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Secondary Buyouts Produce Strong Returns, Bucking the Conventional Wisdom

Drawing on a Unique Database of Private-Equity Deals, BCG and Research Partner HHL Leipzig Graduate School of Management Show That Owners of Secondary Buyouts Create Substantial Value

MUNICH, GERMANY -- (Marketwire) -- 02/07/13 -- Secondary buyouts (secondaries) produce returns that match or even exceed returns on primary buyouts (primaries) sold to private-equity (PE) acquirers -- while carrying substantially less risk, according to a new report by The Boston Consulting Group (BCG) and HHL Leipzig Graduate School of Management. The report, titled "Take a Second Look at Secondaries: Owners That Raise Their Value-Creation Game Can Excel," is being released today.

The report's findings are a strong challenge to critics who claim that secondaries -- companies whose ownership passes from one PE buyer to another -- are second-rate assets, because they have little potential for value creation. Drawing on one of the largest samples of primary and secondary buyout transactions ever compiled, the report reveals that the median annual return on the secondaries in the database was 24 percent, compared with 20 percent on primaries sold to PE acquirers. Another key finding suggests strongly that merger and acquisition (M&A) activity, not leverage, is the surest route to improved returns on secondaries. The median annual return on secondaries that did add-on M&A was 25 percent, compared with a median return of 15 percent on those that did not.

"The competitive returns of secondaries that engaged in add-on dealmaking were driven by the synergies and operational improvements that the deals generated," said Dr. Jens Kengelbach, a BCG partner and coauthor of the report. "So it is puzzling that less than 30 percent of secondaries in our sample engaged in M&A -- even though private-equity executives generally regard M&A as their primary value-creation lever, ahead of alternatives like geographic expansion and outsourcing."

Tertiary Buyouts Are a Viable Exit Strategy

Many PE professionals regard tertiary buyouts (tertiaries) as the exit of last resort -- to be engaged in only if the market's IPO window is closed or strategic buyers show little interest in the asset. But the evidence does not support this view. Returns on secondaries sold to a tertiary buyer were within striking distance of the returns on trade sales. The median annual return on the tertiaries was 21.5 percent, compared with 25.8 percent on the trade sales.

Secondaries that were exited through a sale to a tertiary buyer also held up well compared with those exited through a trade sale on operational-performance metrics such as sales and earnings growth. With little evidence that the IPO market will revive in the near future, investors in secondaries should know that tertiaries remain a viable option.

Secondary Buyouts Are Here to Stay

The report is especially timely, because secondary buyouts have become an increasingly prominent feature of the PE landscape. Secondary and later-stage deal volume in the first nine months of 2012 was roughly $56 billion, according to statistics compiled by Preqin, a clearinghouse for information on alternative investments. Activity in secondary and later-stage transactions is likely to remain high for the foreseeable future, owing to steep declines in public-to-private deals, the moribund state of the market for initial public offerings, continuing efforts by PE firms to deploy capital accumulated during the buyout boom, and pressure from investors for the return of some of their funds.

Better Value Creation Drives Better Performance

The tactics that in the past produced strong returns for secondaries -- M&A and efficiency improvements -- will continue to create value in the years to come. In addition, secondary owners will need to focus more strongly on organic growth. In the future, the PE firms that outperform with secondaries will be those with the skills to pursue organic top-line growth activities while continuing to engage in M&A and realize operational improvements. In short, to maximize returns on their holdings, PE sponsors need to be prepared to use the complete value-creation toolkit.

A copy of the report can be downloaded at

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or [email protected].

About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 78 offices in 43 countries. For more information, please visit

About features the latest thinking from BCG experts as well as from CEOs, academics, and other leaders. It covers issues at the top of senior management's agenda. It also provides unprecedented access to BCG's extensive archive of thought leadership stretching back almost 50 years to the days of Bruce Henderson, the firm's founder and one of the architects of modern management consulting. All of our content -- including videos, podcasts, commentaries, and reports -- can be accessed via PC, mobile, iPad, Facebook, Twitter, and LinkedIn.

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