Secondary Buyout

Private equity firms typically buy companies, improve them and sell them within several years. Instead of selling to a strategic buyer or listing the company on a stock market, they may sell it to another private equity firm.

For example, a private equity firm that bought a business services company five years ago and doubled its profits might sell it to a larger private equity firm, which sees opportunities for further growth through acquisitions or international expansion.

Secondary buyouts have become a major exit route, especially when stock markets are weak or strategic buyers are scarce. They allow the first firm to return money to its investors on schedule, while the buyer acquires a business that is already used to private equity ownership.

Critics question whether secondary buyouts create value or simply pass businesses between firms, adding fees each time, especially when the easiest improvements have already been made. Investors in both funds may sometimes effectively own the same company before and after the deal. Subsequent sales to further private equity owners are sometimes called tertiary buyouts.