Secondary Buyouts Research Articles

Secondary Buy-Outs: Passing the Parcel or Creating Value with Distinct Value Creation Strategies?

This paper studies the growth strategies, the operational performance and the deal performance of 357 world-wide, back-to-back buyout cycles, containing both, the Primary Buyout (PBO) and the consecutive Secondary Buyout (SBO) of the same portfolio firm between 1997 and 2012. I find that inorganic growth strategies are significantly more often conducted in SBOs. There is no evidence that the operational growth is different for PBOs and SBOs, when controlling for the financial crisis. However, SBOs show a significantly lower expansion of the operational margin. Lastly, I find that deal returns are comparable for both buyout cycles, and that buy-and-build strategies are an important return driver in SBOs. My results suggest, that the focus is especially on efficiency improvement during the PBO, while in SBOs the strategy is to further grow the business of an already efficiently managed portfolio firm.

Fund managers under pressure: Rationale and determinants of secondary buyouts

The fastest growing segment of private equity (PE) deals is secondary buyouts (SBOs)—sales from one PE fund to another. Using a comprehensive sample of leveraged buyouts, we investigate whether SBOs are value-maximizing, or reflect opportunistic behavior. To proxy for adverse incentives, we develop buy and sell pressure indexes based on how close PE funds are to the end of their investment period or lifetime, their unused capital, reputation, deal activity, and fundraising frequency. We report that funds under pressure engage more in SBOs. Pressured buyers pay higher multiples, use less leverage, and syndicate less suggesting that their motive is to spend equity. Pressured sellers exit at lower multiples and have shorter holding periods. When pressured counterparties meet, deal multiples depend on differential bargaining power. Moreover, funds that invested under pressure underperform.

Is the Rise of Secondary Buyouts Good News for Investors?

Private equity firms increasingly sell companies to each other in secondary buyouts (SBOs). We examine commonly expressed concerns regarding SBOs using novel and unique datasets. SBOs made by buyers under pressure to spend capital (a minority of transactions) underperform and destroy value for investors, who then reduce their capital allocation to private equity firms doing those transactions. Other SBOs perform as well as other buyouts, and investors do not penalize firms doing those. When the buyer and seller have complementary skill sets, SBOs generate significantly higher returns and 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. Overall, our evidence paints a nuanced picture of SBOs.

Private equity firm experience and buyout vendor source: What is their impact on efficiency?

Using a dataset comprising 88 Private Equity (PE) backed Leveraged Buyouts (LBOs) completed and exited during the period 1999–2008, this study sheds new light on the impact of buyout vendor source and PE investor experience on post-buyout efficiency during the first 3years after the transaction. There are three main findings. First, we observe increases in post-buyout efficiency over time, although LBOs from different vendor source differ in terms of post-transaction efficiency levels and improvement trajectories. Private and divisional buyouts are more efficient than the average. Divisional buyouts show higher efficiency improvements than private and secondary buyouts. Secondary buyouts remain below the average. Second, multivariate analyses suggest a positive and significant effect of PE firm experience on post-buyout efficiency. Finally, the observed efficiency patterns seem to be convex, suggesting the major improvements happen in the first 2years after the transaction.

Fund Managers Under Pressure: Rationale and Determinants of Secondary Buyouts

The fastest growing segment of private equity (PE) deals is secondary buyouts (SBOs)—sales from one PE fund to another. Using a comprehensive sample of leveraged buyouts, we investigate whether SBOs are value-maximizing, or reflect opportunistic behavior. To proxy for adverse incentives, we develop buy and sell pressure indexes based on how close PE funds are to the end of their investment period or lifetime, their unused capital, reputation, deal activity, and fundraising frequency. We report that funds under pressure engage more in SBOs. Pressured buyers pay higher multiples, use less leverage, and syndicate less suggesting that their motive is to spend equity. Pressured sellers exit at lower multiples and have shorter holding periods. When pressured counterparties meet, deal multiples depend on differential bargaining power. Moreover, funds that invested under pressure underperform.

Fund Managers Under Pressure: Rationale and Determinants of Secondary Buyouts

The fastest growing segment of private equity deals are secondary buyouts - sales from one PE fund to another. Using a comprehensive sample of leveraged buyouts we investigate whether SBOs are value-maximizing, or reflect opportunistic behavior. To proxy for adverse incentives, we develop buy and sell pressure indexes based on how close PE funds are to the end of their investment period or lifetime, their unused capital, reputation, deal activity, and fundraising frequency. We report that funds under pressure engage more in SBOs. Pressured buyers pay higher multiples, use less leverage, and syndicate less suggesting that their motive is to spend equity. Pressured sellers exit at lower multiples and have shorter holding periods. When pressured counterparties meet, deal multiples depend on differential bargaining power. Moreover, funds that invested under pressure underperform.

Owner Sequences and Value Proposition Variation: A New Answer to the Best Owner Question

This paper takes a first step towards a theory of sequential prioritization among strategic alternatives. For alternative actions whose values depend on each other and that cannot be executed simultaneously but must be carried out in sequence, the total value of the sequence depends on in which order they are carried out. In particular, the paper discusses who the best owner of a business is and suggests priorities among four types of corporate value propositions, recognizing that different owners have qualitatively different ways to add value to businesses and that a business can be owned by several owners in a sequence. It is argued that a given parent firm can be the best owner in spite of not having the quantitatively greatest value proposition among alternative owners if its value proposition is of higher sequential priority than the alternatives’. It is discussed how sequential prioritization theory in corporate strategy could help explain several phenomena that have not been properly explained with existing theory, such as the conglomerate discount, secondary buyouts, large acquisition premiums, and why so many acquisitions are later divested.

The Consequences of Secondary Buyouts for Private Equity Investors

The Consequences of Secondary Buyouts for Private Equity Investors

The Case for Secondary Buyouts as Exit Channel

Do private equity firms have a clear pecking order when deciding on exit channels for their portfolio companies? Are secondary buyouts—that is, sales to other PE firms—always an exit of last resort? And are there company‐ or market‐related factors that have a clear and predictable influence on decisions to pursue secondary buyouts?Using a proprietary dataset of over 1,100 leveraged buyouts that exited in North America or Europe between 1995 and 2008, the authors attempt to answer these questions by analyzing the returns associated with public, private, and secondary (or “financial”) exits. Based on their analysis of the realized returns, there is no clear pecking order of exit types. Secondary buyouts deliver rates of return that are the equal of those achieved through public exits.In addition, the authors assess the relationship between the likelihood of choosing a financial exit and certain company‐related as well as market‐related factors. Portfolio companies with greater debt capacity are more likely to be sold in secondary buyouts. Furthermore, increases in both the liquidity of debt markets and the amount of undrawn capital commitments to the private equity industry increase the probability of exit through secondary buyouts.

Secondary buyouts: Why buy and at what price?

This paper studies the economic logic and pricing of secondary buyouts, a form of leveraged buyout that has become increasingly popular. I investigate three potential explanations for secondary buyouts: efficiency gains, liquidity-based market timing, and collusion. The results are most consistent with the liquidity-based market timing hypothesis. Specifically, firms are more likely to exit through secondary buyouts when: the equity market is “cold”, the debt market condition is favorable, and the sellers face a high demand for liquidity. While this hypothesis shows a constrained optimal strategy for private equity firms, I do not find any strong efficiency gains for the target firms. Further, my analyses on pricing show that secondary buyouts are priced higher than first-time buyouts due to favorable debt market conditions. Overall, the results are consistent with the notion that secondary buyouts serve no purpose aside from alleviating the financial needs of private equity firms.

Private Equity Lemons?Evidence on Value Creation in Secondary Buyouts

AbstractThis paper analyses whether secondary buyouts have a value creation profile and offer equity returns different from those of primary buyouts. Using a sample of 2,456 buyout transactions (including 448 secondary buyouts), we find no evidence that secondary buyouts generate lower equity returns or offer fundamentally lower operational value creation potential. However, we can show that secondary buyouts obtain 28–30% more leverage than primary buyouts, even after controlling for debt market conditions. Furthermore, we find evidence that secondary buyouts are 6–9% more expensive than other buyouts.

Drivers of Value Creation in a Secondary Buyout: The Acquisition of Brenntag by BC Partners

Purpose – While secondary buyouts have gained in importance in recent years, specific drivers of value creation of this type of private equity deal are not yet well understood. Through the in-depth analysis of the acquisition of Brenntag by BC Partners, we develop propositions on the value creation profile in 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 being part of a large conglomerate to being private equity owned after the primary and secondary buyout up to being publicly listed. Our analysis is based on nine semi-structured interviews with key protagonists and the analysis of primary company data as well as 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 the potential to realize operational improvements in a secondary buyout due to either an early exit of the primary private equity group or measures that further enhance management incentivisation. Furthermore, the Brenntag case shows that low information asymmetries can lead to higher leverage and that opportunities for multiple expansion are limited in secondary buyouts.Originality/value – While a secondary buyout has been 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 to enhance their understanding of drivers behind the value creation profile of secondary buyouts.

Exit of Last Resort? Empirical Evidence on the Returns and Drivers of Secondary Buyouts as Private Equity Exit Channel

Despite an increasing importance of secondary buyouts in the private equity market, little is known about the perspective of the seller and his motives for choosing this exit type. Do private equity firms have a clear pecking order regarding the exit channels for their portfolio companies? Is a secondary buyout only an ’exit of last resort’? And furthermore, have company or market related factors an influence on the decision to pursue a secondary buyout? This article’s aim is to answer these research questions. Based on a proprietary dataset of 1,112 leveraged buyouts exited in North America or Europe between 1995 and 2008, the authors empirically analyze the return potential of different exit channels including public, private and financial exits. They find that based on the realized returns, there is no clear pecking order of exit types. Secondary buyouts, i.e. financial exits, deliver returns that are equally attractive to the ones achieved through public exits. In addition, the authors empirically assess the relationship between the likelihood to choose a financial exit and company as well as market related factors. They show that portfolio companies with a higher lending capacity are more likely to be exited via a secondary buyout. Furthermore, the liquidity of debt markets and the amount of undrawn capital commitments to the private equity industry increase the probability of a secondary buyout. Overall, the authors conclude that private equity firms engage in market arbitrage between debt and equity as well as private and public equity markets.

Secondary Buyouts

Secondary Buyouts

Secondary Buyouts: Why Buy and at What Price?

This paper studies the economic logic and pricing of secondary buyouts, a form of leveraged buyout that has become increasingly popular. I investigate three potential explanations for secondary buyouts: efficiency gains, liquidity-based market timing, and collusion. The results are most consistent with the liquidity-based market timing hypothesis. Specifically, firms are more likely to exit through secondary buyouts when: the equity market is ``cold'', the debt market condition is favorable, and the sellers face a high demand for liquidity. While this hypothesis shows a constrained optimal strategy for private equity firms, I do not find any strong efficiency gains for the target firms. My further analyses on pricing show that secondary buyouts are priced higher than first-time buyouts. However, this premium is driven by favorable debt market conditions. Overall, the results are consistent with the notion that secondary buyouts serve no purpose aside from alleviating the financial needs of private equity firms.

What drives leverage in leveraged buyouts? An analysis of European leveraged buyouts’ capital structure

AbstractThis paper examines leverage in European private equity‐led leveraged buyouts (LBOs). We use a unique, self‐constructed sample of 126 European private equity (PE)‐sponsored buyouts completed between June 2000 and June 2007. We find that determinants derived from classical capital structure theories do not explain leverage in LBOs, while they do drive leverage in a control group of comparable public firms. Rather, we document that leverage levels in LBOs are related to the prevailing conditions in the debt market. In addition, our results indicate that reputed private equity sponsors use more debt and that secondary buyouts have higher leverage levels.

Private Equity Lemons? Evidence on Value Creation in Secondary Buyouts

The sale of a company, where both buyer and seller are private equity funds, is commonly known as a secondary buyout. While the empirical evaluation of value creation and its drivers on deal level has been one of the focus areas of private equity research, this paper presents a specific analysis of the value creation potential of secondary buyouts compared to primary buyouts by focusing on two central issues. It analyzes whether secondary buyouts generate lower returns than primary buyouts and how the value creation profile of secondary buyouts compare to primary buyouts with a specific analysis of the drivers leverage, operational improvements and pricing. Using a sample of 910 realized buyouts transactions (including 115 secondary buyouts), we find little evidence that secondary buyouts generate lower equity returns or offer fundamentally lower operational value creation potential. On the other hand, we can show that secondary buyouts obtain more leverage than primary buyouts even after having controlled for debt market conditions, which can be motivated with reduced informational asymmetries in a secondary buyout setting. Furthermore, we find evidence that secondary buyouts are more expensive than other buyouts, which is not surprising since the acquiring private equity sponsors is purchasing the asset from a seller with similar market timing and negotiation skills.

Secondary Buyouts

Secondary buyouts represent now over 60% of the overall buyout activity. In this paper we investigate the possible determinants of such a spectacular growth. We show 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 the peer group. Returns to secondary PE investors are positive but significantly lower than those of first round buyers. We test several alternative drivers of SBOs and find that favorable credit market conditions and PE reputation drive secondary investment volume.

Why Do Private Equity Firms Sell to Each Others?

How and when to exit portfolio company investments are critical choices facing private equity funds. In this paper we analyze 1,022 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.

A Note on Secondary Buyouts-Creating Value or Recycling Capital

This paper analyzes whether secondary buyouts of private equity (PE) investors in general create value and therefore are a suitable alternative to exit strategies like trade sales and IPOs. Theoretically, two conflicting approaches might explain the use of secondary buyouts as an exit channel of private equity investors: the capital recycling effects and different potential sources of value creation. We present empirical tests of these approaches. The profitability of secondary buyouts is assessed by a comparison of exit multiples realized with secondary buyouts and trade sales. The results are not unequivocal, but overall we interpret our findings in a way that awards secondary buyouts a profitability that is not significantly different from trade sales. Therefore, we argue that secondary buyouts have the potential for adding value that arise from different sources like the reduction of agency costs or the functions of the financial investor. Secondary buyouts should thus not be seen as a second best alternative for recycling the PE investors’ capital in situations where alternative—and supposedly more attractive—exit channels are unavailable.