Value drivers in leverage buyouts and its differences between primary and secondary buyouts: A quantitative analysis

Fabian Streich

Student thesis: Master thesis


The intention of this thesis is to enhance the understanding concerning the prevalence of recent secondary buyouts (SBOs) in the leveraged buyout (LBO) market by employing a value decomposition analysis of LBOs. This decomposition analysis helps to determine the value drivers and discrepancies between primary (PBOs) and secondary buyouts. This thesis discusses various theoretical motivations for investments into SBOs to underline substantial value creation potential in SBOs. Four statistical testable hypotheses are set-up, which will analyze the differences of various value drivers between primary and secondary buyouts. The value drivers in this model are the following: leverage effect, EBITDA-margin effect, sales growth effect, de-leverage and multiple arbitrage effect. Empirical evidence in this thesis underlines the view that the value generation discrepancy between PBOs and SBOs, as measured by the internal rate of return (IRR), is not significantly different. Thus, there exists substantial value creation potential in SBOs. The analysis displays mixed results concerning operational enhancements in SBOs. If the entire EBITDA-effect is considered, there exists substantial operational value creation potential for SBOs. However, this is mainly generated by the sales growth effect and not due to an increase in the margin. Furthermore, this study underpins higher debt ratios and value contributions from leverage for SBOs as compared to PBOs, which is in line with previous research. Hence, the leverage effect determines the value generation in SBOs substantially. All in all, there are several reasons for PE-firms to invest into SBOs. These are identified as mature LBO markets or high “dry powder” capital, which increases the pressure on PE-firms to invest their committed capital. Furthermore, favorable debt market conditions have a positive impact on the SBO activity. This thesis is able to add a further argument to the recent SBOs prevalence: a similar value creation potential between PBOs and SBOs.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2013
Number of pages93