The Secondary Buy-out

Trade sales and IPO’s are well trodden exit paths for PE-backed businesses. Only occasionally do people speak about secondary PE as a viable next step, especially in the earlier ‘growth stage’ of the market where businesses still have plenty of potential for further development. Having sold two portfolio companies to larger PE houses both in the UK and US, we have first-hand experience of this exit route as a potential attractive alternative to the traditional options.

What is a secondary buy-out? 

A secondary buy-out is where a new private equity firm acquires a large minority or majority stake from another (usually smaller) PE firm and a management team. Alongside this, additional equity is often invested to allow the business to continue to grow or make acquisitions.

Why do one?

There are a variety of potential benefits to a secondary buy-out:

  • An opportunity for management change – where some senior managers may wish to retire or move on and some stay with the company for its next step
  • An ability to de-risk existing management – extracting cash for management to secure personal finances whilst continuing towards a larger future goal
  • Management can continue the journey – it may not be the right time for them to step down professionally or personally
  • Investors can exit or partially exit and continue as a passive investor with a smaller stake in the business to enjoy potential future upside – often a flexible way to deal with the end of an investors fund life
  • Brings new skills to the table – for example where the next PE fund has a sector specialism or is located overseas (see below)
  • Management and the company are now used to the rigours of PE investment

Case Studies

Specialist Tours

In 2015, Panoramic successfully sold travel business Specialist Tours to leisure-focused PE house Kings Park Capital (KPC). Panoramic backed a buy-and-build strategy two years earlier, in which time the company had doubled in size. At that point, KPC materialised showing interest in the company, as specialist travel investors they had a particular interest in both the sector and company and structured a transaction that continued to incentivise management while allowing an element of cash out and exited Panoramic fully. Specialist Tours would likely have been too small when PGE invested but was now at a size that made sense to KPC. The transaction gave management a much bigger war chest to continue to acquire and additional investor support to grow.

Captify

In 2021, Panoramic sold advertising technology business Captify to US based PE house SFW Capital. We had invested and supported Captify’s significant growth for 8 years and our first fund was nearing the end of its life. The co-investors (Smedvig Capital) had been invested for 6 years and management had built up the business for 10 years with one of the founders looking to step back. This meant that positions were aligned on seeking an exit. A deal was created whereby we could exit fully from Fund 1 (and reinvest via Fund 2), Smedvig could partially exit and management were able to de-risk and be rewarded for the work done to date but also facilitate management transition into new roles for the next period of growth. The new investors brought significant US and data skills that will be key to the next stage, particularly with Captify’s US business becoming increasingly important.

What does a Secondary – buyout need to succeed?

The incoming PE firm is likely to seek a range of factors when considering a secondary transaction including:

  • Upside for the incoming buyer – acceptable financial returns
  • A committed management team, ready to roll value and continue the journey
  • Potentially an investor who is willing to roll (although not always the case)
  • A clear plan to a future exit

Conclusions

There are multiple exit routes, and, in our experience, a secondary PE is a very valid one, especially where businesses still have growth potential and management remain keen to drive the business forward. It allows a longer runway and allows both management and the incumbent PE firm to generate a return but also benefit from the longer-term upside left in the business as it continues its development.