanding to market new funds? IPO valuation of particular importance at this stage?
Pressure to sell at the end of the fund lifecycle?
Give the long time to exit, are you more likely to IPO early on in the fund lifecycle?

7. Other conflict of interests:
When are other investors leaving the company? Did they leave partly before? Do all partners, i.e. in a club deal, leave at the same time? What happens to co-investments?
Do some fund actually increase their holding?
What’s the value of reputation as it may be a bad signal for future investors as returns are below expectations?
Is it a way to lock in-IRR? I.e. sell a stake at the IPO to lock in IRR, then selling later will not affect it greatly
Calculate difference in carry if they would have sold at IPO versus at the actual selling point to illustrate the economic benefit. What is the economic benefit compared to the funds total fees?

8. General comments
What type of companies / industries? Ritter (2012) assumes that small companies have less incentive to do a IPO?
Time trends? We see a decline in IPOs over the long run.
Do we see short term patterns? So a month prior to see do we see an increase? So a quasi-market timing in the short run?
Returns: different for the M&A sample?
What are the other deals a fund has?

9. At the IPO
Do we see differences in lockup structures? You report that 13% do actually sell in the lockup period
Narrative of Behavioral Issues: what would be a comparable sell be worth in the market: thus, is the market open, is it at the IPO more lucrative to do an IPO? Look closer at market conditions (as Cao 2011)
IPO
Gompers grandstanding
Private Firm
Direct acquisition

10. Returns
The returns you show during the holding period seem to be very low
Other literature, reported a much higher return for IPO exit. That means that returns have to be impressively high prior to exit. So most of the return seem sto be locked in at the IPO. Can you observe this? Do you see a pattern?
Source: Degeorge et al, 2016, On Secondary Buyouts

11. Methodology: which model do you use?
As stocks are listed, you could use more advance asset pricing models: DGTW adjusted returns, etc.
𝑃𝑀𝐸= 𝑆ℎ𝑎𝑟𝑒 𝑆𝑎𝑙𝑒 𝑃𝑟𝑜𝑐𝑒𝑒𝑑 ($𝑚𝑛) 𝑡 𝐴𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝐵𝑒𝑛𝑐ℎ𝑚𝑎𝑟𝑘 𝑅𝑒𝑡𝑢𝑟𝑛 𝑡 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑖𝑛𝑔𝑠 𝑎𝑡 𝐼𝑃𝑂 ×𝑆𝑡𝑜𝑐𝑘 𝑃𝑟𝑖𝑐𝑒 𝐸𝑛𝑑 𝑜𝑓 𝐹𝑖𝑟𝑠𝑡 𝑇𝑟𝑎𝑑𝑖𝑛𝑔 𝐷𝑎𝑦
𝑇𝑉/𝑃𝐼= 𝑆ℎ𝑎𝑟𝑒 𝑆𝑎𝑙𝑒 𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 $𝑚𝑛 𝑎𝑡 𝑎𝑛𝑑 𝑝𝑜𝑠𝑡 𝐼𝑃𝑂 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑖𝑛𝑔𝑠 𝑎𝑡 𝐼𝑃𝑂 ×𝑆𝑡𝑜𝑐𝑘 𝑃𝑟𝑖𝑐𝑒 𝐸𝑛𝑑 𝑜𝑓 𝐹𝑖𝑟𝑠𝑡 𝑇𝑟𝑎𝑑𝑖𝑛𝑔 𝐷𝑎𝑦

12. Methodology, cont.

13. Methodology, cont.
%-Days Stock Price>IPO Price (IPO to Exit) =>Potentially problematic, better take a Cox Proportional Hazard model to measure the likelihood in a given time (see Genesove, D., and C. Mayer. "Loss aversion and seller behavior: Evidence from the housing market." The quarterly journal of economics (2001):
Do we see different selling patterns (number of sells etc.) in downtrends versus uptrends? Do they keep all the shares? Is duration the right variable?
What role is market liquidity playing?
“Both measured from IPO to final share sale” do we see a difference if we look at the largest sale? Do we see sometimes just a toke piece left?

14. Split funds along the carry for a more nuanced picture and to account for non-linearity
Funds deep in the carry: Carry might not be affected,
So they have am incentive for such behavior
2. Funds just above carry threshold: Funds might be reluctant to risk a market downturn and not being in the carry anymore
3. Funds just below the vary: Funds might try to gamble on a market uptrend and so getting above the threshold.
4. Funds way below the threshold: These fund get their money mostly through their 2% on assets invested. So they have an incentive to hold it longer

15. Very interesting paper with a very relevant research question!