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Private Equity Building Big Businesses Through Smaller Acquisitions

By Generational Equity

GE Fish1

Private equity has certainly evolved over the past 30 years and even more so after the Great Recession in 2008. Bain, one of the leading consulting partners to the private equity (PE) industry, confirmed this recently with the release of its Global Private Equity Spotlight for 2018.

As always, Bain’s research is detailed and well analyzed. Some of their key findings include the new reality that add-ons as a percentage of all deals closed by PE firms globally in 2017 reached 50%, an all-time high.

Private Equity investment value rises

This is great news for owners of lower middle-market companies (generally companies with revenue below $100 million).

Add-ons tend to be smaller acquisitions because the PE firm is “bolting” the newly acquired business onto an existing platform company. Equity firms have learned that the best returns come when multiple smaller companies are “added on” to a much larger existing holding.

This strategy allows them to benefit from economies of scale and also tap into the knowledge, contacts, and experienced employee base of multiple companies rather than taking the risk of a single large investment and then growing it organically.

Increased Funding and Numbers of Private Equity Firms

Secondly, the amount of dry powder available for investing is at an all-time high (especially for those firms specializing in buyouts):

Dry Powder capital reserves hit all time high

And not surprisingly, the number of private equity firms has likewise reached record levels:

Quantity of Private Equity firms increases

Again, this is significant news for owners of privately held middle market companies.


Because of increased competition to acquire well run businesses.

You see, capital that is committed to private equity firms by their limited partners is given to be used for one purpose: acquisitions. Most funds have a 3-year to 5-year window in which to make their investments, otherwise the capital must be returned to the investor (an action that PE firms would rather avoid).

As you can see from the second graph, over the last three years alone, buyout firms have raised over $150 billion. Much of that will need to be invested in the next couple of years, which will continue to drive our current seller’s market.

Also, in the third graph, notice how the number of active buyout firms has grown exponentially since 1990. Again, this also implies new and growing competition for acquisitions, as these firms would not be forming without this goal in mind.

Is Private Equity Investment in Your Future?

Thanks to Bain and their detailed research, we can be assured that there is more competition than ever before for privately held, middle market companies who have prepared themselves for the acquisition process.

How does this preparation process begin? By gaining as much knowledge as you can about exit planning and how to find optimal investors for your business from not only among PE firms but also corporate strategics, family offices, offshore buyers, individual investors and a myriad of other sources.

A great place to start your education begins with attending a Generational Equity exit planning conference. Held regularly throughout North America, these meetings are highly educational and completely complimentary. All that is required of you is that you take good notes and ask great questions. Use the following links to learn more:

And special thanks to our friends at Bain for producing a highly informative overview of the PE industry today. If you would like to see the entire report, use the following link: Global Private Equity Report 2018.

By Carl Doerksen, Director of Corporate Development at Generational Equity.

© 2021 Generational Equity, LLC. All Rights Reserved.

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