Overall the study found that secondary buyouts underperform comparable primary buyouts (defined as not being secondary buyouts) by a 0.4x investment multiple and by about 15 percentage points of IRR. What’s interesting, however, is that all of the underperformance is concentrated in those deals done in the second half of investment periods; those done in the first half perform about as well as “similar” primary buyouts, the study found.
The authors, who relied largely on PPMs to gather data on some 548 secondary buyouts and 7,449 primary buyouts, speculate that many buyout firms, under pressure to spend dry powder later in their investment periods, end up using secondary buyouts as a way to rapidly deploy money with limited risk. In their rush to spend money they end up overpaying, the authors believe. Underperformance is especially apparent when the deal is large relative to the fund size.
Another interesting finding from the study: Secondary buyouts in which the seller is fundraising perform better than other secondary buyouts. The authors speculate that such sellers are often under pressure to return capital to their investors; presumably, they may lack the patience to maximize the sale price.
Secondary buyouts, in which a buyout firm acquires a company from another buyout firm, have become increasingly popular, to the point where they represent over 40 percent of all sponsor-backed exits, according to the paper, titled “Is the Rise of Secondary Buyouts Good News for Investors?”. The three authors of the paper, dated Sept. 21, 2013, are Francois Degeorge, a professor at the Swiss Finance Institute, University of Lugano; Jens Martin, assistant professor at the University of Amsterdam; and Ludovic Phalippou, a lecturer at the Said Business School at the University of Oxford.