PE Pursues Buy-and-Build

April 21, 2021

Two charts showing changes in private equity add-on acquisition activity. Chart subtitles: Left reads, "Add-on acquisitions have increased as a share of buyouts," and right reads, "Add-on acquisitions no longer increase holding periods." First chart description: Combined stacked columns and line chart. Left y-axis for columns shows Deal Count, ranging from 0-5,000. X-axis shows years 2002-2020. Right y-axis for line shows Add-Ons as a % of Buyouts as range of percentages from 0-80%. Line has steadily increased since 2002, from 43% to 72% in 2020. The total number of Deals has increased significantly; each stacked column shows deals that were add-ons and were not add-ons which, with add-ons also steadily increasing. Second chart description: Line chart. Y-axis shows Median Years to Exit. X-axis shows years from 2006-2020. There are three lines with the following category labels: 0 Add-ons; 1-4 add-ons; 5+ add-ons. In 2006, the 5+add-ons category was near 7 years holding time and the 1-4 add-ons category and 0 add-ons categories were near 4, but in 2020, all three categories were all very close to 5 years. Chart source: Pitchbook as of December 31, 2020.

Add-on investments, a company acquired by a private equity firm to be added to one of its platform companies, have steadily increased in importance and popularity over the past two decades. In 2020, 71.7% of U.S. PE deals were add-ons, compared with 43.2% in 2002. After a dip in total deal count in 2020 amid the COVID-19 pandemic, we expect 2021 will see the highest number of add-on deals on record. These buy-and-build strategies can take different forms. Some involve large-scale roll-ups in which a platform company acquires a large number of smaller, often founder-owned companies. Others include more opportunistic M&A transactions that allow portfolio companies to pursue specific product or operational goals. The growth of add-ons across two decades of various market cycles can be attributed to a number of advantages: multiple arbitrage, giving larger firms access to out-of-reach market segments, helping portfolio companies enter new geographical markets, and doubling down on more profitable end markets.

The holding period for add-ons has also evolved. Historically, private equity has held platform investments that included add-ons longer than other portfolio companies. In recent years, the median exit times for portfolio companies with and without add-ons have converged to roughly five years. We attribute this to both private equity becoming more skilled at executing these buy-and-build strategies as well as buyers being increasingly willing to pay for the unrealized potential of recently-completed add-on acquisitions.

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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.

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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