The LBO-SBO Relationship

Abstract

Since the beginning of the private equity industry in the 1980s, it has evolved and adopted new strategies and methods for generating returns to investors. As the industry grew, deals became harder to find as the buyer market grew immensely and what deals remained appeared picked over. Enter the secondary buyout (SBO). This strategy involves one financial sponsor buying a portfolio company from another financial sponsor. This thesis attempts to fill a gap in the field of research in two ways. First, this thesis analyzes the difference in value creation using a longitudinal and matched-sample approach. This approach is unique in that I will only analyze data for which information on the SBO, the preceding LBO, and the following exit are all available. Second, this thesis looks specifically at the relationship between LBOs and SBOs in an attempt to provide a practical application of the analysis. Additionally, most studies stray away from performing analysis on the U.S. market due to the limited data availability, but this approach ignores one of the largest private equity markets in existence. This thesis will look solely at U.S. buyouts. I find no significant difference in the relative change in enterprise value from acquisition to exit for LBOs or SBOs. Further, there is a statistically significant negative relationship between the holding period and annualized change in EV for both LBOs and SBOs. Finally, while the results were not significant, there is a slight negative relationship between the EV change of LBOs to the EV change of SBOs.