Equity firms specialize in acquiring platforms and then during the ensuing 5- to 7-year “hold period” make additional investments in synergistic companies in order to expand the platform far beyond the size of the initial investment. These additional investments are called “add-ons” or “bolt-ons.” These descriptors refer to the fact that the subsequent investments are acquired and then rolled into the platform acquisition. They are typically “additive” and enable the equity firm to grow its investments beyond just organic expansion.
This strategy has become extremely popular for equity firms to pursue, according to PitchBook, a leading research company focused on private equity and venture capital firms. They do a great job compiling research on an industry that is notoriously secretive.
As you can see, based on their analysis, add-ons are now extremely popular with equity firms:
As shown, in 2005 add-ons accounted for only 39% of the acquisitions and investments made by equity firms. In only nine years, that percentage has exploded to 61% of all investments (through half a year in 2014). What is fueling this dramatic increase? In a word: success.
Equity firms have learned through years of trial and error that it is far more financially lucrative to make a number of smaller, less risky acquisitions (relatively speaking) and combine them into a new entity rather than trying to hit a home run with $1 billion deal.
The Great Recession was a real eye opener for many firms who had made highly leveraged, somewhat speculative mega deals only to see the investments fail or at best flounder when demand shrank. Because of this, funds are now targeting their investments in narrow synergistic ranges after the initial investment in a platform company.
The really good news is that for most private equity firms, the size of the add-on can be quite small (more on that in our next posting on the 17th). Lots of business owners that attend our seminars are surprised to learn that add-on acquisitions are popular and can be quite small in size.
And, because the equity firm wants existing management to stay with the acquired company post-acquisition, a good portion of these add-ons are partial sales. If you are unfamiliar with that deal-making strategy, typically the equity firm will acquire 51% or more of the target’s stock and recapitalize the new firm by rolling it into the platform company. Existing management and ownership is retained and most often is given added incentive by taking stock (ownership) in the new entity. This can prove quite lucrative for many owners who are young enough to stay and grow the new firm 5-7 years and then participate in a second liquidity event when the much larger entity is sold or taken public.
If this information is all new to you, then I recommend attending a Generational Equity exit planning workshop. An investment of a few hours of your time will really speed you along the path of determining when and how you want to exit your company.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
© 2014 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.