Secondary Buyout

A secondary buyout is a leveraged buyout in which the seller is another private equity firm, rather than a strategic buyer, public shareholders, or a founder. In a secondary buyout, a PE firm acquires a company from another PE firm’s portfolio. This has become an increasingly common exit strategy for private equity, as growing numbers of PE firms must deploy capital and are willing to buy from competitors. Secondary buyouts represent the recycling of capital and deal activity within the private equity industry.

How a secondary buyout works

A PE firm (PE Firm A) acquired a company 5–7 years ago via leveraged buyout. The company has grown, debt has been paid down, and EBITDA has improved. Now PE Firm A wants to exit and monetize its investment.

Instead of selling to a strategic buyer (another operating company) or taking the company public, PE Firm A sells to another PE firm (PE Firm B). PE Firm B finances the acquisition with debt and equity, just like a typical LBO.

Timeline and value creation:

• Year 0: PE Firm A acquires company for $500 million (60% debt, 40% equity)
• Years 1–5: Company improves; EBITDA grows from $50M to $75M
• Year 5: PE Firm A sells company to PE Firm B for $900 million (new LBO)
• Return for PE Firm A: ~1.8x initial investment over 5 years (reasonable for PE)

PE Firm B now owns the company with its own new debt and equity structure. Over the next 5–7 years, PE Firm B will pursue similar improvement tactics and plan another exit.

Growth of secondary buyouts

Secondary buyouts have exploded in importance since 2010:

Reasons:

• Capital availability. PE firms have more capital under management than ever; they need places to deploy it.
• Fewer attractive exits. Strategic buyers are pickier about acquisitions. Going public requires stronger companies. PE-to-PE sales are reliable and common.
• PE-to-PE competition. Megafunds (KKR, Blackstone, Apollo) have so much capital that they frequently bid against each other for portfolio companies from smaller PE firms.
• Better valuations. PE buyers will pay premium prices for companies with proven operational improvements, often paying more than strategic buyers.

By 2020–2023, secondary buyouts accounted for 20–30% of all PE exits, compared to only 10% a decade earlier.

Dynamics of secondary buyout pricing

A secondary buyout price often exceeds what a strategic buyer would pay because:

PE buyer expectations. PE Firm B expects to replicate PE Firm A’s playbook — cut costs, improve margins, grow revenue, lever up, and exit in 5–7 years. This model works at premium valuations if the company has demonstrated that the model works (which PE Firm A just proved).

Multiple expansion. The company’s EBITDA multiple often increases from PE Firm A’s exit to PE Firm B’s purchase. If PE Firm A paid 8x EBITDA, PE Firm B might pay 9–10x EBITDA, reflecting the company’s improved quality and lower business risk.

Competition among PE buyers. Multiple megafunds bidding for a single portfolio company drives prices up through auction competition.

Conversely, secondary buyouts can sometimes price lower than strategic sales if:

• The business is mature and non-strategic (better fit for operational buyer)
• Integration synergies are unavailable to the PE buyer (they are available to a strategic buyer)
• The market for that sector is weak

Benefits and risks

Benefits for the exiting PE firm:

• Predictable exit; PE buyers understand the investment case
• Often higher valuation than strategic sales (due to multiple expansion and competition)
• Quick process; PE buyers move fast
• No integration risk for the seller

Risks and concerns for the incoming PE firm:

• Leverage stacking; buying at high multiples with significant debt may leave little room for error
• Previous PE firm has already captured easy cost cuts; next PE firm must find harder-to-implement improvements
• Economic downturn risk; a leveraged company in recession is at risk of default

Chain of ownership

A company can go through multiple PE owners. For example:

1. Strategic buyer sells division to PE Firm A (LBO)
2. PE Firm A holds 5 years, sells to PE Firm B (secondary buyout)
3. PE Firm B holds 5 years, sells to PE Firm C (another secondary buyout)
4. PE Firm C takes company public (IPO)

Each step involves a leveraged buyout, and each PE firm applies its playbook to improve the company before the next exit.

Impact on corporate ownership and structure

The proliferation of secondary buyouts has changed the landscape of corporate ownership:

• More companies spend longer in private equity ownership (10+ years across multiple PE firms vs. 5–7 years under a single PE owner)
• Less stability; each new PE owner may have different strategy, cost structure, and operational priorities
• Employees and suppliers face uncertainty with each ownership change
• Management teams may face pressure from multiple PE owners in succession

Market cycles and secondary buyouts

Secondary buyouts are cyclical. In strong markets (2018–2021), secondary buyout activity surged as PE firms had abundant capital and confidence. In weak markets (2022–2023), secondary buyout activity slowed as valuations became less attractive and capital became scarcer.

See also