Secondary Buyout - Explained
What is a Secondary Buyout?
Written by J. Mance Gordon
Updated at April 20th, 2024
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What is a Secondary Buyout?
Secondary buyout involves private equity firm selling its stake or assets in a startup or a company to another private equity firm. A secondary buyout is different from secondary market purchases in that the latter involves acquiring a large pool of assets. Secondary buyout sale of investment of an equity firm to another can cause a high decline in price and at that, the process sometimes might be hard to complete.
How does a Secondary Buyout Work?
A secondary buyout is more profitable especially when the firm wishing to sell has made profits from the investment. The investment can be quickly bought or sold in the market at a price estimating its value profitable to the buyer firm. Lastly, private equity firms seek out buyout opportunities because of the benefits. A secondary buyout is similar to an Initial Public Offering but limited.
A secondary buyout is considered a panic sale but most limited partner investors see it as a profitless venture. Partners in buyout are either private equity firms or financial sponsors. Buyout features a clean break between the seller and other investors. In recent years, private equity firms demand secondary buyouts for quite a handful of reasons such as It is more preferable unlike IPO, it can generate a quick sale or returns on investment and equity firms find it more lucrative. While the year 2000 experienced huge popularity of secondary buyout with higher demand. This was due to a high increase in available capital for buyouts.
The Rise of Successful Secondary Buyouts
A secondary buyout is successful when there is a return on investment. And this is when the investment yields a significant value for the selling firm. Another factor that determines whether a secondary buyout is successful or not is the capacity of the buyout to have attained value in the long term and it is more preferable to sell than to continue. 20 years ago, private equity firms stop investment by either selling to another company within or outside the industry with little or no interest in who acquires the investment, but in recent years, investment exits have come through secondary buyout as it provides an avenue to generate liquidity fast.