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Institute
Secondary buyouts (SBOs) appear paradoxical because the surge in SBO activity is met with scepticism from the public and investors regarding their performance. In this paper, we undertake a comprehensive analysis of SBO performance through two distinct lenses: First, we address the prevailing notion of SBOs as “lemons”. These are perceived as opportunities that, following a successful primary buyout (PBO), seemingly leave little room for further value creation. To investigate this “negative correlation hypothesis”, we employ a unique back-to-back sample of 276 cases involving the same firm in both a PBO and an SBO. Analysing the correlation between the internal rate of returns (IRRs) of back-to-back PBO/SBOs, our results do not support the “negative correlation hypothesis”. Second, we directly compare the deal performance of the two related back-to-back buyout rounds. For our back-to-back sample, we find that PBOs display significantly higher IRRs than SBOs. However, after performing a matched comparison adjusting for size and holding period differences, which are two well-known pitfalls of IRR rank orders, our findings suggest that there is no systematic outperformance of SBOs against their PBO comparables. Finally, we analyse differences in operating performance between PBOs and SBOs. Our results do not indicate a significant difference, either based on the back-to-back sample or when comparing PBOs and SBOs against matched public peers. In the light of our findings, we advocate for a reevaluation of the current perception of SBOs. Rather than being dismissed as “second-hand” opportunities, they should be recognised as “second-generation” opportunities deserving closer consideration.
Buying performance?
(2022)
B&B strategies are increasingly popular, with past studies showing them to achieve superior returns. The question of how exactly B&B strategies create value is, however, still a "black box". Relying on a unique and proprietary sample of 161 B&B buyouts with valuation details on related add-on acquisitions, this study is, to the best of our knowledge, the first to decompose EBITDA growth as value driver into the organic, inorganic and the "sourcing" component. The "add-on sourcing effect" thereby considers the reduction of the average entry multiple caused by acquiring smaller firms in add-on transactions at multiples lower than the entry multiple for the platform company and labels the corresponding multiple uplift following the revaluation of add-on acquisitions post-closing. We find this effect to be a significant component of B&B buyout performance, contributing roughly 8% to the equity value CAGR. When eliminating it from the performance measurement, we find B&B outperformance to decrease significantly to the levels of their non-B&B peers. Finally, we find preliminary evidence that potential buyers of the buyout company do not seem to differentiate between the different sources of EBITDA growth.
Secondary buyouts (SBOs) can be viewed as an oxymoron: Booming SBO activity meets public and investor´s perception of this investments as “lemons”, claiming that first round buyers in the primary buyout (PBO) leave no potential for further value creation on the table. Using a unique back-to-back sample of 276 cases of the same firm in a PBO and a SBO we do not find the internal rate of returns (IRRs) of back-to-back PBO/SBOs to display significant correlation and thus reject the “negative correlation hypothesis”. When directly comparing the performance of the two back-to-back buyout rounds, we find PBOs to display higher IRRs than SBOs at higher risk; however this difference disappears when taking size and holding period differences as two well-known pitfalls of IRR related rank orders into account. Operating performance also is not significantly different. Our results thus suggest that the current perception on SBOs should be revised and turn from "second hand" deals to "second generation" deals.