Performance Dependency of Secondary Buyouts on Primary Buyouts
38 Pages Posted: 4 Jan 2019
Date Written: December 20, 2018
Secondary buyouts (SBOs) represent up to 52 per cent of the total private equity activity. Recent studies generally found an underperformance of SBOs compared to primary buyouts (PBOs), making this high share of SBOs questionable insinuating that these investments are much more driven by the appetite to invest than by rational investment decisions. This paper analyses the dependency of the performance of SBOs on the performance of the preceding PBOs. The dataset of the underlying study consists of 295 PBOs and 295 subsequent SBOs in the UK. We investigate the value drivers for all buyouts in general and for PBOs and SBOs separately. We find that PBOs and SBOs have strongly differing value drivers. Further, we analyse the effect of the firm development during the PBO on the value creation of the SBO and thereby identify several selection criteria of PBOs and their influence on the performance of SBOs. We find that value drivers, e.g. a superior EBITDA margin development, are not a sign of a potentially low further value creation but rather trigger the SBOs performance. We further analyse the value drivers of the SBO conditional on the identified selection criteria. When investigating the required action for each selection criteria, we find that those conditional value drivers also differ strongly among the criteria. The paper offers a grid of parameters and its dependencies for analyzing investment pre-decisions for SBOs based on the performance of the previous PBOs.
Keywords: Private Equity, Secondary Buyout, Value Drivers, Investment Selection
JEL Classification: G11, G23, G24, G34
Suggested Citation: Suggested Citation