Operational Value Creation in Secondary Buyouts: An Empirical Study of Secondary Buyouts in the Nordics and Great Britain

Jens Andersen & Mads Kristian Hofmeister

Student thesis: Master thesis


The number of secondary buyouts (SBO’s) has increased significantly during the last decades, although this type of buyout has been surrounded by conventional wisdom in both practice and academia, stating that SBO’s should only allow an inferior return from operational improvements compared to the preceding primary buyout (PBO). As Private Equity (PE) firms often are regarded as experts of abnormal returns, this seems highly irregular. As a consequence of this irregularity, we set out to answer how operational value creation differs between PBO’s and SBO’s, and SBO’s dependency of their preceding PBO. The analyses are based on a novel hand-collected dataset containing 297 consecutive exited SBO’s across the Nordics and Great Britain. We follow a comprehensive peer-matching and valuation technique in order to identify the excess operational value creation of the portfolio companies in each buyout round.
By analysing the value drivers of operational value creation, we are able to identify the value creation profiles and how they differ between PBO’s and SBO’s. Similar to prior empirical research we find supporting evidence that both buyout rounds generate excess operational value creation, albeit the value creation is 4.5 times larger in PBO’s, and that operational value creation is less likely to be found in a SBO. The value creation profiles do not differ significantly across the buyout rounds, as excess revenue growth and EBITDA-margin development explain the majority of the operational value creation in both PBO’s and SBO’s.
By analysing how the SBO’s operational value creation is dependent on the preceding PBO’s development, we identify three selection criteria that enable excess operational value creation in SBO’s, namely excess revenue growth, excess EBITDA-margin development, and excess intangible asset-ratio development. Following this we identify the conditional value drivers for these criteria, and as a consequence we identify how operational value creation can be realised in the SBO depending on which development took place in the preceding PBO. Subsequently, we find evidence suggesting that not only do PE-firms employ complementary skill sets in order to achieve returns but moreover that the structural incentives of PE allow for operational value creation in SBO’s. Finally, we discuss how the similar value creation profiles are a result of the priorities of PE-firms. Additionally, we discuss how SBO’s could be a natural step in the pecking order of PE, and the rationales of engaging in a SBO.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2020
Number of pages159