What will come of add-ons in a market correction?

Private equity add-ons are an increasingly popular investment strategy to deploy capital in this competitive environment. Over the three-year period from 2016 to 2018, there was a 29.4% increase in the number of add-on investments completed by PE firms, including an 11% increase from 2017 to 2018. To date, 2018 was the most active year in add-on activity in recent history, with 2,116 deals closing.

While there has been significant growth in the add-on strategy, earlier this week, BDO released findings from its Tenth Annual Private Equity Perspective Survey, which suggest that add-ons may take a backseat in an economic downturn. Two interesting takeaways from the survey include:

  • “Over the next 12 months, the overwhelming majority (89 percent) of firms will direct the most capital toward new deals, putting on the backburner add-on acquisitions and de-leveraging portfolio company balance sheets. Funding portfolio working capital needs is also not a top priority compared to the hunt for new deals.”
  • “Other than to fund acquisitions, nearly a third of survey respondents said they’re using proceeds from debt towards dividend recaps. Just under one-quarter of survey respondents say they’re using proceeds from debt to fund add-on acquisitions.”

In 2018, there were 718 unique portfolio companies that invested in 2,116 add-ons transactions, with 49 firms completing 10 or more add-ons for the period. Compare this with 2017, there were 680 unique portfolio companies investing in add-ons, with 38 firms completing 10 or more for the year.

The three most active sponsors in 2018 for add-on strategies were Genstar Capital, Hellman & Friedman, and Audax Group. Furthermore, the most active industries for add-ons in this period include, IT: Software & services (333); Industrial: Equipment & products (295); Financial: Insurance (166); Healthcare: Specialty clinics & centers (131); and Industrial: Services (104).

Add-ons are a core investment strategy for private equity to build out strong portfolios. Sourcing for compatible add-ons is a challenging endeavor and it all starts with the initial sourcing strategy. Employing a thoughtful, data-driven approach will alleviate the stresses of finding that perfect deal to add to your portfolio mix. The SPS Portal can provide your sourcing strategy a meaningful analysis to help your fund get ahead of dynamic market trends to illustrate how an existing strategy may encounter diminishing returns, as the more forward-thinking portfolio companies move on to other approaches and markets. Don’t get left in the dust.

While add-ons were very active in 2018, it will be interesting to compare the first quarter of 2019 with the prior three years to see if the trends are continuing. Or, as signaled by BDO’s survey, a downturn in the economy impacts the market for add-ons.

Last week’s deals today

February 4 – 8, 2019
~128 deals traded

Deal of the week

Last week, Cleco Corporate Holdings LLC completed its acquisition of NRG South Central Generating, an operator of 3,555 megawatts of electric generating assets based in Minneapolis for $1 billion. Both Barclays Capital and J.P. Morgan Chase acted as the sell-side financial advisor on this transaction.  
Most active subsectors
  • IT: Software & services
  • Industrial: Equipment & products
  • Financial: Services
  • Retail: Specialty
Most active cities
  • New York
  • San Francisco
  • Toronto
  • Chicago

Photo by rawpixel on Unsplash

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