Performance Dependency of Secondary Buyouts on Primary Buyouts

Abstract

Secondary buyouts (SBOs) represent more than 50 percent of the total private equity (PE) buyout activities. However, in academia and practise, a potential underperformance of SBOs compared to primary buyouts (PBOs) is discussed. Therefore, it is all the more important to further understand how the value in SBOs is driven and what makes a potential SBO attractive to look at in a due diligence process. This paper describes the dependency of SBOs on the preceding PBOs based on a dataset of 295 PBOs with their consecutive SBOs. It analyses the impact of the performance of a portfolio company during a PBO on the performance of the following SBO and derives value drivers and their influence on the SBO. Based on the performance of the value drivers during the PBO five criteria are identified for a pre-selection of SBOs. There is not a single perfect strategy for all SBOs, but the value drivers during the SBO differ strongly depending on the identified selection criteria. Generally, general partners (GPs) do not only use complementary skillsets, i.e. they do something completely different across buyout rounds. Additionally, they work on similar value drivers but with a different focus than the previous investor, i.e. they work differently on similar areas of improvement.