The rise and rise of the secondary buyout

20 May 2004

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The prominence of the secondary buyout was one of the most notable trends of 2003. With trade buyers conspicuous by their absence, and the stock markets still unreliable, private equity houses have now turned to this exit route as the most viable way of realising their investment. During the course of 2003, buyout firms had to reposition their strategies in order to play a safe hand in difficult economic conditions. Whilst some private equity houses still preferred to find higher-paying trade buyers for their portfolio companies, others opted to sell to another financial sponsor as a more risk-free way to make their money back. For others, a secondary buyout is a way for firms to demonstrate performance before starting new fundraising. Whatever the reasons behind a secondary buyout, there is a considerable variation in their prevalence, and in attitudes to them, within the various European regions.

Secondary buyouts are, of course, nothing new to many of the regional European markets, with the UK in particular maintaining a fairly stable volume of secondary buyouts since 2000. 2003 provided its share of prominent high-value deals, including Cinven and Candover's â‚¬1.9bn secondary buyout of Gala from PPM Ventures and Credit Suisse First Boston Private Equity, Apax Partners' â‚¬1.5bn buyout of Focus Wickes from Duke Street Capital, and the acquisition of Linpac by Montagu Private Equity for â‚¬1.2bn. In fact, in the UK, secondary buyouts account for around a quarter of the deals in the â‚¬50-250m bracket. These now account for 19% of all deals done in 2003, compared with 18% in 2002 and 14% in 2001.

Meanwhile, in Germany, secondary buyouts provided the most frequent form of exit in 2003, with a dramatic rise in volume when 12 were recorded, compared to a mere three in 2002. This increase is not surprising, given the state of the stock markets, and the fact that corporates have been implementing divestment programmes for some time rather than making acquisitions. Furthermore, secondary buyouts are an inherent feature of a mature market, and symptomatic of the fact that Germany also faces a situation where dealflow cannot match the amount of capital available for investment. Secondary buyouts completed in 2003 include the buyout of Premiere Fernsehen GmbH & Co KG for approximately â‚¬1bn by Permira from a syndicate led by Bayerische Landesbank, the acquisition of Minimax Holding by Investcorp from Barclays Private Equity for around â‚¬350m and the sale by Permira of TFL Holding (Together for Leather) to Odewald & Compagnie for an estimated â‚¬200m.

The number of secondary buyouts in France almost doubled in 2003, rising from 13 in 2002 to 25. The year also marked the first time such deals had been valued at over â‚¬1bn, with LBO France's acquisition of Lafarge Speciality Products from The Carlyle Group, CVC Capital Partners and Advent International. Another high-value secondary buyout was PAI's acquisition of Elis in a â‚¬1.5bn BC Partners. Secondary buyouts also took over from trade sales as the most common means of exit in France in 2003, with notable exits via this route including the sale of Lafarge Speciality Products (MatÃ©ris) to LBO France for â‚¬1.1bn and the purchase of Frans Bonhomme by Apax Partners and Goldman Sachs.

The southern European markets are particularly interesting with regard to this particular kind of transaction, being less mature and generally less evolved than some other regions. Whereas the Italian exit market has traditionally been dominated by trade sales and exits via secondary buyouts, 2003 was slightly unusual in that there were no trade sales recorded, but there were five exits as a result of secondary buyouts. These included the sale of FL Selenia for â‚¬670m to Vestar Capital Partners, providing an exit for Doughty Hanson, and the buyout of Global Garden Products by ABN AMRO Capital from UBS Private Equity for â‚¬555m. In Spain, 2003 saw the country record its first-ever secondary buyout, when ABN AMRO Capital acquired Labiana from 3i for â‚¬30m. This is a significant milestone in the development of the Spanish private equity market, not just because it signals another step towards maturity, but also because secondary buyouts had something of a stigma attached to them in the past. Indeed, some Spanish investors felt they would lose face by buying a company from another financial sponsor because they felt they should have spotted it themselves in the first place.