Taking the secondary buyout route to exit

Current market conditions make achieving a successful exit from a buyout transaction difficult. As well as being faced with a virtually closed IPO market, buyout houses are having to contend with the fact that underperforming stocks have left many publicly quoted companies unable to raise the necessary capital, via the public markets, to finance acquisitions. The resulting options for buyout players are to hold their portfolio companies for longer, or be more creative when considering exit routes. This increasingly means considering the secondary buyout route.

According to data analysed in Initiative Europe’s latest focus report, entitled ‘Secondary Buyouts: The Changing European Buyout Market’, 57 secondary buyouts were completed in Europe last year, up from 49 in 1997, at a time when the trend is for overall buyout volumes to decline. The bulk of such activity has historically taken place in the UK, Ireland and France; together, these regions have accounted for some 80% of all deal flow since 1997. Whilst the dominance of the UK is not surprising, the level of activity seen in France is. The region has accounted for around 25% of all secondary buyout deal flow seen in Europe since 1997, significantly in excess of its 17% proportion of all European buyout activity in this period, with secondary buyouts representing around 20% of all buyouts by source in France. In contrast, very little activity has been seen in the German-speaking countries. This may be a reflection of the lower levels of buyout activity in the Deutsche region generally and the lack of a developed mid-market for buyouts. Whatever the reasons, the Deutsche region has accounted for a mere 5% of all secondary buyout activity since 1997. Until very recently, the Nordic market had been devoid of secondary buyout activity. However, in recent weeks, a flurry of activity has seen FSN Capital acquire Industri Kapital’s stake in Kongsberg Automotive ASA and Bridgepoint Capital purchase Nordisk Parkering from UBS Capital for around SKr 850m.

Secondary buyouts have followed the trend witnessed in the buyout sector as a whole and have been getting bigger. A considerable number of secondary buyouts have broken the Euro 1bn barrier, including Punch Taverns (Euro 1.3bn), William Hill (Euro 1.2bn) and Baxi Group (Euro 1.1bn). Indeed, Europe’s sixth largest buyout transaction ever was a secondary buyout: the Euro 2.1bn sale of General Healthcare by Cinven to BC Partners in 2000.

It is likely that secondary buyouts will continue to be an important feature of Europe’s private equity landscape, representing a viable and attractive exit route, as well as a source of quality deal flow. If the current problems in achieving an exit via the traditional routes of IPO or trade sale continue, many more buyout players may actively seek potential buyers from amongst their immediate peers.

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• Nordics
• Healthcare