The secondary coming: SBOs to rise again

Secondary buyouts (SBOs) were once deemed a bubble market phenomenon. Hefty price tags were made possible by an abundance of inexpensive debt, and buyout houses were even accused of horse trading when they needed to boost exits ahead of fundraising. This has come to a screeching halt, with the value of UK private equity-backed SBOs down more than 70% last year on 2007's figures (see graph), according to unquote" data.

For very different reasons, SBOs may be set to make a slow but steady comeback. 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 down, yet still appeal 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 (see page 25). 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 target's keys 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 losses on businesses.

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