October 5, 2022

Private Equity: “Bolt-Ons” Shine in Turbulent Times

With higher borrowing costs, squishy valuations & exits harder to come by, this Institutional Investor article says that private equity sponsors are eschewing platform deals in favor of smaller, “bolt-on” acquisitions to grow the businesses of their portfolio companies:

As borrowing costs spike and exits get harder, private equity firms are increasingly buying smaller, specialized companies that can be bolted on to existing holdings. Over the last year, these smaller add-on acquisitions have become a bigger part of the mergers and acquisitions market. According to several consultants, the strategy has always piqued the interest of lower-middle-market firms, but it has recently gained popularity among all sectors as private equity carefully scales up the platforms of portfolio companies in a risk-off environment.

In the first half of 2022, add-on acquisitions accounted for almost 80 percent of the deal activity undertaken by buyout funds, according to data from PitchBook. In the middle market, both the value and number of add-ons as a percentage of all deals reached all-time highs of 73 percent and 63 percent, respectively, according to the most recent U.S. PE middle market report from PitchBook. The report noted that the add-on market has been especially active in industries such as healthcare, financial services, and information technology.

The article says that the growing percentage of deal activity devoted to bolt-ons suggests that that PE firms are becoming more risk-averse. In that regard, one of the advantages of these deals is that they allow the sponsors to engage in “multiple arbitrage” by averaging down the overall price multiples of the portfolio companies.

John Jenkins