Secondary buyouts among private equity funds have skyrocketed in the last year in Spain. In other words, more and more Spanish private equity funds are leveraging on other international funds to sell their best assets.
A secondary buyout (SBO) is an M&A transaction in which a private equity fund buys from another private equity fund its stake in a company previously acquired by the latter.
Also known as secondary leveraged buyouts, these mega-buyouts between private equity funds last year moved more than €7 billion in Spain. Some of the main deals were Altadia, acquired by Carlyle from Lone Star for more than €1.9 billion; the telecoms company Adamo, acquired by Ardian from the Swedish fund manager EQT for more than €1 billion; and the slates company Cupa, acquired by Brookfield from Carlyle for €900 million.
Why there are more and more secondary buyouts in Spain
There are several reasons why large buyouts of Spanish companies are increasingly taking place between national and international private equity funds.
- Historic levels of liquidity in private equity thanks to the capital raising processes of the last few years.
- The firm commitment of international investors to Spain. Numerous foreign venture capital funds are landing in the Spanish market, many even opening local offices.
- Increasing competition for quality assets has created a strong appetite in the market, providing owners with juicy capital gains. There are more buyers and sellers in the market and the gap between the terms demanded by different parties has narrowed.
- Global uncertainty encourages investment in more established companies. Because, in theory, companies that have already had a private equity partner have higher quality standards and have experienced two or more stages of growth and internationalisation.
Characteristics of secondary buyouts
The speed
Secondary buyouts are M&A transactions that are often concluded particularly quickly. Several private equity funds and even other companies are often interested in these deals. For this reason, the acquiring party often faces strong pressure not only in terms of price, but also in terms of timing.
The use of the manifestation and warranty insurance policy
The selling private equity fund makes it a priority to ensure that it has no potential future liability in connection with the sale of the company. To achieve this clean exit, it usually obliges the buyer to take out a warranty and indemnity insurance (W&I) policy. In this way the buying fund is covered against unknown contingencies and the insurer covers the risk of non-compliance with the seller’s representations and warranties.
Locked box pricing
In secondary buyouts the price is usually fixed by the locked box system. In other words, the price is fixed on the basis of accounts closed prior to the signing of the purchase contract. From that date onwards, the economic risk/benefit of the business is transferred to the buyer. For his part, the seller assumes certain obligations during the interim period.
Future prospects
In markets such as France and the UK, secondary buyouts account for almost 30% of total M&A transactions. In Spain we are still far from this percentage, so we should think that secondary leveraged buyouts still have a long way to go in terms of growth in the coming years.