Maybe it’s just me, but the idea of secondary buyouts seems completely perverse. The only exceptions I can imagine are mandate issues (e.g. the investee is becoming too large for the fund to support) or if there is a logical secondary buyer with a specialist skill set that may be able to realise further value. In all other cases, if one private equity firm can’t extract value, then why would another firm believe they can (egos aside for a minute)?
We’ve had a few secondary buyout approaches at my firm from other private equity firms for secondary deals, but if I’m looking for the best deals available, I’m certainly not thinking of buying businesses that other private equity firms reject. These are smart people and you have to give them some credit. Sure, there are other arguments, such as the business may make sense as a bolt-on to another investee, but for a private equity firm to sell an investee at a deep discount in a secondary buyout, there must be serious concerns.
With all of that said though, I’m sure there have been successful secondary buyouts and I’m certain that the bigger private equity firms often don’t have a choice but to consider the secondary buyout. There’s also the case of selling non-core business units, but I don’t really consider these as secondary deals. The types of deals that I question are those where a private equity fund buys a primary investment from another fund and the acquirer doesn’t have a materially different mandate or a more applicable strategic offering to make secondary buyouts worth it.