What is 'Secondary Buyout'

In a secondary buyout, a financial sponsor or private equity firm sells its investment in a company to another financial sponsor or private equity firm, thereby ending its involvement with the company. Historically, secondary buyouts have been perceived as "panic" sales and, thus, sometimes hard to consummate. Secondary buyouts are not the same as secondary market purchases, or "secondaries," which typically involve the acquisition of entire portfolios of assets.

BREAKING DOWN 'Secondary Buyout'

Part of the reason that seller private equity firms seek out secondary buyout opportunities is the instant liquidity it offers – similar to an IPO but perhaps smaller in scope. Secondary buyouts often make sense when the selling firm has already realized significant gains from the investment, or when the buyer private equity firm can offer greater benefits to the firm being bought and sold.

In a secondary buyout, both the buyer and the seller are private equity firms or financial sponsors. A secondary buyout can offer a clean break between the seller and other partner investors. Historically, since such buyouts were considered distressed sales, most limited partner investors considered secondary buyouts to be unattractive investments.

The 2000s saw an increase in the popularity of secondary buyouts. This development was largely driven by increases in available capital for such buyouts. Today, private equity firms pursue secondary buyouts for a variety of reasons, among them:

  • A sale to strategic buyers or an IPO may not be an option for a niche or small business.
  • Secondary buyouts might be able to generate quicker liquidity.
  • Slow growth businesses with high cash flows may be more appealing to private equity firms than they are to public stock investors or other corporations.

The Rise of Successful Secondary Buyouts

Secondary buyouts are successful if the investment matures to the point where it is necessary or desirable to sell rather than continue holding the investment...or if the investment has generated significant value for the selling firm. A secondary buyout may also be successful if the buyer and seller have complementary skill sets. In such a scenario, a secondary buyout can generate significantly higher returns and outperform other types of buyouts over the long term.

In recent years, 40 percent of private equity exits have come by way of secondary buyouts. By contrast, 20 years ago, private equity firms looking to exit an investment either took their portfolio companies public or sold them to another company active in the same industry.

 

RELATED TERMS
  1. Secondary Market

    A secondary market is a market where investors purchase securities ...
  2. Buyout

    A buyout is the acquisition of a controlling interest in a company ...
  3. Spot Secondary

    A market for the sale of a security that does not require SEC ...
  4. Secondary Stock

    A secondary stock is a public stock offering considered riskier ...
  5. Institutional Buyout - IBO

    An institutional buyout is the acquisition of a controlling interest ...
  6. Secondary Offering

    A secondary offering is sale of new or closely held shares of ...
Related Articles
  1. Investing

    The Most Famous Leveraged Buyouts

    A look at the largest and most famous leveraged buyouts in history.
  2. Investing

    Effects Of Interest Rate Hikes On Private Equity

    Private Equity firms would be wise to lock in current interest rates on their debt payments in anticipation of rate hikes.
  3. Investing

    Private Equity For Retail Investors

    Recent hot IPOs has many regular investors salivating at the chance to participate in start-ups and private equity. With returns in the 13% to 30% range, who wouldn’t be? Luckily, the world of ...
  4. Managing Wealth

    How to invest in private companies

    It can be tough to analyze a company that doesn't trade publicly, but there are several advantages to investing in private companies.
  5. Investing

    10 Most Famous Public Companies That Went Private

    Here’s a list of the most popular listed companies that went private in recent decades.
  6. Investing

    Private Equity: Understanding the J-Curve Effect

    Investors considering private equity need to understand what the J-curve effect is and how it works.
  7. Investing

    Adjusting Price Charts To Secondary Offerings

    Secondary offerings may require rapid readjustment of trading strategies.
  8. Investing

    AMC Prices Secondary at $31.50, Shares Fall

    AMC Entertainment priced at secondary offering at 31.50
  9. Investing

    How to Invest in Private Equity

    Private equity might be a pricey investment, but the payoff could be big. Here's why and where you should invest in private equity.
  10. Investing

    How Trump Fueled Drone Maker Kratos' Stock Offering

    Secondary offerings have surged since election day.
RELATED FAQS
  1. What's the difference between primary and secondary capital markets?

    In the primary market, investors buy securities directly from the company issuing them, while in the secondary market, investors ... Read Answer >>
  2. How are leveraged buyouts financed?

    Understand the basics of a leveraged buyout, who is involved in executing the transaction and some of the various ways to ... Read Answer >>
  3. What Happens to Call Options If a Co. is Bought?

    Typically, the announcement of a buyout offer by another company is a good thing for shareholders. Read Answer >>
Trading Center