Secondary Buyouts: Why Buy and at What Price?
California State University, Fullerton
June 10, 2012
This paper studies the economic logic and pricing of secondary buyouts, a form of leveraged buyout that has become increasingly popular. I investigate three potential explanations for secondary buyouts: efficiency gains, liquidity-based market timing, and collusion. The results are most consistent with the liquidity-based market timing hypothesis. Specifically, firms are more likely to exit through secondary buyouts when: the equity market is ``cold'', the debt market condition is favorable, and the sellers face a high demand for liquidity. While this hypothesis shows a constrained optimal strategy for private equity firms, I do not find any strong efficiency gains for the target firms. My further analyses on pricing show that secondary buyouts are priced higher than first-time buyouts. However, this premium is driven by favorable debt market conditions. Overall, the results are consistent with the notion that secondary buyouts serve no purpose aside from alleviating the financial needs of private equity firms.
Number of Pages in PDF File: 50
Keywords: private equity, buyouts, exits
JEL Classification: G23, G24, G34
Date posted: October 24, 2011 ; Last revised: June 14, 2012