Secondary buyouts (SBOs) occur when one PE firm sells control of a portfolio company to another PE firm. SBOs were 40% of all PE exits in 2013 and 44% of all PE exits in 2012. Why should you care? Joseph Baratta, the London-based Global Head of Private Equity for Blackstone Group (NYSE:BX), commented in late 2013 at a Bloomberg Dealmakers Summit:
Right now in Europe, something like 75% of deals above $500 million in enterprise value are sponsors selling to each other—that’s not a sign of health in our market. (emphasis added)
I’m rooting for a large scale resumption of corporate M&A because that’s the lifeblood of our business in private equity.
Large corporate mergers result in non-core asset sales or some corporations who don’t have ready access to capital need our help. That’s a healthy functioning private equity market. (emphasis added)
Why does all this matter? Some commentators argue that it reflects the maturing of the private equity market, the finite term of buyout funds, and the huge amount of “Dry Powder” that needs to be invested by PE firms. This group feels that SBOs are less successful than primary buyouts and reflect the relative absence of available target companies.
Others point out that smaller PE firms often sell portfolio companies to larger PE firms and that certain PE firms simply have much greater expertise in a certain area. This group feels that SBOs are a natural extension of PE activity – SBOs do not reflect a maturing market.
In the first half of 2014, there were 213 SBOs, the second greatest number of SBOs in a half year since 2006.
From January 2006 through December 2013, of the large PE firms, Carlyle did the most SBOs (38). Interestingly, Blackstone did 22 SBOs during that period.
Several studies in recent years have found that SBOs are statistically less successful than primary SBOs. The investors in PE firms argue that SBOs diminish overall PE returns by layering additional transaction costs on the same portfolio company. An investor in multiple PE firms may suffer the unusual situation of selling itself a portfolio company it already owned.
PE firms are driven by economics to invest in the best deals possible, so SBOs will continue to be a primary exit alternative.