Leveraged Buyout - Secondary and Tertiary Buyouts

Secondary and Tertiary Buyouts

A secondary buyout is a form of leveraged buyout where both the buyer and the seller are private equity firms or financial sponsors (i.e., a leveraged buyout of a company that was acquired through a leveraged buyout). A secondary buyout will often provide a clean break for the selling private equity firms and its limited partner investors. Historically, given that secondary buyouts were perceived as distressed sales by both seller and buyer, limited partner investors considered them unattractive and largely avoided them.

The increase in secondary buyout activity in 2000s was driven in large part by an increase in capital available for the leveraged buyouts. Often, selling private equity firms pursue a secondary buyout for a number of reasons:

• Sales to strategic buyers and IPOs may not be possible for niche or undersized businesses.
• Secondary buyouts may generate liquidity more quickly than other routes (i.e., IPOs).
• Some kinds of businesses—e.g., those with relatively slow growth but which generate high cash flows—may be most appealing to private equity firms than they are to public stock investors or other corporations.

Often, secondary buyouts have been successful if the investment has reached an age where it is necessary or desirable to sell rather than hold the investment further or where the investment had already generated significant value for the selling firm.

Secondary buyouts differ from secondaries or secondary market purchases which typically involve the acquisition of portfolios of private equity assets including limited partnership stakes and direct investments in corporate securities.

If a company that was acquired in a secondary buyout gets sold to another financial sponsor, the resulting transaction is called a tertiary buyout.