Unquote

Secondary buyouts hit 10-year low in Q1

Volume of European buyouts by vendor
Proportion of deals sourced from fellow PE firms has ebbed back to the level last seen in 2007, according to Unquote Data
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Slightly more than a quarter (27%) of European buyouts were sourced from other private equity firms in the first three months of 2018, against more than a third over the comparable period last year.

Drawing parallels between the current private equity market and the industry's heyday in 2007 has become commonplace, and, almost invariably, the comparison is made with some sense of foreboding: deals are once again over-leveraged, 2007-like entry multiples threaten future returns, and a new high-water mark in fundraising will inevitably lead to a lack of investment discipline as PE houses rush to put that money to work.

All these observations might have some merit, but looking at buyout activity over the first three months of 2018 can also invite comparisons that are more favourable at face value – chief among these is the fact that the proportion of deals sourced from fellow PE firms has ebbed back to the level last seen in 2007.

Time will tell if this holds out as 2018 unfolds, but 27% of all buyouts recorded by Unquote over the first quarter were secondary transactions – compared with 34% in the first quarter of last year, and 31% over 2017 as a whole. Furthermore, 2017 was already noteworthy in that the proportion of SBOs was significantly lower than that seen over the two previous years (36%) and more in line with the longer, 10-year average of 32%. More strikingly, SBOs only accounted for 40% of the buyout market in aggregate value terms in Q1 2018. For 2017 as a whole, that market share stood at 54%.

Limited partners worried about the increasingly large amounts of capital previously "recycled" within the industry will no doubt be delighted that primary sources of dealflow (chiefly family and private vendors) have been on the rebound in recent months.

This tends to explain the relative decline of SBOs at the lower end of the market though. The main driver behind the resurgence of primary deals in terms of volume of capital deployed in early 2018 once again echoes 2007: mammoth take-privates (Nets, Refresco) and hefty corporate carve-outs (AkzoNobel, Wyndham Vacation Rentals, among others) have already been plentiful in the space of three months and seen "pass-the-parcel" deals mostly confined to the upper end of the mid-market.

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