Improved Credit Markets Fueling Secondary Buyouts

Thirty-five percent of the year’s private euqity deals have been secondary buyouts (aka sponsor-to-sponsor), according to The Wall Street Journal.

That’s the highest percentage in at least a decade, and doesn’t even include today’s $850 million sale of Harrington Holdings — which I’m told produced a 2.7x return for seller Jordan Co., with an IRR in excess of 30 percent.

Also Tuesday, BC Partners agreed to sell Picard Surgeles S.A., a France-based frozen food retailer, to Lion Capital LLP. And then there is the apparent Intermedix deal.

So why so many secondary buyouts? PE firms are in a quandary right now. They are facing a $425 billion overhang and have to put their money to work. This could account for much of the PE firm to PE firm deals.

But one buyout executive disagrees. “It’s because credit is better than it was in 2009,” he says.

The $425 billion overhang is a motivator to buy, the PE source says, but the situation hasn’t change in over a year. In 2009, buyout shops were faced with the same urgency to put their money to work. “In the absence of credit, nothing was sold,” the PE source says. “You need credit to make the wheel go round.”