Risk of Financial Distress in Secondary Buyouts

36 Pages Posted: 11 Jan 2020

See all articles by Tjark Eschenröder

Tjark Eschenröder

University of Cologne - Department of Banking

Thomas Hartmann-Wendels

University of Cologne - Department of Banking

Date Written: December 23, 2019

Abstract

Secondary buyouts (SBOs) represent more than 50 percent of all buyouts in 2018. Even though general partners argue that SBOs are less attractive investment targets for buyouts and some empirical indication against an outperformance of SBOs exists, the share of SBOs continuously increases. However, SBOs might be a favourable target with regard to its investment risk. Using a unique dataset of 295 PBOs and their consecutive SBOs in the UK, we analyse the risk level of financial distress of the buyout rounds considering the Altman Z-Score. We find that SBOs reduce this risk of portfolio companies more than PBOs during the holding period. Therefore, SBOs, in general, cannot be seen as riskier investments. However, risk of financial distress is driven differently between PBOs and SBOs. The risk development in distressed companies is not different in PBOs and SBOs. However, SBOs perform better at risk management if the portfolio company is not distressed. This risk-adjusted view identifies SBOs as attractive investment targets. It also contributes to rectify investments in SBOs as rational and promising decisions.

Keywords: Private Equity, Secondary Buyout, Risk Measurement, Risk Management

JEL Classification: G11, G23, G24, G32, G34

Suggested Citation

Eschenröder, Tjark and Hartmann-Wendels, Thomas, Risk of Financial Distress in Secondary Buyouts (December 23, 2019). Available at SSRN: https://ssrn.com/abstract=3508613 or http://dx.doi.org/10.2139/ssrn.3508613

Tjark Eschenröder (Contact Author)

University of Cologne - Department of Banking ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Thomas Hartmann-Wendels

University of Cologne - Department of Banking ( email )

Albertus-Magnus-Platz
D-50923 Cologne
Germany

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