If They Build It, Buyers Will Come

June 06, 2023 | Amy Miller, Associate Director of Private Equity

This chart description is for illustrative purposes only and its accuracy cannot be guaranteed. Please see full disclosures at end of PDF document in the web post. General description: Combination stacked column and line chart showing add-ons as a share of U.S. Buyouts. Chart subtitle: Add-ons are an important tool used by private equity to build valuable businesses. Chart source: PitchBook as of March 31, 2023. Chart visual description: Left y-axis is labeled “Number of Total Transactions by Type” and ranges from 0 to 9,000. Right y-axis is labeled “Add-on as a % of Buyout Transactions” and ranges from 0% to 90%. X-axis shows annual data from 2008 to 1Q23. Each column includes “Add-on” in dark brown and “non-add-on” in tan. Line above plots “Add-on % of Buyout” in orange, with 1Q23 plotted with a diamond marker instead of the line. Chart data description: Total transactions have generally increased since 2008; in 2008, there were 1,141 Add-Ons and 1,142 Non Add-ons, with 50% add-on % of Buyout. That percentage increased to 54% in 2009, 59% in 2013, 65% in 2018, and 77% in 2022; in 2022, there were 5,081 Add-on and 1,515 non add-on. Please contact our team for the full data set. End chart description. See disclosures at end of document.

Stalled sale processes have become the norm in the private equity market due to several factors, including a mismatch between buyer and seller expectations around price and interest rates. Private equity owners have been forced to pivot from the traditional leveraged buyout model, now taking on less debt as they look to create an asset that will be attractive to potential acquirers. One way to do this is to build a better business, including via add-on acquisitions, which have been growing as a proportion of buyout transactions for the last several years. In 2008, add-ons accounted for 50% of deal volume. In the first quarter of 2023, that amount was close to 80%.

Add-ons offer several benefits to private equity firms. First, they are an efficient way to expand and diversify a business’s geographical footprint, customer base, and product offering. Second, add-on acquisitions tend to be smaller businesses, and thus typically less expensive than larger platform investments, allowing the private equity manager to average down the total cost of the combined investment. Third, add-ons tend to be accretive, increasing revenue, EBITDA, and EBITDA margins. Taken together, with proper integration, the end business can become a more attractive acquisition target for both large private equity firms and corporations.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Amy Miller
Associate Director of Private Equity

Get to Know Amy

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

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