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.


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