Secondary buyouts lag when the buyer has money to use up

What is a secondary buyout, and how is it different from a continuation fund?

A secondary buyout is a sale in which one private equity firm sells a portfolio company to another private equity firm. The seller’s fund exits, and the buyer’s fund, run by a different manager, becomes the owner. Researchers call it an SBO and dealmakers call it a sponsor-to-sponsor sale. It is one way a buyout can end, alongside a sale to a company or a stock market listing, and the private equity deals hub follows the whole process stage by stage.

A continuation fund is a different transaction, and the secondaries and liquidity hub covers continuation funds and other GP-led secondaries, along with sales of fund stakes. Bain & Company put GP-led continuation vehicles at less than 10% of total private equity exit value in its February 2026 report, after growth of 62% in a year.

How common is a secondary buyout as an exit route?

Secondary buyouts were 40 percent of private equity exits according to Degeorge, Martin and Phalippou, writing in 2015 without stating the data behind the figure, and over half of US exit value in the third quarter of 2024. Foley & Lardner reported on 21 September 2026 that sponsor-to-sponsor sales fell to 94 in the second quarter, the fewest in at least a decade, but the sentence names no data source, and the year and the US are inferred from the sentence before it, which reports US exit value at midyear against 2025’s pace. No single series covers the period, so the table lists each measured point with what it counts.

Period	What is counted	Figure	Source
Not stated	Share of private equity exits, authors’ dataset	40 percent (basis not stated)	Degeorge, Martin and Phalippou, 10 November 2015
Q3 2024	Share of US private equity exit value	Over half, up from 47% in Q2	Moonfare, citing PitchBook, 4 December 2024
2025	Change in the value of sponsor-to-sponsor exits, global	Up 21%, against 66% for sales to corporates	Bain & Company, 22 February 2026
Q2 (year inferred as 2026)	Number of sponsor-to-sponsor sales; geography and data source not stated (the paragraph reports US figures)	94, the fewest in at least a decade	Foley & Lardner, 21 September 2026
Q2 2026	Change in sales to other sponsors from Q1; geography not stated	Down almost 40%	Penn Mutual Asset Management, citing PitchBook data as reported by Inc., 22 October 2026

The rows mix shares, growth rates and counts, neither Q2 2026 row states a geography, and the two may rest on the same PitchBook data, so Unmatched Capital has not computed a trend from them. The most the rows support is that volume moves with the market. Bonini, in a 2015 study, found that favourable credit market conditions and private equity reputation go with more secondary investment. Slaughter and May’s 2026 note says industry participants expect sponsor-to-sponsor exits to continue to dominate, without giving a share or a geography, and a UK recruiter wrote in October 2023 that the route had become routine in the UK (FD Capital). The Q2 2026 count is the low point of the table, and it is one quarter.

Do secondary buyouts return less than primary buyouts?

Secondary buyouts return less than other buyouts in some studies and as much in others, and the best-documented shortfall belongs to buyers under pressure to spend. Degeorge, Martin and Phalippou (Journal of Financial Economics, April 2016) found that late-period secondary buyouts, made late in the buyer fund’s investment period, returned $0.88 on average, net of fees, for each $1 that the same money in a stock market index would have returned. The working paper’s abstract calls deals by buyers under pressure to spend “a minority of transactions”. Early-period deals performed as well as other buyouts, and buyers and sellers with complementary skills earned significantly higher returns. Investors reduced their commitment to the next fund of the firms making the weak deals.

That is narrower than an earlier summary by the same authors. A January 2014 summary of an earlier paper, The Performance of Secondary Buyouts, reported that the average secondary buyout distributed $0.4 less cash per $1 invested and had an IRR about 15% lower than comparable primary buyouts. The same summary found that late secondary buyouts did worse when the fund had more capital left to invest and when the deal was large relative to the fund, that late deals were no safer than comparable primary buyouts, and that secondary buyouts acquired by a specialised fund performed better. The journal’s abstract calls the evidence nuanced, and Wall Street Prep, updated in February 2024, still says there is substantial evidence that secondary buyouts produce lower fund returns, without giving a figure.

Study	Finding	What it cannot tell you
Arcot, Fluck, Gaspar and Hege, Journal of Financial Economics, January 2015	Funds under pressure do more secondary buyouts. Pressured buyers pay higher multiples and borrow less; pressured sellers accept lower multiples and sell sooner; funds that invested under pressure underperform	Sample size and period are not on the pages read
Bonini, Financial Management, 2015	Returns to secondary investors are positive but significantly lower than first-round buyers; operating growth matches peers	An earlier working paper used 2,911 buyouts from 1998 to 2008, 163 of them companies bought twice in a row
Kick and Schwetzler, Financial Markets and Portfolio Management, 2024	In 276 companies bought in a primary and then a secondary buyout, the first buyout’s IRR was significantly higher; after matching for size and holding period, the authors found “no systematic outperformance of SBOs against their PBO comparables” and no significant difference in operating performance	The abstract gives no sample period

Arcot and colleagues measure pressure from how close a fund is to the end of its investment period or life, how much capital is unused, its reputation, its deal pace and how often it raises money. Of these studies, only the newest was published after 2016, and its abstract gives no sample period, so none can be shown to say how secondary buyouts bought since 2020 will end.

What does an LP pay when its funds sit on both sides of one deal?

An LP that owns both the selling fund and the buying fund pays management fees to both managers on the same company, and carried interest to both on different slices of its gain. Degeorge, Martin and Phalippou argue that this overlap adds no extra transaction cost, on their assumption, which they call true in practice, that a manager always invests the capital committed to it: each dollar in a fund then pays two rounds of transaction costs, one on entry and one on exit, whatever the manager buys. Their analysis covers transaction costs. Carrying the same logic to management fees and carried interest is Unmatched Capital’s own extension, in the example below.

The deal is hypothetical, and every input is an example input:

• Fund A bought a company’s equity for $100 million and held it five years. Fund B bought it from Fund A for $180 million, held it four years and sold it to a trade buyer for $234 million.
• Each manager charges 2% a year of cost while it holds the company, a base that fits the authors’ page, which says managers usually earn fees only on the invested portion of committed capital once the investment period ends. Each takes 20% of the net profit as carried interest once its fund’s LPs have earned a hurdle of 8% a year, UK Private Capital’s typical figure, with a full catch-up, and nothing below it. Unmatched Capital found no readable public survey of fee and carry levels, so 2%, 20% and the catch-up are examples.
• Fund A’s LPs earn about 8.6% a year after carry, so it takes carry. Fund B’s LPs would earn about 4.7% a year even with none, so it takes none on this deal, though a real manager could still be paid if the rest of its fund did well.
• The LP owns 10% of each fund’s holding. Debt, deal costs and taxes are left out.

$ million, whole holding	Fund A	Fund B	Both
Cost	100.00	180.00
Management fees	10.00	14.40	24.40
Sale proceeds	180.00	234.00
Carried interest	14.00	0.00	14.00
Net profit to LPs	56.00	39.60	95.60

Fees and carry come to $38.40 million, 28.7% of the $134 million gain, in Unmatched Capital’s calculation. If Fund A had sold to a trade buyer at $180 million and Fund B had bought a different company at $180 million that sold for $234 million four years later, every figure would be identical. That extends the authors’ point about transaction costs to fees and carry, and it holds only if Fund B would have spent the $180 million anyway.

The LP’s exposure to price depends on its shares in the two funds. Each $20 million Fund B pays above $180 million moves $16.00 million of net profit to Fund A’s LPs, after Fund A’s carry, and takes $21.60 million from Fund B’s: the extra $20 million of cost plus $1.60 million of extra fees. The table shows each LP position’s profit on this company, in $ thousand.

LP holds	B pays $180m	B pays $200m	B pays $220m
10% of A only	5,600	7,200	8,800
10% of B only	3,960	1,800	-360
10% of both	9,560	9,000	8,440
2% of A, 10% of B	5,080	3,240	1,400

Does the overlap cost an LP more than a single owner would?

The overlap costs an LP extra fees when the sale replaces a longer hold or capital that would otherwise stay undrawn, and nothing extra when the buyer would have spent the same money on another deal on the same terms. In the example, one fund holding the company for all nine years and selling at $234 million would charge $18.00 million of fees, against $24.40 million for the two-owner route, because Fund B charges on $180 million of cost, not $100 million. The carry comparison is fragile: counting every fee as paid at the start, as the example does, that single owner’s LPs would earn about 7.9% a year before carry, just under the hurdle, so the example charges no carry; a slightly higher sale price, or fees counted year by year (about 8.5%), would bring some back: with yearly fees and a full catch-up, about $9.1 million, not 20% of the $116 million profit.

A nine-year hold is uncommon rather than impossible. UK Private Capital says private equity firms typically hold investments for four to seven years, within funds whose initial life is usually 10 or more years.

The authors’ own page supplies the strong form of the view that an LP is paid twice. It records the investor concern that secondary buyouts are deals passed along so that the buying fund can spend capital and collect fees, and it says managers usually earn fees only on the invested portion of committed capital once the investment period ends. In Unmatched Capital’s reading, that makes the late-period buyer under pressure to spend, the case where the research finds the weakest returns, also the case where the sale is most likely to create fees that would not otherwise be charged. The authors’ result holds only if each committed dollar will be spent anyway, an assumption they call true in practice but unlikely to be value-maximising for investors.

What that means depends on which funds the LP holds. An LP with equal shares recovers about 74% of what an LP in Fund B alone loses, so its exposure is its share of the buyer fund minus about three quarters of its share of the seller fund, in this example. It recovers in one fund the price it overpays in the other, less the seller’s carry on the extra price, and nothing offsets the buyer’s extra fees. An LP in the buyer fund alone bears the overpayment and the fees. An LP in the seller fund alone receives the price. The hedge also covers price and not selection: if a pressured buyer’s whole programme underperforms, every LP in Fund B shares the loss, and LPs rarely hold equal shares, as the last row of the price table shows.

What does management usually get in a secondary buyout?

Management in a secondary buyout is usually asked to sell part of its stake and roll the rest into the new owner’s structure, with a new incentive plan on top, according to the glossary on Altss, a reference site, in October 2026. A team that rolled into the first buyout is therefore asked to roll a second time, now alongside a different sponsor.

Published evidence on the terms is thin. Mishcon de Reya, a UK law firm, wrote in February 2020, in an archived note prompted by the 2019 wave of UK take-privates, that in private equity incentive plans a rollover of 40% to 60% of sale proceeds, after tax, is quite usual. The note does not mention secondary buyouts, and Unmatched Capital found no figure specific to them. FD Capital, a UK recruiter, wrote in October 2023 that sweet equity in a secondary buyout is struck at the new, higher entry valuation and that a secondary buyout sponsor often needs a hold of three to four years rather than five to seven. Teams that have been through one ownership cycle can be more resistant to a second round of change, it added.

A seller under pressure accepts a lower multiple (Arcot and colleagues), and, in Unmatched Capital’s reading, that multiple also prices the stake management sells. How a buyer and seller split the risk of warranties that prove wrong has its own page on warranty and indemnity insurance, and tax on a rollover depends on the country, so it needs advice.

What should an LP, a management team or an adviser check?

Before treating a secondary buyout as a conflict or a bargain, check how much unspent capital and time the buyer’s fund has and whether buyer and seller bring different skills; an LP should also check its net position across the two funds.

1. An LP should net its share of the buyer fund against its share of the seller fund, weighting the seller side by what each extra dollar of price leaves the seller’s LPs after carry and the buyer side by that dollar plus its fees: about three quarters in the example above ($16.00 million against $21.60 million), a ratio that other fee terms, waterfalls and holding periods change. If the result is positive, a high price costs the LP, and with equal shares it costs about a quarter of what an LP in the buyer fund alone would lose, because the seller’s manager takes carry on the higher price and the buyer’s fees rise with it. The overlap costs extra only when the sale replaces a longer hold or capital that would otherwise stay undrawn, so the LP should ask the buyer’s manager how much of the fund is unspent and when its investment period ends, because late-period deals are where the research finds the $0.88, and weigh the answer when that manager next raises a fund, as the investors in the study did.
2. Any investor should ask what the buyer brings that the seller did not. Degeorge, Martin and Phalippou found that complementary pairs, such as a finance-oriented firm and an operations-oriented one, earned significantly higher returns for buyers.
3. A management team should ask for the valuation at which the new plan’s shares are struck, how much of its stake rolls, and how long the buyer plans to hold. If the buyer plans add-on acquisitions, it should ask how they enter that valuation.
4. An adviser should establish which side is under pressure: Arcot and colleagues found that pressured buyers pay more and pressured sellers accept less.

This page is general information, not investment, tax or legal advice.