Secondary buyouts, which have driven exits in Europe, have also had a big impact in North America, according to new research from accounting giant Ernst & Young.
Almost 25 percent of exits in North America in 2012 came through sales of companies by private equity firms to other private equity sponsors, the study revealed. Exits via secondary buyouts rose to 20 in 2011 and 19 in 2012, the highest numbers during the study’s time frame, from 2006 through 2012.
Such deals are not always popular with limited partners, who argue it’s hard for managers to find good value this way. However, recent studies have shown secondary buyouts, also known as “pass-the-parcel” deals, have been better performers than primary deals.
“Some of the smaller funds don’t have as many operating partners, so they’re taking the company as far as they can and then maybe selling it on to another private equity fund,” said Michael Rogers, E&Y global deputy private equity leader. “The first wave of capital comes in and makes initial adjustments to the business, then we have been able to see some of the bigger funds come in and help revenue and EBITDA grow.”
Michael Rogers: The market
Secondary deals produced an average of 2.6x in returns. The top 15 percent of private equity-to-private equity deals produced 4x returns, the study disclosed. Take-private deals posted an average return of 2x or less. A separate study this year, done by the Boston Consulting Group, compared a sample of 225 European private equity deals and concluded the median annual return on secondary deals was actually higher than on primary deals – 24 percent compared to 20 percent, Private Equity International reported earlier. The study also claimed secondary buyouts were less risky.
The rise in secondary buyouts coincided with a decline in public market exit value. In 2012, 49 percent of annual exit value came from IPOs, but this compares to 70 percent in 2011. The E&Y study cited a higher degree of caution among corporate companies and their M&A strategies as reason for the decline. “2012 was arguably a more challenging year for public markets,” the study stated.
But Rogers said the first quarter of 2013 saw a lot of IPOs, “a lot of it was just opportunistic, that will probably be a very popular vehicle for the foreseeable future, as long as the markets don’t pull back”.
E&Y’s seventh annual study, titled Clear direction, focused vision: How do private equity investors create value, reviewed 539 North American exits. Each exit had an enterprise value of $150 million or more at entry.
Meanwhile, European secondary buyouts were the largest source of exit deals by value, with £2.7 billion worth of acquisitions undertaken so far in 2013, according to a study from the Centre for Management Buyout Research that was completed last month.