Secondary Buyout
Sponsor-to-sponsor deals, why they happen, and the debate around pass-the-parcel concerns
~15 min read
A secondary buyout (SBO) occurs when one PE firm sells a portfolio company to another PE firm. The selling sponsor exits and returns capital to its LPs, while the buying sponsor acquires the company with a fresh equity check and new debt financing, beginning a new hold period with its own value creation plan.
Secondary buyouts are the second most common PE exit route, accounting for 25-30% of exits by value. They have grown steadily since the early 2000s and are now a permanent, structural feature of the PE market. In some years (particularly when strategic M&A activity slows due to macroeconomic uncertainty), SBOs become the most common exit route.
Why Sponsor-to-Sponsor Deals Make Sense
SBOs are not simply a sign that one PE firm 'missed value' that another firm can capture. There are several legitimate, structural reasons why sponsor-to-sponsor transactions occur:
- Different value creation theses. The first sponsor may have focused on operational improvements and cost reductions. The second sponsor may see opportunity in a buy-and-build strategy, international expansion, or digital transformation. Different firms bring different playbooks.
- Portfolio construction. The buying fund may be a sector specialist acquiring a company that fits perfectly within its portfolio, while the selling fund was a generalist that owned it opportunistically.
- Fund lifecycle pressure. The selling fund may be approaching the end of its 10-year life and needs to return capital to LPs. A secondary buyout provides certainty of close and speed of execution that a strategic sale process may not.
- Scale for the next stage. A lower middle market fund ($200M) may have grown a company to the point where it is now appropriate for an upper middle market fund ($2B+). The company has outgrown its original sponsor.
- Market conditions. In weak M&A markets, strategic buyers pull back, but PE firms with dry powder continue to deploy capital. SBOs fill the gap.
The 'pass the parcel' concern
Critics of secondary buyouts argue that they represent a value-destructive cycle: PE firms simply pass the same company from one fund to another, each time layering on new debt and charging new fees, without creating real value for anyone except the GPs collecting carried interest and the banks earning transaction fees.
This concern is not unfounded. Academic research has found that returns on SBOs are, on average, lower than returns on primary buyouts (deals where the PE firm acquires the company from a non-PE owner). A 2022 study by researchers at Oxford and Stockholm universities found that SBOs generated a median gross MOIC of approximately 1.9x, compared to 2.3x for primary deals.
However, defenders of SBOs point to several counterarguments:
- Different firms, different skill sets. A company can genuinely benefit from a change in ownership if the new sponsor brings capabilities the previous sponsor lacked.
- Continued professionalization. Many companies go through 2-3 PE ownership cycles, each one leaving the business more efficient, more scalable, and better managed than before.
- LP perspective. From the selling LP's perspective, an SBO is a perfectly good exit. They receive cash, the fund's DPI improves, and the capital can be recycled into new commitments.
Leverage Dynamics in Secondary Buyouts
One key feature of SBOs is the continuation and often increase of leverage. The buying sponsor typically refinances the existing debt and may add additional leverage to fund the higher purchase price.
Consider a simplified example: Fund A acquires a company for $500M (3x debt, 2x equity = $300M debt + $200M equity). Over five years, debt is paid down to $150M and EBITDA grows. Fund B then acquires the company for $800M, financing it with $500M of new debt and $300M of equity. The company now has more absolute debt than when Fund A first acquired it, even though Fund A spent five years paying down the original debt.
This 're-leveraging' concerns some market observers because it means the company never truly delevered in a permanent sense. It also means that cumulative interest payments across multiple ownership cycles can be substantial. However, if EBITDA has grown commensurately, the leverage ratio (Debt / EBITDA) may actually be lower, and the company's ability to service the debt may be stronger.
SBO in Practice: Refinitiv (Thomson Reuters Financial Data)
In 2018, a consortium led by Blackstone acquired a 55% stake in Thomson Reuters' Financial & Risk business for $20 billion, rebranding it as Refinitiv. This was effectively a secondary transaction, as Thomson Reuters had owned and operated the business for decades. Blackstone's thesis was that Refinitiv could grow faster as a standalone entity with focused management and investment in technology. Just two years later, in 2021, the London Stock Exchange Group (LSEG) acquired Refinitiv for $27 billion. Blackstone's $20 billion investment generated a reported $5-7 billion profit in under three years. The deal illustrates how a financial sponsor can acquire a business, execute a clear operational thesis (in this case, technology modernization and cost rationalization), and sell to a strategic buyer at a significant premium within a compressed timeframe.
Blackstone 2021 Annual Report; LSEG press release
Secondary Buyout Transaction Flow
Fund A decides to exit
The selling sponsor determines the company is ready for exit, often driven by fund lifecycle timing, achievement of the value creation plan, or favorable market conditions.
Sell-side process launched
An investment bank runs a dual-track process, marketing the company to both strategic acquirers and other PE firms (financial sponsors).
Fund B wins the auction
A competing PE fund offers the highest price based on its own value creation thesis, underwriting assumptions, and return targets.
New debt financing raised
Fund B arranges new acquisition financing. The existing debt from Fund A's ownership is typically refinanced or repaid at closing.
Closing and ownership transfer
Fund A receives sale proceeds and distributes capital to its LPs. Fund B assumes ownership and begins executing its own operational plan.
Fund B's hold period begins
A new 3-7 year ownership cycle starts, with Fund B implementing its thesis: buy-and-build, technology transformation, international expansion, or other value creation levers.
Fund A decides to exit
The selling sponsor determines the company is ready for exit, often driven by fund lifecycle timing, achievement of the value creation plan, or favorable market conditions.
Sell-side process launched
An investment bank runs a dual-track process, marketing the company to both strategic acquirers and other PE firms (financial sponsors).
Fund B wins the auction
A competing PE fund offers the highest price based on its own value creation thesis, underwriting assumptions, and return targets.
New debt financing raised
Fund B arranges new acquisition financing. The existing debt from Fund A's ownership is typically refinanced or repaid at closing.
Closing and ownership transfer
Fund A receives sale proceeds and distributes capital to its LPs. Fund B assumes ownership and begins executing its own operational plan.
Fund B's hold period begins
A new 3-7 year ownership cycle starts, with Fund B implementing its thesis: buy-and-build, technology transformation, international expansion, or other value creation levers.
Secondary buyouts are a permanent and growing feature of the PE landscape. While they have drawn criticism as 'pass the parcel' transactions, they serve legitimate structural purposes: different sponsors bring different skills, fund lifecycle dynamics create natural sellers, and the depth of PE capital means there is nearly always a willing buyer for a quality business. The key question for LPs evaluating an SBO is whether the buying fund has a genuinely differentiated value creation thesis or is simply recycling the same company at a higher price and higher leverage. In the next lesson, we will examine the third major exit route: the initial public offering.
Quiz: Secondary Buyout
5 questions · ~3 min