In times past, private equity firms achieved “good” exits for their portfolio companies via public markets or trade sale to a strategic buyer. But the recent years have shown that over 40% of PE exits have come via secondary buyouts (SBO).

PE to PE SBO exits were previously considered “panic sales” driven by managers with fixed life closed-end funds running up against the clock and thus under pressure either to negotiate fund extension or liquidate their investments.

Today PE to PE SBO’s are the new black. With SBO’s increasingly being seen as an opportunity to create value both for sellers and buyers.


Benefits of Secondary Buyouts

A Secondary Purchase in the PE world can be either the sale of part or all of single asset or an entire portfolio.

One result of strong recent inflows of capital into Private Equity has been the creation of ladder of Private Equity funds ranging from small to huge. With more funds chasing deals of every scale, SBO’s (single asset sales) have become increasingly common as small(er) PE sells to big(ger) PE. A second feature has the emergence of Secondary Funds who specialise in picking up stakes from exiting Limited Partners or the entire portfolios from exiting fund managers.


Benefits to Private Equity managers selling via SBO’s include:

Instant Liquidity

SBO’s can short-cut the time and complexities of running a full managed sale or IPO process. Cash is paid upfront without some of the holdbacks associated with trade sales or the escrow periods associated with IPO’s.

Flexibility and Discretion

The selling private equity firm can choose to sell down partial positions to realise their return while retaining upside exposure. Moreover, likely PE buyers are readily identified and are used to moving quickly, all of which is helpful when the goal is a discreet process with minimal disruption to the underlying business.

Comparable Pricing

With increasing competition for quality assets, the prices paid for SBO’s are increasingly comparable to more traditional exits.

 

Benefits for buyers

Scale

For larger funds, somebody else has done some of the hard yards in assembling smaller components to create a ‘big enough’ assets to fit with a large fund strategy.

Fast Due Diligence Process

Oftentimes, the incumbent PE manager has already cleaned up potential issues in their portfolio. It is also more likely that robust reporting processes are already in place.

Signs of a Successful Secondary Buyouts

Analysis of returns from secondary purchases suggests that the strategy delivers value to both sellers and buyers. Because of this, we expect secondary buyouts to continue to be featured prominently amongst Private Equity transactions.

Neil Bourne

Managing Principal

Neil Bourne is the Managing Principal for Eaton Square Sydney. Neil has been working with growth stage technology business for over 15 years in venture capital and corporate finance. Neil is married to Sarah, has three children and enjoys Brazilian jujitsu and outdoor sports.

[email protected] +61 1800 332 866 eatonsq.com