According to recent data from Pitchbook, through the first half of 2022, add-ons, as a percentage of all private equity transactions, have reached an all-time record high:
*As of 6/30/2022 - Source: PitchBook
As you can see, despite some overall slowing in PE activity through Q2 of this year, add-ons are well over 70% of all activity this year.
So, what technically is an add-on? Why are they so popular with PE firms? Why does an add-on transaction make sense to a business owner? How can a business owner position his/her firm to be an add-on target?
Let’s take a look at each of these important questions.
First, an add-on simply is a business added to a PE firm’s portfolio via a “platform company”. A platform company is typically the first entre a PE firm makes into an industry with the goal of “adding on” or “bolting on” smaller companies to the platform.
This allows the PE firm to grow an investment in an industry without the risk of making a much larger acquisition – under the proven theory that it is more efficient to absorb a number of smaller, synergistic acquisitions under the platform company than take a much bigger risk of making one very large investment.
And that also answers the second question above regarding why add-ons are a very popular strategy with private equity entities today: It is risk diversification in action!
As for business owners, the fact is that most PE firms that focus on the middle market not only make an initial investment in the business to acquire a portion of the company, they then make subsequent follow-on investments in terms of capital, people, processes and infrastructure, often items that the original owner could not afford or even imagine.
And most importantly, once the acquisition program is finished, quite often the PE firm will sell the now much larger entity to a strategic player in that space and/or take the new business public; either way the original owner of the add-on can then get a “second bite of the apple” as a partial owner of the larger enterprise.
So, add-ons have truly become a win-win option all around and you can see that in the graph above, with add-ons growing from around 50% of all PE investments just seven years ago to over 70% today.
Now the final question (and probably the most important) is how do you position your business to attract PE firms using an add-on strategy in your industry?
First, and most challenging for those not intimately involved with buyer databases, is finding firms active in your niche. Because of the sheer volume of inquiries that they get annually, many private equity firms do not publicize their acquisitions, using a far more targeted approach to find acquisition candidates.
This is especially true of a subset of PE firms, the Family Office which as we have discussed in past posts, are very secretive about their acquisition searches.
Assuming you have found several (and remember one buyer is no buyer) that are active in your industry, you then need to create documentation about your business that is not only accurate, it is also in a format that an equity firm wants to see. Again, they are approached by hundreds of targets annually, making it a real challenge to sort the “wheat from the chaff” as it were.
Bottomline: You will need experienced exit planning advice to appropriately and adequately target any PE firm specializing in an add-on program. Fortunately, Generational and its team has the experience and expertise to not only locate appropriate targets but also approach them with information that is relevant to the PE firm’s review committee.
To learn more about add-on strategies in action, and how you can benefit from their growing popularity, please plan on attending a Generational Growth and Exit Strategy Conference in your area soon. To find one near you, please use this link.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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