Secondary buyout
LBOThe sale of a portfolio company by one private equity firm to another, rather than to a corporate buyer or the public market.
Also written: sponsor to sponsor, sponsor to sponsor sale, SBO
A secondary buyout is a buyout of a business that was already owned by a sponsor. It is the most executable of the three exit routes, because the buyer values the company on the same metrics the seller used at entry, runs a process the seller recognises, and faces no integration planning and usually no antitrust problem.
The objection it invites is obvious: if both parties run the same arithmetic on the same business, how does the second sponsor justify a higher price? The credible answers are concrete. EBITDA is larger after a hold, so the same multiple is more money. The company has been professionalised and can support cheaper and deeper debt than it could under founder ownership. The buyer often has a thesis, typically a buy and build or an international expansion, that the seller had neither the capital nor the remaining fund life to run. Or the buyer is a larger fund working to a lower target return, which mathematically supports a higher price for identical cash flows.
Where none of those apply, the criticism the structure attracts is fair, and the phrase used for it is passing the parcel. A candidate who can give the four legitimate reasons and then concede the illegitimate case sounds considerably more credible than one who defends every secondary as value creating.
What it will not do is pay for synergies, because a financial buyer has no business to merge the target into. That is the structural reason a secondary usually clears below what a strategic buyer with a genuine cost case would pay, and it is the trade off at the heart of most exit decisions.
Worked example
A sponsor exits at 8.5 times on 100 of EBITDA, having bought at 8.0 times on 70 of EBITDA five years earlier.
Entry enterprise value was 560 and exit is 850, so the buyer paid half a turn more for a business that is half again as large and now has audited accounts, a finance function and a bolt on pipeline.
The second sponsor is not paying more for the same thing. It is paying a modestly higher multiple for a different, larger and more financeable company, which is the defensible version of the transaction.