Private Equity Lemons?Evidence on Value Creation in Secondary Buyouts

Abstract

This paper analyses whether secondary buyouts have a value creation profile and offer equity returns different from those of primary buyouts. Using a sample of 2,456 buyout transactions (including 448 secondary buyouts), we find no evidence that secondary buyouts generate lower equity returns or offer fundamentally lower operational value creation potential. However, we can show that secondary buyouts obtain 28–30% more leverage than primary buyouts, even after controlling for debt market conditions. Furthermore, we find evidence that secondary buyouts are 6–9% more expensive than other buyouts.

Sustaining the Buyout Governance Model: Inside Secondary Management Buyout Boards

“…Evidence on SMBO underperformance would be consistent with the hypothesis that agency cost reduction and other benefits associated with the buyout model are exhausted in the primary buyout (Arcot et al, 2015;Degeorge, Martin and Phalippou, 2016). However, while previous studies report mixed evidence on SMBO performance (Achleitner and Figge, 2014;Bonini, 2015;Jelic and Wright, 2011;Wang, 2012;Zhou, Jelic and Wright, 2014), they pay little attention to whether the SMBO has effective governance mechanisms, especially relating to board expertise. The ownership change in SMBOs represents a distinctive firm-specific characteristic that may impact the effective composition of boards, yet understanding is lacking.…”

“…Third, we extend the agency theory perspective by incorporating the strategic entrepreneurship perspective as a complementary theory in the SMBO context and, as such, we respond to calls for more multi-theoretical work on corporate governance. Agency theory suggests that SMBOs are unlikely to make significant further performance improvement, owing to the exhausted benefits from agency costs reduction in the primary buyout (Achleitner and Figge, 2014;Wang, 2012). We argue that agency conflicts may still exist in SMBOs and, according to the strategic entrepreneurship perspective (Meuleman et al, 2009;, new PE partners and executives may bring new resources and capacities to identify and exploit growth opportunities.…”

What determines the exit decision for leveraged buyouts?

“…In particular, as would be expected, secondary buy-outs are more likely when the portfolio company's characteristics 2 Achleitner and Figge (2014) and Bonini (2015) have analyzed the sources of value creation for secondary buyouts. Guo et al (2011) and Harford and Kolasinski (2013) study value creation in buyouts more generally, irrespective of the chosen exit route.…”

Secondary buyouts: Why buy and at what price?

“…Achleitner and Figge (2011), Sousa and Jenkinson (2012), and Bonini (2010) all examine the operating performance, returns, and financial structure of secondary buyouts to various degrees. This paper was independently done at roughly the same time as these papers.…”