Secondary Buyout (SBO)
What Is a Secondary Buyout (SBO)?
The term secondary buyout (SBO) alludes to a transaction including the sale of a portfolio company by one financial sponsor or private equity firm to another. This sort of buyout shows the finish of the seller's control or inclusion with the company. Secondary buyouts have generally been seen as frenzy sales. Accordingly, they can be difficult to perfect. Secondary buyouts are not equivalent to secondary market purchases or secondaries, which commonly include the acquisition of whole portfolios of assets.
How Secondary Buyouts (SBOs) Work
A secondary buyout is a financial transaction that includes the sale of a portfolio company — an entity wherein a corporation has an investment. The buyer and seller are typically a financial sponsor or a private equity firm. A secondary buyout offers a clean break between the seller and other partner investors. Private equity firms hoping to exit an investment had two different options available to them — they either took their portfolio companies public or sold them to one more company active in the equivalent industry.
Part of the explanation that seller private equity firms search out secondary buyout opportunities is that they offer instant liquidity like a initial public offering (IPO). Despite the fact that they might be smaller in scope, a SBO permits the selling company to swear off satisfying the regulatory requirements that accompany an IPO. Secondary buyouts frequently check out while the selling firm as of now acknowledges critical gains from the investment, or while the buying private equity firm can offer more noteworthy benefits to the firm being bought and sold. Buyouts are additionally viewed as distressed sales since they're finished on occasion when firms need to sell assets to stay away from financial issues. In these cases, most limited partner investors believed them to be unattractive investments.
The selling company can renounce the regulatory requirements of taking the entity public by going through a secondary buyout.
The 2000s saw an expansion in the fame of secondary buyouts. This development was generally determined by expansions in available capital for such buyouts. The number of SBOs keeps on expanding — truth be told, over 40% of all private equity exits stop via secondary buyouts. Private equity firms keep on seeking after secondary buyouts for various reasons including:
- A sale to strategic buyers or an IPO may not be a possibility for a niche or small business
- Secondary buyouts could possibly create speedier liquidity
- Slow growth organizations with high cash flows might be more interesting to private equity firms than they are to public stock investors or different corporations
Special Considerations
There are a couple of things the buying company can do to ensure the buyout checks out including determining the potential for future accomplishment for the entity by investigating its previous victories and directing stress tests and other research.
Secondary buyouts are fruitful in the event that the investment develops to the point where it is fundamental or desirable to sell as opposed to keep holding the investment. Or on the other hand, on the off chance that the investment has produced huge value for the selling firm. A secondary buyout may likewise find true success in the event that the buyer and seller have complementary ranges of abilities. In such a scenario, a secondary buyout can create fundamentally higher returns and outperform different types of buyouts over the long term.
Highlights
- A secondary buyout is a transaction including the sale of a portfolio company by one financial sponsor or private equity firm to another.
- These buyouts seem OK while the selling firm acknowledges gains from the investment or while the buying firm can offer more benefits to the entity being sold.
- SBO opportunities furnish seller firms with instant liquidity.
