SBOs to make comeback

Secondary buyouts (SBOs) were once deemed a bubble market phenomenon, but came to a screeching halt this year. One of the few Nordic buyouts recorded this year is Axcel's recent acquisition of LGT from Litorina. Judging market trends based on one deal would be foolish. However, as continental and Nordic private equity markets generally follow UK and US trends, movements in the UK's secondary buyout market could be a sign of things to come.

After a 70% drop in volume last quarter, according to unquote" data, UK SBOs may be set to make a slow but steady comeback, albeit for very different reasons. Firstly, the frenzy of deals done over the last few years means private equity is sitting on a lot of assets - assets whose valuations are done, yet whose allure may still be apparent to other private equity houses with complementary and/or competing businesses. If those houses have the capacity to buy, they may eye up such targets as bolt-ons, offering the incumbent backers at least partial exits. This was the case recently when Barclays Private Equity (BPE)-backed ATP bought Instone from 3i for £37m. BPE was able to strengthen its investee company, while 3i reaped 4.5x money on the sale.

There may also be partial SBOs where assets were acquired years ago. "Where a private equity backer doesn't have the capacity to further grow an investee company since it sits in an older fund, it may seek another sponsor to come in and take a minority stake," says Jacques Callaghan, managing director of Hawkpoint. As there is no change of ownership, it often means no new debt is involved. Plus it gives the incumbent backer a partial exit.

Another type of SBO may occur via a bank: where the incumbent sponsor hands the keys to the target over to the bank, and the bank is eager to offload it sooner rather than later (owing more to its inability to have such assets on its balance sheet than to its being ill-equipped to turn businesses round). This may lead to a fire-sale to another private equity house in situations where the businesses are operationally sound but overleveraged, with the bank aiming to minimise its loss on the business.

Nordic SBO records

The Nordic secondary buyout market peaked in 2005 when Macquarie Bank purchased Dyno from IK, EQT disposed Flexilink Systems to AAC Capital Partners, and also acquired Sanitec from BC Partners; all deals that were valued at EUR1.3bn-1.45bn each. The largest recorded Nordic SBO, however, remain the EUR2.85bn buyout of Apax-owned Molnlycke Health Group by a consortium led by Morgan Stanley in 2007. EQT's 2006 sale of Com Hem ranks second, estimated at approximately EUR1.5bn.

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• Buyouts
• Nordics