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TalkingPoint: Secondary Buyouts In Today’s Market « Back
July 2012
FW moderates an online discussion covering secondary buyouts in today’s market between
Richard J. Welch, a partner at Bingham McCutchen LLP, James Goold, a partner at Jones Day, and Manuel Carvalho, a manager at Preqin.

FW: How would you describe secondary buyout activity over the last 12 months or so? What notable deals have you seen in this space?

Welch: Secondary buyout activity has definitely increased over the last 12 months. It is not unusual to see private equity funds where 50 percent or so of their acquisitions and dispositions over the last 12 months have been secondary transactions. Overall, I would say secondary transactions have represented close to a third of completed transactions, and I would expect that level to continue to increase. There have been lots of notable deals; you simply need to open the newspaper on any given day. Recently, secondary deals making news have included Getty Images, Party City and Savers Inc. These are significant deals – all over $1bn. There is a pretty constant drumbeat of activity, especially so in the middle market for deals of up to $1bn, with secondary deals getting done across virtually all industries and geographies.

Goold: Secondary transactions remain a key feature of the UK private equity landscape and a significant driver for mid-market deal activity. According to CMBOR/Equistone Partners Europe/Ernst & Young UK buyout data, in 2011 they accounted for 45 percent of all PE market activity, representing a total transaction value of £5.4bn. This momentum seems to have been maintained in the first half of 2012, although with a slight falling off of activity in the lower mid-market in the first quarter of the year, according to Lyceum Capital/Cass Business School’s UK Growth Buyout Dashboard. This is in line with our own experience. A significant proportion of the completed PE deals we’ve acted on over the last 18 months have been fund-to-fund transactions. On top of completed deals, more often than not, we’re seeing auction processes involving PE portfolio company sales which attract a large number of unsuccessful bids from PE houses, demonstrating ongoing appetite for these sorts of deals.

Carvalho: During the first six months of 2012, 160 secondary buyouts with an aggregate value of $27.1bn were announced globally, broadly keeping pace with the level of activity witnessed during the previous year when 335 secondary buyouts valued at $65bn were announced. Throughout this period, secondary buyout activity has typically mirrored the wider buyout sector, with a post-Lehman peak of $25.9bn in secondary buyouts achieved in Q2 2011 – followed by a slowdown in activity in the following months due to the re-emergence of market turmoil globally – and, most recently, a rebound in activity in Q2 2012, when 80 secondary buyouts valued at $18.4bn were announced. Interestingly, in the post-financial crisis period, secondary buyouts, along with sales to trade buyers, have maintained strong levels of activity, with fund managers and trade buyers utilising the large amounts of dry powder and cash reserves at their disposal to acquire PE-backed companies. This is in stark comparison to other traditional exit routes such as IPOs, which have struggled in recent quarters due to volatility in the public markets. Notable secondary buyouts in 2012 include the $3bn acquisition of credit data company Transunion by Advent International and GS Capital Partners from Madison Dearborn in February 2012, and CVC Capital Partners’ acquisition of technical trading company Ahlsell for $1.8bn from Cinven and GS Capital Partners.

FW: Could you outline some of the key factors driving current deals? Are PE firms using secondary buyouts as desirable exit routes, or are they considered a last resort in the absence of other exit opportunities, such as a trade sale or IPO?

Goold: It is true that there is currently a fundamental absence of IPO exit opportunity, which limits realisation options for PE investments. That isn’t the sole driver for the current prominence of secondaries, though. Despite reduced levels of warranty cover available – as PE sellers will customarily only give warranties as to title to their shares and capacity/authority to transact – secondaries appeal on the buy-side for a number of reasons: the target has been through the ‘wash’ of a previous transaction so its management team will be used to operating under a private equity regime, reducing the prospect of post buyout culture shock; also, its recent corporate activity, including bolt on acquisitions, will have been conducted under the auspices of the PE owner, which adds a level of comfort to the acquirer. On the sell-side, transacting with a counterparty familiar with the dynamics of PE sales – in particular, the unavailability of meaningful warranty cover – can remove some of the transaction risk and smooth the negotiation process. In addition, trade sales continue to provide plentiful exit opportunities in the lower mid-market, making up approximately 50 percent of the total exits in 2011, according to the Lyceum/Cass report. The result is that meaningful prospects remain for exit value enhancement through competitive bidding processes without the need for an IPO dual track. Finally, the need for certain PE houses to deploy their funds after the slowdown in transactions through the economic crisis, so they can move forward with the next fundraising cycle, seems to be leading to decent assets attracting very full prices. Exiting PE houses are able to take advantage of those dynamics to maximise returns whilst achieving the buying house’s need to get existing funds fully invested.
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