As we have discussed, one of the most popular methods for private equity (PE) growth is via an add-on strategy. Add-ons (a.k.a. bolt-ons) are relatively smaller companies that equity firms invest in and then “bolt on” to an existing platform company.
Usually the initial investment by an equity firm into an industry is a fairly large transaction – often companies with revenue in excess of $50 million or earnings of $10 million plus. After the platform or portfolio company is acquired, PE firms then do extensive research, looking for synergistic additions to that platform. Synergies can be either vertical or horizontal and are often both.
Skeptics out there might say, OK, that is only a sample set of four deals. What about some real data? According to PitchBook’s 1st Quarter 2016 U.S.PE Breakdown, add-ons as a percentage of all PE deals completed have leaped dramatically so far this year. This is how they describe the current situation:
Transactions closing between $25 million and $100 million represented 26% of all 1Q deals. We still have plenty of room to run in the year, yet 2015 as a whole saw transactions in this size bucket represent just 22.5% of all activity. Deals in this range also continue to be a haven for add-on acquisitions, which accounted for68% of all 1Q buyout volume, more than any other year we’ve tracked to date.The buy and build strategy will continue to be essential for PE buyers as they look to position portfolio companies to endure any dip in the economic and business cycle.
And for you visual learners out there, you can see this trend graphically:
This trend is statistically significant, doubly so if you are the owner of a business in the U.S. today. An increase from 43% to 68% is a massive shift, and the percentage change from 2006 to 2015 (959 deals vs. 1,752) represents a compound annual growth rate (CAGR) of over 9%. Keep in mind too that the starting point of this chart, 2006 was actually two years before the recession hit, which affected deal making dramatically. But as you can see, the percentage of add-ons just kept on climbing.
In the paragraph preceding the chart, PitchBook makes some points about why private equity firms are pursuing “buy and build” strategies. Although theirs are certainly accurate (enduring any dip in the economic and business cycle), I want to add an even more fundamental reason that add-ons have become a key part of the PE model: It just makes sense! By that I mean, the fastest, most efficient way to grow a platform, and eventually take it public or sell it outright to a larger strategic is via synergistic add-ons over a 5-7 year period.
Don’t confuse an add-on strategy with the heyday of roll-ups personified by Harold Geneen and ITT, where over a 20-year period in the 60s and 70s hundreds of unrelated businesses in completely divergent industries were acquired. No, PE add-ons are “additive” to the overall growth of the platform and ultimately generate tremendous returns for limited partners that invest in these funds.
What does this mean to you, an owner of a company that is typically under-capitalized but has great growth potential and ideas?
Simply this: A partial sale to a private equity firm could make tremendous sense. A partial sale is usually how these add-on deals are structured. Current management is retained in “newco” with new ownership structure, where you may retain a minority position. Then the PE firm infuses the business with capital investment, along with sales, marketing, operations, and management advice that will enable you to take your company to a new level as part of a larger platform investment (and you retain a partial interest in the new company).
That may sound too good to be true, but the reality is it is entirely possible. Generational Equity has closed a number of deals using this same structure with great success.
Of course not all businesses are good fits for PE firms even as add-ons. By their very definition, bolt-ons have to meet specific criteria such as location, industry niche, intangible assets, management team experience, potential growth, etc. In addition, a partial sale requires the business owner, if retained, to be able to manage on a collaborative basis AND in most cases to be able to answer to a board made up of PE firm leaders, as well as management of the platform company. For many entrepreneurs this can be a challenging transition.
But it can be a great deal structure for many business owners. If you would like to learn how, and begin to research if it might be a good match for you, reach out to a Generational Equity Senior Business Analyst at 877-213-1792. Our team will discuss your options with you and help you begin the path towards an exit time and strategy.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
© 2016 Generational Equity, LLC. All Rights Reserved.
The information we learn from customers helps us personalize and continually improve your experience at gencm.com. Here are the types of information we gather.
Information You Give Us: We receive and store any information you enter on our Web site or give us in any other way. We do not sell or rent your personal information to others without your consent. We use the information we collect only for the purposes sending promotional information, enhancing the operation of our site, serving advertisements, for statistical purposes and to administer our systems. We DO NOT use third parties to provide customer service, to serve site content, to serve the advertisements you see on our site, to conduct surveys, to help administer promotional emails, or to administer drawings or contests, but reserve the right to do so in the future without advance notice. Our computer system protects personal information using advanced firewall technology.
Information from Other Sources: For reasons such as improving personalization of our service, we might receive information about you from other sources and add it to our account information.
Generational Capital Markets LLC may license the use of its intellectual property including but not limited to its name, likeness, and logo for the use of affiliated offices. Such affiliated offices may not be owned, controlled, managed, supervised or staffed by employees, officers, or agents of Generational Capital Markets, L.L.C. Affiliated offices may be independently owned and operated. For more information about a particular office, please contact Generational Capital Markets LLC at is office in Dallas, Texas.
This page may contain other proprietary notices and copyright information, the terms of which must be observed and followed.
INFORMATION ON THIS WEB SITE IS PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NON-INFRINGEMENT. SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OF IMPLIED WARRANTIES, SO THE ABOVE EXCLUSION MAY NOT APPLY TO YOU.
Information on this web site may contain technical inaccuracies or typographical errors. Information may be changed or updated without notice. Generational Capital Markets may also make improvements and/or changes in the products and/or the programs described in this information at any time without notice.
Generational Capital Markets does not want to receive confidential or proprietary information from you through our web site. Please note that any information or material sent to Generational Capital Markets will be deemed NOT to be confidential. By sending Generational Capital Markets any information or material, you grant Generational Capital Markets an unrestricted, irrevocable license to use, reproduce, display, perform, modify, transmit and distribute those materials or information, and you also agree that Generational Capital Markets is free to use any ideas, concepts, know-how or techniques that you send us for any purpose.
Information Generational Capital Markets publishes on the World Wide Web may contain references or cross references to other products, programs and services that are not announced or available in your country. Such references do not imply that Generational Capital Markets intends to announce such products, programs or services in your country. Consult a Generational Capital Markets representative for information regarding the products, programs and services which may be available to you.
Generational Capital Markets makes no representations whatsoever about any other web site which you may access through this one. When you access a non-Generational Capital Markets web site, please understand that it is independent from Generational Capital Markets, and that Generational Capital Markets has no control over the content on that web site. In addition, a link to a non-Generational Capital Markets web site does not mean that Generational Capital Markets endorses or accepts any responsibility for the content, or the use, of such web site. It is up to you to take precautions to ensure that whatever you select for your use is free of such items as viruses, worms, trojan horses and other items of a destructive nature.
IN NO EVENT WILL Generational Capital Markets BE LIABLE TO ANY PARTY OR ANY DIRECT, INDIRECT, SPECIAL OR OTHER CONSEQUENTIAL DAMAGES FOR ANY USE OF THIS WEBSITE, OR ON ANY OTHER HYPERLINKED WEBSITE, INCLUDING, WITHOUT LIMITATION, ANY LOST PROFITS, BUSINESS INTERRUPTION, LOSS OF PROGRAMS OR OTHER DATA ON YOUR INFORMATION HANDLING SYSTEM OR OTHERWISE, EVEN IF WE ARE EXPRESSLY ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Furthermore, all information contained within this website is the property of Generational Capital Markets.
Honored to win Investment Banking Firm of the Year 3 years running.
Over 50 awards and counting.
Sign up to receive regular email updates, industry-leading insights and details on complimentary M&A executive conferences in your area from our award-winning team
Success, you have been added to our list.