Private Equity Investors Hungry For Add-On Acquisitions

I get regular bulletins from PitchBook, a company which tracks investments that private equity groups ("PEG's) make in businesses. Today's bulletin really caught my eye, and it seems to support  many merger and acquisition advisors' expectation that the market for M&A activity will build rapidly this year, for a number of reasons.
 
To put this information into perspective, a few terms may help.

Definititions: Private Equity, Platform Acquisition, Add-on Acquisition
Private equity - Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity. Capital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet.

The majority of private equity consists of institutional investors and accredited investors who can commit large sums of money for long periods of time. Private equity investments often demand long holding periods to allow for a turnaround of a distressed company or a liquidity event such as an IPO or sale to a public company. (definition courtesy of Investopedia)

Add-on Acquisition vs. Platform Acquisition - an "add-on" is an acquisition made by a PEG because it is a strategic fit for something else in their portfolio of companies. Here's an example.

A PEG may buy all or part of a company that manufactures electronic controls and sells them to an industrial market.  If they have no prior investment interest in this type of company, it would be considered a "platform" investment, in other words an initial investment in a category from which they will build other investments.

Now suppose that I bring them a company for sale that manufactures electronic controls also, but this one is serving the consumer market for residential energy efficiency, such as solar water heating, pool and hot tubs, kitchen and bath water heat control, etc.  That PEG may elect to buy this second company, and "add it on" to the first investment, based on the synergies that they may anticipate achieving from both complementary investments -- thus, the term "add-on acquisition."

Often, add-on's are smaller investments than platforms in terms of the transaction dollar value.

Rapid 2010 Growth Rate in Add-on Acquisitions
Excerpt from today's Pitchbook bulletin:

"According to the PitchBook Platform, there have been 41 add-on acquisitions completed by private equity-backed companies so far in 2010. An amount already equivalent to 70% of 4Q 2009's total of 59 completed deals. The 41 deals represent 29% of all buyouts so far in 2010, a portion well above the 23% that add-ons represented in 4Q 2009. It is also very suggestive of the fact that private equity firms are finding a wealth of opportunities in the current market to grow their portfolio companies acquisitively in addition to organically." (my emphasis)

Implications for Business Owners

We work with many private equity groups.  I get at least one daily inquiry from a PEG who seeks to buy something specific, or just maintain contact so that I remember them when I am representing a company for sale that matches their buying criteria.  Additionally, as an active member of The M&A Source and the Association for Corporate Growth (ACG), I meet with 50-60 PEG's at two to three national conferences per year.  


Just this past week alone, I met with many of them at the Sustainable Capital Forum, and then at the ACG Capital Connection, two back-to-back conferences held in San Francisco.

If you are a business owner and/or major shareholder in a privately held company with cash flow of at least $500,000 annually (in some cases, add-on acquisitions may not be subject to this floor) and any of these points apply to your situation, please contact me to discuss it.

• You are even remotely considering your exit plan, either now, or over the foreseeable next few years
• Your company needs additional capital to grow
• Your company could benefit from having the additional resources of highly educated, accomplished, professional management

There is plenty of private equity capital seeking good companies in which to invest.  For many company owners, this translates into the optimal recapitalization and/or exit strategy.


Cautionary Note
At the risk of seeming self-serving -- OK, it is -- be very wary of negotiating directly without the professional representation of an investment banker-merger & acquisition intermediary-business broker.  Part of the way a PEG, or any corporate buyer for that matter, delivers high returns to investors is buying the company as inexpensively as possible.  Their success rate in doing so is much, much greater when the owners of the company do not have professional representation (and no, a lawyer is not what you need for this).