Risk of Financial Distress in Secondary Buyouts

Abstract

Secondary buyouts (SBOs) represent more than 50 percent of all buyouts in 2018. Even though general partners argue that SBOs are less attractive investment targets for buyouts and some empirical indication against an outperformance of SBOs exists, the share of SBOs continuously increases. However, SBOs might be a favourable target with regard to its investment risk. Using a unique dataset of 295 PBOs and their consecutive SBOs in the UK, we analyse the risk level of financial distress of the buyout rounds considering the Altman Z-Score. We find that SBOs reduce this risk of portfolio companies more than PBOs during the holding period. Therefore, SBOs, in general, cannot be seen as riskier investments. However, risk of financial distress is driven differently between PBOs and SBOs. The risk development in distressed companies is not different in PBOs and SBOs. However, SBOs perform better at risk management if the portfolio company is not distressed. This risk-adjusted view identifies SBOs as attractive investment targets. It also contributes to rectify investments in SBOs as rational and promising decisions.