Second buyouts (SBOs) are on the rise. What are they and why are they doing so well? Here’s a look, according to a fascinating new research note from private equity data provider Pitchbook.
What are Secondary Buyouts?
The topic is secondary buyouts, but what exactly are secondary buyouts? In private company investing, there are often multiple owners of a company. Suppose a company has received a growth equity investment from a private equity company, and then that private equity company decides to sell their stake in the business to a different private equity company. This is a second buyout because it is one private equity company selling to a different private equity company.
The value of SBOs are hotly debated, with the debate generally centered around how a second private equity company can unlock value that the initial private equity company could not. Some observers also argue that if an SBOs is completed, that it may take longer for general partners to realize value in the company.
What Is the Trend in Secondary Buyouts?
Having established what an SBO is, what does the trend in SBO activity look like? The following is such a look.
The figure shows the global SBO value as a percentage of the total non-add-on leverage buyout-outs. The data, shown through May 2018, shows a generally upward trend in the relative importance of SBOs to the private equity industry.
In North America (green), SBO’s take of the activity has risen from around 10 percent in 2002 to about 25 percent today. Very similar figures are present for all activity. Interestingly, the rise of SBOs as a percentage of non-add-on LBOs has risen more sharply in Europe, with the SBO percentage rising from around 10 percent in 2002 to about 30 percent today.
Source: Pitchbook
What’s Behind the Trend?
With the background and trend now established, what might be causing the trend?
One theory is that private equity investors, in a search for profit maximization, are being pushed to embrace a buy-and-built strategy as a value creation lever, as opposed to a quick exit strategy. This strategy shift could be being driven by increased competition within the private equity industry, as well as increased competition for investment dollars from outside the private equity industry.
A second theory as a causal factor is that the global median time to exit post-entrace via a SBO or a primary buyout (PBO) has increased relative to where it stood a decade ago, and part of this might be due to increased use of SBOs. This theory is backed-up by the following Pitchbook graphic, depicting the median time to exit (in years) post-entrance fro PBOs and SBOs.
Source: Pitchbook
Conclusion
Overall, in a fascinating look at private equity secondary buyout activity, a recent Pitchbook research note showed a surprising rise in the importance of second buyouts for overall deal activity. What might be behind the rise is up for debate, but the trend in importance is clearly there, with no indication that the trend will reverse itself anytime soon.
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