Secondary Buyouts: why do funds sell companies to each other?

When a student discovers private equity, one question often comes up: why does an investment fund sell a company to another fund rather than to a strategic buyer or through an IPO?

At first glance, this practice may seem strange. Some observers even see it as a simple game of musical chairs between financial investors. Yet Secondary Buyouts, often referred to as SBOs, have now become one of the main exit routes in the private equity industry.

Far from being an anomaly, they actually reflect the increasing maturity of the market and the growing specialization of investment funds.

In some vintages, Secondary Buyouts even represent a significant share of exits carried out by European and US funds.

     

Read more: Roll-up, Buy-and-Build, Consolidation: the strategies that transform SMEs into European leaders

    

What is a Secondary Buyout?

  

A Secondary Buyout refers to the sale of a company owned by a private equity fund to another private equity fund.

The concept is simple. A first investor acquires a company, supports it for several years in order to develop its business, and then decides to sell its stake. Instead of selling to a strategic buyer or carrying out an IPO, it chooses to sell to another fund.

The company therefore remains owned by a financial sponsor, but its shareholder changes.

A Secondary Buyout is above all a transaction between two investors with different strategies and value creation horizons.

  

Why does the first fund want to sell?

   

The simplest reason is linked to how private equity works.

Most funds have a limited lifespan. After several years of holding, they must return capital to their investors and crystallize the capital gains achieved.

Even when a company continues to perform well, the fund cannot hold it indefinitely.

Take the example of a fund that invested in a company five or six years earlier. Through operational improvements, acquisitions, and solid organic growth, the company has significantly improved.

The fund has executed a large part of its initial value creation plan. It is therefore natural for it to consider an exit.

The willingness to sell does not necessarily mean that the company’s potential has been exhausted.

   

Why does another fund want to buy?

   

This is probably the most interesting question.

If the first fund believes it has created value, why would a second investor agree to pay an even higher price?

The answer is that the two funds do not necessarily look at the same company.

The first investor may have focused on professionalizing governance, improving profitability, or implementing a buy-and-build strategy.

The second fund may identify other value creation levers that remain untapped.

Each fund has its own expertise, network, and strategic view of the company.

What appears to be a mature company for one investor may represent a new transformation opportunity for another.

   

Size changes create new opportunities

   

One of the main reasons explaining Secondary Buyouts lies in the evolution of company size.

A company valued at €100 million at the time of its initial acquisition may be worth €500 million or €1 billion a few years later.

This growth completely changes the universe of potential buyers.

Some small-cap focused funds no longer have the financial capacity to hold or refinance the company. In contrast, mid-cap or large-cap focused players may now become interested.

The company gradually moves into a new category and naturally attracts a new generation of investors.

The Secondary Buyout therefore becomes a logical transition between different development phases.

  

Increasing specialization of funds

   

The private equity industry has become extremely specialized.

Some funds excel in buy-and-build strategies. Others focus on international expansion. Others specialize in digital transformation or complex operational improvements.

This specialization encourages transactions between funds.

One investor may feel it has completed its mission, while another believes its specific expertise can unlock a new growth cycle.

The transfer of a company between two funds often reflects a strategic handover rather than a simple financial transaction.

  

The role of leverage

  

In some cases, a Secondary Buyout can also be used to refinance the company’s capital structure.

After several years of growth and deleveraging, the company may be able to support a higher level of debt than at the time of the initial acquisition.

The new buyer can therefore implement a different financing structure and optimize investment returns.

Of course, this approach must remain cautious.

Private equity history shows that excessive leverage can become problematic when the economic environment deteriorates.

Sustainable value creation is primarily based on operational growth, not solely on leverage effects.

  

Criticism of Secondary Buyouts

  

Secondary Buyouts are not unanimously accepted.

Some critics argue that they reflect a lack of strategic buyers or an overly financialized market.

According to this view, value creation may be more limited when several funds succeed each other in the ownership of the same company.

However, the reality is often more nuanced.

Many companies have experienced several successive sponsors while continuing to grow, expand internationally, and develop strategically.

In some cases, each fund has contributed differently to the company’s trajectory.

The simple fact that a company is sold to another fund does not allow one to judge the quality of the transaction.

   

Some emblematic examples

  

Many European companies have gone through multiple private equity ownership cycles.

This situation is particularly common in software, B2B services, healthcare, and infrastructure sectors.

Buy-and-build, digitalization, and international expansion strategies often require more time than a single holding period.

It is therefore not uncommon for a company to pass successively through several investors before eventually being listed on the stock market or sold to a strategic buyer.

A Secondary Buyout is often an intermediate step in building a European or global leader.

  

Conclusion

Secondary Buyouts now play a central role in the private equity ecosystem. Far from being simple asset exchanges between investors, they reflect the increasing specialization of funds and the complexity of value creation pathways.

A company can offer several successive waves of value creation, each corresponding to a different investor profile.

The first fund may professionalize the organization. The second may accelerate acquisitions. The third may drive international expansion. Together, these stages progressively transform a local SME into a major industry player.

For students discovering private equity, understanding Secondary Buyouts is essential. They perfectly illustrate that value creation does not necessarily stop after the first acquisition and that a company can go through several transformation cycles before reaching maturity.