On Secondary Buyouts

Private equity firms increasingly sell companies to each other in secondary buyouts (SBOs). We examine commonly expressed concerns regarding SBOs using novel and unique datasets. SBOs made by buyers under pressure to spend capital (a minority of transactions) underperform and destroy value for investors, who then reduce their capital allocation to private equity firms doing those transactions. Other SBOs perform as well as other buyouts, and investors do not penalize firms doing those. When the buyer and seller have complementary skill sets, SBOs generate significantly higher returns and outperform other buyouts. Investors do not pay higher total transaction costs as a result of SBOs, even if they have a stake in both the buying fund and the selling fund. Overall, our evidence paints a nuanced picture of SBOs.