A second look at secondaries

…but M&A activity is crucial – and that’s not easy at the moment.

Secondary buyouts don’t always get great press. The practice of GPs buying companies from each other – something that’s becoming increasingly common as managers come under pressure to put money to work  – is sometimes referred to dismissively as “pass-the-parcel” buyouts. 

Some LPs argue that it’s hard for managers to get a good deal this way. As Paul Newsome, executive director and head of private equity investments at Unigestion, puts it: “Due to the competitive nature of the private equity market, attractively priced secondary buyouts with room for material upside coupled with limited downside are a rarity.”

Which is why the results of a new study by the Boston Consulting Group are interesting. The consultancy compared returns from a sample of 225 European private equity deals, and concluded that the median annual return on secondary transactions was actually higher than on primary deals – 24 percent compared to 20 percent. What’s more, these deals tended to be less risky, too.

The study also suggested that M&A was central to the success of a secondary deal. Within the sample set, the median return from secondary deals where there were add-on acquisitions was 25 percent – compared with 15 percent when there was not. 

This is not surprising, says Patrick Knechtli, partner at SL Capital Partners. As there may be less for secondary buyers to do in terms of ‘easy fixes’ or professionalisation, he argues, buy-and-build will often be part of their strategy to grow a business.