Simone Girardeau explains the advantages of secondary buyouts and how they allow businesses to unlock additional value, including how private equity firms can offer investment which aligns with a business’ particular circumstances and growth aspirations.
People often assume that the next stop on the growth journey for a business that is majority owned by a private equity investor will be an IPO or a trade sale. However, secondary buy-outs, where another private equity investor replaces the first, are becoming increasingly common. Secondary transactions have always been significant, but if you take the last year it’s estimated that volumes globally reached between $55bn and $60bn; more than double the value of secondaries five years previously. Even taking into account the growth in the whole private equity market over the same period, secondary transaction volumes are growing particularly quickly.
One reason for this growth has been the record amounts of dry powder that private equity firms have at their disposal; this has led to fierce competition – and high valuations – for strong assets including for businesses already held by private equity. Sellers, including both the incumbent private equity firm and management, have naturally been keen to take advantage.
New owner, new value
However, secondary transactions are attractive not only because of realisation prices. Additional rounds of private equity ownership also represent new opportunities. For example, for management teams that want to maintain the business’s independence – potentially lost through a trade sale or IPO – a secondary deal can be a useful way to de-risk, perhaps by reducing the size of their stake in the company. It can also be a good moment to distribute equity to key staff who didn’t share in the first transaction, or to crystallise gains for employees moving on – for example for those looking to retire.
In addition, each investor is different so new private equity backing represents the potential for a new set of value-enhancing skills. Companies that have been through one cycle of private equity ownership will have seen how that created new value; they will be looking to understand how new investors can repeat this during the next phase of growth.
Every business’s needs evolve over time – and different private equity firms offer different types of expertise. A business that initially needed an investor’s support to build scalable infrastructure, may now need help from an investor well-placed to help it internationalise. A secondary deal is a chance to match the business with an owner whose skillset and experience represents the best fit for the organisation’s current stage of development. At Livingbridge we’ve curated a bespoke team of 10 growth acceleration specialists, designed around needs of the businesses we back, to ensure they are best equipped at each stage in their life cycle.
Secondaries in practice
Livingbridge has a long track record of backing secondary buy-outs, providing further capital for growth, helping management to de-risk and to restructure the business’s equity, and bringing in new skills. These have been some of our most successful investments, and we’re always keen to meet companies preparing for the next stage of their growth.
M247, for example, is now the UK’s fastest growing connectivity and internet infrastructure provider. When we invested in the company in 2014, through a secondary buy-out from its previous investor, it was trading as Metronet and operated as a wireless-focused domestic business. With our funding and support, the company made two strategic investments in M247 and Venus, with the combined rebranded group serving significantly more customers across a newly expanded European network. M247 has retained the attributes that were part of the attraction in the first place, including superb customer service focused on tech-centric small and medium-sized enterprise. But it is now executing the next stage of its vision for growth – not least with help from our in-house talent team, which has supported the augmentation of the existing management team with the appointment of an interim CFO, CTO and Chair.
rhubarb is a similar story. We invested in this premium food and beverage company in 2016, again through a secondary buy-out. The company was keen to open new sites and to expand internationally for the first time. The investment helped to fund three new locations, but we were also able to provide expertise gained from our investments in other companies in the sector, as well as advise on rhubarb’s US expansion plans from our Boston office. The deal also gave management an opportunity to unlock some of the value they’d created under their/the previous owner.
If you would like to find out more about how Livingbridge can help enhance the value of your business through your next investment, please get in touch on email@example.com