Private Equity Firms turn to add-ons in 2024
It has been a tough year for private equity managers, who grappled with a series of headwinds, including a slump in private market valuations and difficulty securing cheap debt for new deals.
With the expectation that these conditions may linger into 2024, PE sponsors will continue to rely on tools that optimize their existing assets rather than seek out new platform investments.
We asked advisors to share PE firms' strategies for deploying capital and managing portfolios in 2024. Here’s what they said.
Divestitures
Private equity buyers love to acquire a good carveout. Still, next year, they are also expected to dice up their portfolio companies increasingly and sell non-core businesses from their holdings to bolster balance sheets.
One reason is that PE firms have shifted their focus to strengthening their portfolio companies' operational efficiency and EBITDA growth, as the prohibitive cost of debt drives up expenses in running businesses.
Through selective carveouts, PE managers can trim a portfolio company's underperforming appendages, help it concentrate on its core strategy, and generate cash to pay down existing debt or fund add-ons for inorganic growth.
Additionally, in a market with wide valuation disparity, it’s easier to align buyers' and sellers' expectations in carveout transactions, according to Matthew T. Simpson, co-chair of the private-equity practice at law firm Mintz.
Buyers for these divested assets are typically strategic acquirers looking to integrate the acquired business into their existing infrastructure and create synergies. They are also willing to pay more of a premium than financial buyers.
In general, strategic buyers are known to pay up for carveouts, with recent research by Deloitte noting they are often willing to spend up to 20% more for these assets than financial buyers.
A recent example of a divestiture by a sponsor-backed company was Crenlo Engineered Cabs’ sale of its Brazilian business to a unit of German manufacturer JOST Werke. According to a company statement in August, the transaction enabled the US auto-part maker, which is owned by lower mid-market PE firm Angeles Equity Partners, to concentrate on its business in the North American market.
More recently, NavaDerm Partners, a dermatology platform owned by specialist manager BelHealth Investment Partners, announced the sale of its New Jersey practices to Schweiger Dermatology Group in December as part of a stated strategy to focus on its core geography of New York.
Further, PE sellers seeking to dispose of non-core assets are less price sensitive than selling other assets—for instance, in the exit of a platform investment.
Sometimes, a buyer can selectively acquire a portion of the assets the seller wants to divest rather than pay for the entire unit. Sometimes, this means the seller has to shutter the part of the business the buyer did not purchase.
“Sponsors are increasingly flexible on jettisoning non-core assets,” Simpson said.
Add-ons
In the same vein, dealmakers also anticipate a steady stream of add-ons to continue to drive the lion’s share of PE deal activity, following the pattern of 2023.
Accessing cheap debt financing has made it more challenging to carry out platform acquisitions. The add-on—which allows a PE sponsor to integrate a smaller business into its platform to increase the aggregate EBITDA—has become a critical strategy for the PE buy-and-build playbook this year.
According to PitchBook data, add-on acquisitions accounted for 76.1% of buyout deal count through the first three quarters of 2023, the second highest since 2008. The only year this figure was higher in the past 15 years was 2022, when add-ons represented 76.3% of overall buyouts made by PE firms for the same period.
It is less expensive to purchase an add-on than to acquire a platform, making it easier to execute in an environment where debt is no longer abundant. Buyers typically tap into the cash on their balance sheet or use existing credit facilities to finance these deals, allowing them to avoid seeking new debt.
The bulk of add-ons are valued at less than $1 billion. Only nine add-ons with values topping $1 billion closed this year through Dec. 18, accounting for less than 1% of the overall add-on deal count, according to PitchBook data. These large bolt-on deals totaled $25.2 billion, representing about 7% of the total add-on deal value.
The few exceptions included Nordic Capital‘s $8 billion bid for healthcare software provider Amplexor Life Sciences for its portfolio company ArisGlobal, a life-sciences software provider. In another example, Platinum Equity took hygiene and cleaning products company Diversey Holdings private for $4.6 billion. The transaction was designed to boost the growth of Solenis's water treatment platform investment.
Private equity managers will keep building within their platforms for the foreseeable future, which means deal activity next year will likely follow the same trajectory, said Omar Lucia, an M&A attorney at Foley & Lardner.
In a report by Private Equity Data, each of the Top 10 firms shown below averaged more than one add-on per month.
Top 10 Private Equity Firms based in US & Canada in 2024 for add-on investments
Genstar Capital (San Francisco, CA) – 30 add-ons
Alpine Investors (San Francisco, CA) – 30 add-ons
Riverside Company, The (New York, NY) – 27 add-ons
Kinderhook Industries (New York, NY) – 27 add-ons
Freeman Spogli & Co. (New York, NY) – 27 add-ons
Insight Partners (New York, NY) – 27 add-ons
Frontenac Company (San Francisco, CA) – 27 add-ons
Altas Partners (Toronto, Ontario) – 25 add-ons
Wind Point Partners (Chicago, IL) – 22 add-ons
Leonard Green & Partners (Los Angeles, CA) – 22 add-ons
We also looked at which private equity firms are doing the most add-on investments, differentiated by the typical deal size the firm does for platform investments. For this study, deal size ranges are defined by Enterprise Value:
Small: $0 – 50 million
Mid: $50 – 250 million
Large: $250 – 500 million
Mega: $500+ million
These ranges are not indicative of the add-on deal sizes, just the typical deal size ranges these firms do for platform investments.
Top 10 Private Equity Firms for add-on investments – Mega
Genstar Capital (San Francisco, CA) – 30 add-ons
Insight Partners (New York, NY) – 27 add-ons
Altas Partners (Toronto, Ontario) – 25 add-ons
Leonard Green & Partners (Los Angeles, CA) – 22 add-ons
Thoma Bravo (Chicago, IL) – 21 add-ons
TA Associates (Menlo Park, CA) – 20 add-ons
Madison Dearborn Partners (Chicago, IL) – 19 add-ons
Onex Partners (New York, NY) – 14 add-ons
Oak Hill Capital (New York, NY) – 14 add-ons
HarbourVest Partners (Boston, MA) – 12 add-ons
Top 10 Private Equity Firms for add-on investments – Large
Alpine Investors (San Francisco, CA) – 30 add-ons
Freeman Spogli & Co. (New York, NY) – 27 add-ons
Riverside Company, The (New York, NY) – 27 add-ons
Gryphon Investors (San Francisco, CA) – 27 add-ons
Wind Point Partners (Chicago, IL) – 22 add-ons
LLR Partners (Philadelphia, PA) – 20 add-ons
A&M Capital Partners (Greenwich, CT) – 18 add-ons
Knox Lane (San Francisco, CA) – 18 add-ons
Arlington Capital Partners (Bethesda, MD) – 16 add-ons
Battery Ventures (Boston, MA) – 15 add-ons
Top 10 Private Equity Firms for add-on investments – Mid
Kinderhook Industries (New York, NY) – 27 add-ons
Frontenac Company (Chicago, IL) – 26 add-ons
NMS Capital (New York, NY) – 21 add-ons
Gemspring Capital (Westport, CT) – 17 add-ons
RFE Investment Partners (Westport, CT) – 15 add-ons
HCI Equity Partners (Washington, DC) – 14 add-ons
Align Capital Partners (Dallas, TX) – 13 add-ons
Blue Sea Capital (West Palm Beach, FL) – 13 add-ons
Levine Leichtman Capital Partners (Beverly Hills, CA) – 13 add-ons
Renovus Capital Partners (Wayne, PA) – 12 add-ons
Top 10 Private Equity Firms for add-on investments – Small
O2 Investment Partners (Bloomfield Hills, MI) – 18 add-ons
Osceola Capital Management (Tamps, FL) – 18 add-ons
JAL Equity (Sarasota, FL) – 16 add-ons
Halle Capital Management (New York, NY) – 12 add-ons
Trivest Partners (Coral Gables, FL) – 11 add-ons
RF Investment Partners (New York, NY) – 10 add-ons
RTC Partners (Miami, FL) – 10 add-ons
White Wolf Capital (Miami, FL) – 10 add-ons
Copley Equity Partners (Quincy, MA) – 9 add-ons
MedEquity Capital (Waltham, MA) – 8 add-ons