The analysis of private equity investments in secondary buy-outs: The case study of US market

Abstract

Popularity of secondary buyouts is increasing from year to year – number of transactions grows with the faster rate than total number of buyout deals. However to date this topic is poorly studied and understood. The first goal of current research is to define the set of factors that influence returns from private equity investments in secondary buyouts. The second goal is to develop set of recommendations for both investors and private equity firm managers for asset allocation between primary and secondary buyouts. Conducted research results in several important findings. Secondary buyouts are associated much higher risk than primary and thus investors should require additional return for excess risk taken. The most likely exit from secondary buyout is a sale to another private equity firm. This is a new phenomenon not described before in the literature that can be called “tertiary” buyout. Even more surprising is a finding that this exit route is the most frequent outcome of secondary buyout and it is the second most profitable outcome for investors after the sale to strategic buyer. Holding period of secondary and primary buyouts are not statistically different, the same as not different are the mean returns. Debt is not a significant value creation driver in secondary buyouts – this is the contrary to primary buyouts where debt is one of the key value creation drivers.