Secondary buyout meaning

For both the investing private equity fund and the target’s leadership, the prime lure of a private equity-backed buyout is the chance to crystallise a meaningful gain on exit. There are several potential paths to exit from such an investment, most typically: a trade sale to another company operating within the same sector, a flotation (IPO), or a secondary buyout (SBO). The ultimate route will hinge on considerations such as public market appetite for a listing and whether credible purchasers are available. Management often influence the decision, and may favour renewed private equity support via an SBO when the business model and prevailing market backdrop align. A secondary buyout (SBO) is, in essence, a private equity-backed acquisition of a company that has already undergone a private equity-backed buyout. In an SBO, the existing private equity owner exits its stake, though the current management team can remain in post afterwards. Alternatively, fresh management might be appointed, or a blend of old and new...

Management’s position in a management buyout (MBO) or management buy‑in (MBI) is frequently characterised by tension and potential conflict: on one side they act as owners and participants in the target enterprise, while on the other they remain employees and officers subject to the control and employment of the primary backer (ie the private equity fund). For management, an MBO or MBI is an appealing way to obtain finance to expand an existing business and to capture the rewards of that expansion as part‑owners of the business. Nevertheless, there are meaningful risks for management, both at the initial investment phase and throughout the life of the investment. In an MBO or MBI, management stands alongside the investor as a buyer of the business. In secondary and subsequent MBOs, management additionally appears in the role of seller. For further information, see Practice Note: Buyouts...

The primary appeal of private equity for investors and fellow shareholders (including management) is the prospect of realising a notable capital uplift on exit. While income streams during the holding period—dividends on shares, interest on loan notes and assorted fees—are meaningful to the investor, the true benchmark of success is the capital return. Over the longer term, this is what ultimately defines whether a venture capital or private equity firm has succeeded and its capacity to attract investment into later funds. For further information, see Practice Note: Private equity investment—firms and funds. Managing the exit Exit planning starts almost from day one of the private equity investment journey. The likelihood of achieving a successful realisation forms a central part of the investor’s assessment and decision-making. Without a workable exit, the investment will, in all likelihood, be judged a failure. Correspondingly, the equity documentation for the deal includes provisions that address and govern the exit...