On Secondary Buyouts

Buyout funds increasingly sell their portfolio companies to other buyout funds. These secondary buyouts (SBOs) underperform primary buyouts. Yet, only SBOs made late in the investment period underperform, consistent with funds using SBOs to sometimes “go for broke”. After a fund invests in late SBOs, investors appear to shun the follow-on fund. Differences in risk do not explain these results. SBOs bought by specialized funds and those bought from a fund-raising seller perform better. Some companies seem better suited to private equity ownership as we find persistence in both returns and exit channels between successive buyout transactions.