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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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