Private Equity 101: New Platforms vs. Add-Ons
Over the past several years, private equity firms have been increasingly interested in investing in add-on acquisitions, rather than platform companies. While the current economy has solid footing, more businesses are returning to the mergers and acquisitions marketplace. This opens the door for acquiring new platforms and broader possibilities for supporting add-ons.
What are Platform Companies?
Platform investments are companies that a private equity group (PEG) can view as a starting point for more acquisitions, or add-ons, to follow in the future. Normally, new platforms include companies in high-growth industries that are commanding a significant market share. Platforms are generally of sufficient size and have the capability to acquire and support add-ons. Often, these platforms are reasonably capitalized and have broad market exposure, although are usually limited to one industry. When sold, platform investment companies are sold at premium price.
What are Add-ons?
On the other hand, add-on companies are not normally viewed as industry leaders. These companies are more prone to suffer issues with management, undercapitalization, and lack of exposure in their industry. Add-ons are marketed by boutique investments banks or small companies to be sold to larger platforms. Estimates can vary, but add-ons constitute about 40-50% of private equity buyout activity. Generally, add-ons provide complimentary services, technology, or expansion to larger platforms. Depending on the industry, add-on companies may be considered competitors to the original platform company, yet they are added with the goal of increasing overall revenues and earnings.
“Buy and Build” Strategy
While both new platforms and add-ons serve separate purposes, using them together can create maximum profits. The “buy and build” strategy is normally employed by private equity groups to increase their returns and generate value. This strategy entails buying a new platform company, with its already established management systems, and leveraging it to acquire subsequent add-on acquisitions. To successfully transition through this strategy, private equity firms must have significant experience in platform management, as this process requires serious change. The “buy and build” strategy is most commonly deployed in a slower economy as a way to improve returns. These strategies can become challenging as it takes time to properly acquire and integrate several companies together.
At Symmetrical Investments, our main focus is to maximize value. If you have questions or are interested in these types of investment, contact us to learn more.