Salient to Investors:

Private-equity firms, struggling with slumping demand for IPOs are instead turning to private-to-private sales as a sluggish economic recovery saps demand for IPOs. Global IPOs fell in Q3 to the second-lowest level since the financial crisis.

Private-equity returns are falling. Secondary deals don’t bring the payoffs from IPOs or sales to corporate buyers that investors expect when they invest.  Target companies may have already yielded significant returns under their first private-equity owner, leaving less upside for the next buyer.

Mike Kelly at Hamilton Lane Advisors said secondary buyouts are not necessarily troubling, but investors may wonder what deal flow a buyout firm has if it can only find investments in another private-equity firm’s portfolio.

Donn Cox at LP Capital Advisors said many deals held through the downturn have gotten to the point where funds want to exit.

Hugh Johnson at Hugh Johnson Advisors said firms that increasingly rely on secondary buyouts are trying to perpetuate an asset class that’s become very overcrowded and where the returns are going to be much less. 

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