What's in the box?

Emanuel Eftimiu
20 September 2010

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Secondary buyouts have grabbed many headlines this year, with the media trying to make the most out of recovering private equity deal activity. тPass the parcelт seems to be the new buzz phrase for 2010, while the negative connotation of this seems to be taken for granted. After all, private equity funds are still sitting on a large amount of тdry powderт (one of last yearтs favourites) and are now using as much of it as possible to acquire portfolio companies from fellow private equity houses, clearly willingly accepting lower returns. Such transactions are bound to underperform, arenтt they? Not quite.

For a start, current secondary buyout volume makes up a quarter of all buyout activity, which is in line with levels recorded in previous years, except 2009, as unquote" proprietary database Private Equity Insight reveals. Indeed, the perceived increase in such deals is most likely down to the fact that secondary buyouts have been at the larger end of the market. Nevertheless, even total value figures for such European transactions are in line with previous years, worth around a third of all buyout value.

Regarding the claim secondary buyouts produce lower returns; one should be careful not to generalise. A number of companies acquired via SBOs have achieved substantial returns for their backers this year. Most famously, Bridgepoint made 8x money on their sale of Pets at Home to KKR.

True, companies now on their third or fourth private equity owner are still in the private equity cycle and some argue a sale via SBO does not constitute a real private equity exit. However, at the same time they show that secondary buyouts can certainly still produce exceptional returns for their backers. Therefore, one should be less concerned about passing the parcel, and more concerned about its contents.