Secondary Buyouts Research Articles

Life cycle of private equity investments in physician practices: an overview of private equity exits.

Private equity (PE) firms acquire and grow physician practices through add-on consolidation, generating outsized returns on the sale of the acquisition in 3-8 years ("exit"). Private equity's abbreviated investment timeline and exit incentives may deter long-term investments in care delivery and workforce needed for high-quality care. To our knowledge, there has been no published analyses of the nature or duration of PE exits from physician practices. We address this knowledge gap by using novel data to characterize PE exits from dermatology, ophthalmology, and gastroenterology, physician specialties with the largest number of acquisitions between 2016 and 2020. Of 807 acquisitions, over half (51.6%) of PE-acquired practices underwent an exit within 3 years of initial investment. In nearly all instances (97.8%), PE firms exited investments through secondary buyouts, where physician practices were resold to other PE firms with larger investment funds. Between investment and exit, PE firms increased the number of physician practices affiliated with the PE firm by an average of 595% in 3 years. Findings highlight the rapid scale of ownership change and consolidation under PE ownership and motivate evaluations by policymakers on the effects of PE ownership over the life cycle of PE investments.

Private Equity Exits in the CEE:

Purpose of the article: The purpose of this article is to assess private equity exit strategies of CEE portfolio companies with regards to desired exit routes, including a cross-border deal aspect and a pre-exit holding period.Methodology/methods: This paper employs secondary data from the Mergermarket database containing information on more than 20 thousand private equity M&A deals and IPOs. General scientific methods such as analysis, comparison or generalization were used.Scientific aim: Only limited amount of research was carried out on the private equity exits in the region of central and eastern Europe. This study aims at shedding new light on understanding of private equity exit route decisions and timing in this particular geographic area.Findings: Exiting a CEE portfolio company, private equity investors tend to prefer exiting via trade sales over secondary buyouts or IPOs. They also tend to prefer foreign acquirers over domestic ones. A typical pre-exit holding period averages around 5 years.Conclusions: Our results show that while exiting a CEE portfolio company, private equity investors tend to divest by selling the company to a strategic investor (trade sales) rather than a financial investor (secondary buyouts) or exiting via an IPO. While exiting via trade sales and secondary buyouts, private equity investors tend to prefer foreign acquirers rather than domestic ones with a strong preference of acquirers from outside of the respective region. Typical holding period of a CEE private equity portfolio company remains on average in line with academic theory. Our paper contributes to the developing literature of private equity by using an extended and up to date dataset and introducing the research on the cross-border aspect of PE exit strategies.

Shaking hands with common foes: Clique premium and information diffusion in private equity networks

The fastest growing segment of private equity deals is secondary buyouts (SBOs) sales from one private equity (PE) firm to another. We operationalize a novel FactSet database to map the network structures of secondary buyouts between PE firms. We offer three contributions. First, after controlling for economic covariates, we find that PE firms are almost three times more likely to transact if they share a partner, that is both firms belong to the same clique. Second, we find that the profitability of such transactions is unambiguously higher relative to the baseline only if these are the result of repeated interaction between firms belonging to the same cliques. In other words, a clique premium exists under repeated interaction. Third, we provide evidence that the economic incentive at the core of clique premium may be related to access to information. In fact, we show that information related to transactions diffuses through the network, with 23% and 16% of the information going one and two steps beyond transacting parties, respectively.

Second Hand or Second Generation? -The Performance of Secondary Buyouts

Second Hand or Second Generation? -The Performance of Secondary Buyouts

Secondary Buyout Performance

Abstract There is an ambivalent discussion about the performance of secondary buyouts (SBOs): Private equity (PE) sponsors often assume an underperformance of SBOs compared to primary buyouts (PBOs). However, the share of SBOs grew significantly to more than 50 percent of all buyouts in 2018. This paper contributes to solve this apparent contradiction. It analyses the performance of SBOs compared to PBOs based on a dataset of 295 UK portfolio companies which underwent back-to-back buyout rounds. The analysis of the total sample shows that SBOs perform worse or at least not better than PBOs. A more detailed analysis of subsamples reveals that SBOs may be attractive PE targets: The underperformance is driven by size and time effects. SBOs perform worse at growing small and medium-sized portfolio companies and are inferior at developing the profitability of medium-sized companies. Interestingly, the underperformance diminishes in the course of time; SBOs do not perform differently compared to PBOs for the time after the financial crises. Considering the limited supply of investment opportunities for PBOs, I find that well-chosen SBOs outperform the remaining, low performing PBOs. Therefore, SBOs are not means of last resort for PE firms. SBOs have a promising potential of value creation, which may partly explain the significant growth of SBO deals.

Risk of Financial Distress in Secondary Buyouts

Secondary buyouts (SBOs) represent more than 50 percent of all buyouts in 2018. Even though general partners argue that SBOs are less attractive investment targets for buyouts and some empirical indication against an outperformance of SBOs exists, the share of SBOs continuously increases. However, SBOs might be a favourable target with regard to its investment risk. Using a unique dataset of 295 PBOs and their consecutive SBOs in the UK, we analyse the risk level of financial distress of the buyout rounds considering the Altman Z-Score. We find that SBOs reduce this risk of portfolio companies more than PBOs during the holding period. Therefore, SBOs, in general, cannot be seen as riskier investments. However, risk of financial distress is driven differently between PBOs and SBOs. The risk development in distressed companies is not different in PBOs and SBOs. However, SBOs perform better at risk management if the portfolio company is not distressed. This risk-adjusted view identifies SBOs as attractive investment targets. It also contributes to rectify investments in SBOs as rational and promising decisions.

Secondary Buyout Performance

There is an ambivalent discussion about the performance of secondary buyouts (SBOs): Private equity (PE) sponsors often assume an underperformance of SBOs compared to primary buyouts (PBOs). However, the share of SBOs grew significantly to more than 50 percent of all buyouts in 2018. This paper contributes to solve this apparent contradiction. It analyses the performance of SBOs compared to PBOs based on a dataset of 295 UK portfolio companies which underwent back-to-back buyout rounds. The analysis of the total sample shows that SBOs perform worse or at least not better than PBOs. A more detailed analysis of subsamples reveals that SBOs may be attractive PE targets: The underperformance is driven by size and time effects. SBOs perform worse at growing small and medium-sized portfolio companies and are inferior at developing the profitability of medium-sized companies. Interestingly, the underperformance diminishes in the core of time; SBOs do not perform differently compared to PBOs for the time after the financial crises. Considering the limited supply of investment opportunities for PBOs, I find that well-chosen SBOs outperform the remaining, low performing PBOs. Therefore, SBOs are not means of last resort for PE firms. SBOs have a promising potential of value creation, which may partly explain the significant growth of SBO deals.

New directions in entrepreneurial finance

Abstract Entrepreneurial finance is a distinctive aspect of corporate finance, notably with respect to informational asymmetries and investor involvement in portfolio companies. Entrepreneurial finance research has explored four levels of analysis: the entrepreneur or entrepreneurial firm, the organization providing finance to the entrepreneurs, the organizations providing funds to these organizations, and the region or country in which the entrepreneurial firms or investors are established. We discuss recent developments in forms of entrepreneurial finance. We summarize the contributions of the papers published in this issue on entrepreneurial finance at different points in the life cycle, including work on trade credit, debt finance, micro-cap IPOs, venture capital, and angel finance. Also, we highlight avenues for future research focusing on funding gaps, accelerators, crowdfunding, secondary buyouts, boards, and exits.

Performance Dependency of Secondary Buyouts on Primary Buyouts

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.

Private Equity Firms Owned Chemical Distributors

This article is a follow up on the article Tay and Chelliah [2013] where at that time five of the world's top chemical distributors are owned by private equity firms. This paper will revise the information on the global chemical market sales and the market size available for chemical distributors. This discussions and anayses will cover the private equity owned chemical distributors whom have undergone primary and secondary buyouts, and also initial public offerings, namely Brenntag, IMCD and Univar. The value creation drivers, operational performances improvements, leverage and multiple expansion, were used to evaluate the performances of the companies after they have undergone IPOs. For Brenntag, the three value creation drivers were also used to evaluate their performances after their primary and secondary buoyouts.

Private-Equity-Firm-Owned Chemical Distributors: Exit through SBOs or IPOs?

This article is a follow-up to 2013 research by Tay and Chelliah. At that time, five of the world’s top chemical distributors were owned by private equity firms. This article updates the information on global chemical market sales and the market size for chemical distributors. This discussion and analyses will cover the PE-owned chemical distributors that have undergone primary and secondary buyouts and initial public offerings—namely, Brenntag, IMCD, and Univar. The value-creation drivers—operational performance improvements, and leverage and multiple expansion—were used to evaluate the performances of the companies after they underwent their IPOs. For Brenntag, the three value-creation drivers were also used to evaluate its performance after its primary and secondary buyouts.

Inorganic growth strategies and the evolution of the private equity business model

This paper investigates inorganic growth strategies in PE buyouts where the portfolio firm, which has been acquired in the initial buyout, serves as a platform for subsequent add-on acquisitions. We analyze a comprehensive sample of 9548 buyouts and 4937 add-on acquisitions spanning 16years of buyout activity in 86 countries. We find that the probability for add-on acquisitions is high if the PE sponsor is experienced and has reputational capital, if the portfolio firm is large, has M&A experience at entry and operates in an industry with moderate degree of fragmentation, as well as in case of favorable financing conditions. Similar factors also explain higher add-on productivity and faster add-on execution. On average, cross-border/industry diversifying inorganic growth strategies are most likely if the portfolio company already draws upon international/inter-industrial M&A experience at entry and if the PE sponsor frequently invests across borders/industries. Furthermore, our results indicate that add-on acquisitions increase the probability for exiting through IPO and secondary buyout. The effect on secondary buyouts is driven by deals where the subsequent PE owner continues the inorganic growth strategy of the previous buyout.

IPO or SBO?: The Increasing Importance of Operational Performance for Private Equity Exits Following the Global Financial Crisis of 2007–08

The authors report the findings of their recent study of the role of portfolio company operating performance in determining the choice of exit options by private equity firms between initial public offerings (IPOs) and secondary buyouts (SBOs), and how that role may have changed since the Global Financial Crisis of 2007–2008. Virtually all studies of PE exits in all countries have found that portfolio companies that exit through IPOs tend to be larger and have higher operating returns than companies that exit through SBOs or sales to other companies. After examining the exits of PE portfolio companies based in Denmark and Sweden during the period 2003–2013, the authors report that, although general market conditions continue to be a major factor, operating performance and size have become even more important requirements for IPO exits since the crisis. And thus PE firms that fail to make operating improvements in their portfolio companies are likely to find their exit options limited.

Private Equity, Jobs, and Productivity: A Comment

Davis et al. (2014) provide evidence that the impact of leveraged buyouts on employment is quite modest. We challenge this view. We illustrate that the documented job creation is the artifact of deviating from Census data event time and selecting October. Moreover, job destruction is potentially underestimated due to four deviations from established practices: (1) failing to specifically identify leveraged buyouts; (2) including secondary buyouts; (3) testing treated establishments while no longer treated; and (4) failing to consider bankruptcies. Finally, Census data under represents controversial larger public-to-private leveraged buyouts. Nonetheless, we applaud efforts to bring data to these sensitive issues.

The Effects of the Specialization of Private Equity Firms on their Exit Strategy

AbstractWe investigate how industry and stage specialization of Private Equity (PE) firms affect the likelihood to exit investments by means of trade sales, Initial Public Offerings (IPOs), or Secondary Buyouts (SBOs). Our empirical analysis relies on competing risks models. Using a sample of 818 Leveraged Buyouts (LBOs) by US and European PE firms over the period 2000–2015, we find that both industry and stage specializations of PEs increase the likelihood of exiting via IPO, whereas only industry specialization positively affects the likelihood of divesting through a trade sale. Finally, SBOs are more likely for non‐specialized investors.

On secondary buyouts

Private equity firms increasingly sell companies to each other in secondary buyouts (SBOs), raising concerns which we examine using novel data sets. Our evidence paints a nuanced picture. SBOs underperform and destroy value for investors when they are made by buyers under pressure to spend. Investors then reduce their capital allocation to the firms doing those transactions. But not all SBOs are money-burning devices. SBOs made under no pressure to spend perform as well as other buyouts. When buyer and seller have complementary skill sets, SBOs outperform other buyouts. Investors do not pay higher total transaction costs as a result of SBOs, even if they have a stake in both the buying fund and the selling fund.

What determines the exit decision for leveraged buyouts?

Abstract How and when to exit portfolio company investments are critical choices facing private equity funds. In this paper we analyze 1022 European private equity exits, using information on fund and portfolio company characteristics, and on conditions in capital markets. For over 43% of the exits, private equity funds sold to each other and we analyze why such secondary buyouts have gained in popularity relative to IPOs and sales to corporate acquirers. We find that the exit route depends on various portfolio company characteristics, and that conditions in the debt and equity markets have a strong influence on exit choice. The existing literature has tended to portray the IPO is the “preferred” exit route. However, our analysis suggests this is mistaken: private equity funds take advantage of ‘windows of opportunity’, and the exit route that maximizes value varies with market conditions.

Exit Through Exitus in Private Equity Buyouts

We study the impact of PE firm and buyout characteristics on default probability employing a Cox proportional hazards model to a global sample of 5,093 buyouts between 1997 and 2012. Our results indicate that investments of generalists have lower default probability than those of specialists. However, industry specialization reduces default probability if stated focus and target industry match. Investments of captive PE firms and secondary buyouts are more likely to default, while the opposite holds true for syndicated investments. In sum, our findings indicate that increasing heterogeneity within a maturing PE market goes along with increasing heterogeneity in default probabilities.

Secondary Buyouts: Operating Performance and Investment Determinants

Secondary buyouts (SBOs) now represent over 60% of the overall buyout activity. In this paper, I investigate the possible determinants of such spectacular growth. I find that first round buyers generate a large and significant abnormal improvement in operating performance. In contrast, SBO operating growth is not different from that of its peer group. Returns to secondary private equity (PE) investors are positive, but significantly lower than those of first round buyers. I examine several alternative drivers of SBOs and find that favorable credit market conditions and PE reputation drive secondary investment volume.

Value creation drivers in a secondary buyout – the acquisition of Brenntag by BC Partners

Purpose – The purpose of this paper is to identify specific drivers of value creation in secondary buyouts. While this type of private equity deal has risen in importance in recent years, it is not yet well understood. Through an in-depth analysis of the acquisition of Brenntag by BC Partners, we develop propositions on the value creation profile of secondary buyouts. Design/methodology/approach – We use a single case study design to explore the information-rich context of a secondary buyout. The Brenntag case epitomizes the development of a company from forming part of a large conglomerate to being private-equity owned after the primary and secondary buyout, to its final disposition of public listing. Our analysis is based on ten semi-structured interviews with key protagonists and observers, as well as analysis of primary company data and additional secondary data sources. Findings – We propose that even if the investment management and monitoring skills of the primary and secondary private equity group are similar, there is still potential to realize operational improvements in a secondary buyout, due to either early exit of the primary private equity group or measures that further enhance management incentives. In addition, the Brenntag case shows that low information asymmetries can lead to higher leverage and that opportunities for multiple expansions are limited in secondary buyouts. Originality/value – While a secondary buyout has become a common exit route in recent years, we are the first to undertake an in-depth case analysis of a secondary buyout. Our study helps researchers and practitioners enhance their understanding of drivers behind the value creation profile of secondary buyouts.