(Charlotte, NC – October 16, 2018)
In our last newsletter, we discussed secondary buyouts (“SBOs”) as a strategy for PE to speed up due diligence. In this newsletter, we will highlight the rise of SBOs and the impact to corporate buyers.
US PE-backed exits (#) by type
* As of June 30, 2018
In the first half of 2018, SBOs accounted for 52% of all PE-backed exits, the highest figure on record and the first time SBOs accounted for more than half of PE exits. Corporate acquisitions made up 43% of PE-backed exits and the remaining 5% were IPOs (1). PE fund investors (LPs) have been skeptical of SBOs because they might find themselves on both the buy and sell sides of the same target. LPs also have worried the next PE owner might not be able to add value to a company that has already had private equity backing (2). But, the current environment of record dry powder levels, low interest rates, and increasing competition has forced PEs to look beyond traditional means of deal sourcing, causing many to rethink SBOs. SBOs actually offer quicker exits than their traditional primary buyout counterparts and successive SBOs can create value. When ownership of a portfolio company transfers from a firm with a generalist approach to a firm with a compatible or complementary specialty, it can have a positive impact on value creation (2).
With all this PE congestion building, it begs the question – when will corporates regain their long-held position as buyer of choice? While difficult to predict, the growth of PE has been significant. Since 2000, the number of PE firms and the number of PE owned companies has increased 189% and 364% (2). The increased population of PE firms and PE-backed companies suggests that corporates may be getting crowded out of the M&A or that PE platforms today have become the corporate buyers of yesterday, with strategic intent, synergies, and liquid capital. Corporate buyers should be aware of this growing trend and adapt their strategies. (See our previous newsletter series on how corporates can learn from successful private equity practices: portfolio building, upgrades, leverage and cash flow, exit planning, and research).
(1) Pitchbook US PE Breakdown 2Q 2018
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