Agency costs and investor returns in private equity: Consequences for secondary buyouts

Private equity funds are structured as finite-life entities with a fixed investment period. Fund
managers with unspent capital towards the end of a fund’s investment period have an incentive to burn capital. We argue that secondary buyouts (SBOs) are a natural channel for doing so. Consistent with this agency hypothesis, we find that SBOs made late in a fund’s investment period underperform similar primary buyouts. After a fund invests in late SBOs, investors appear to shun the follow-on fund. Early SBOs, however, have similar performance as other buyouts and some SBOs appear to be value-enhancing.