The Art of the Add-On (Second of a Series)

Last week we began our series on acquisitions by platform companies of private equity sponsors (“add-ons”) by examining the various roles they play in enhancing value of the underlying businesses. This week we take a closer look at how different sponsors view and implement this strategy.

For many firms, it starts with management. “For us,” one managing partner reported, “it starts with finding the right team. Sometimes our teams will bring add-ons with them. These are often smaller companies they’ve been competing with for years. Now they have the ability to take them out of the market and bring them on to our platform.”

Another PE chief agreed. “Our management teams run their own add-on strategies,” he told us. It also depends on the size. “The larger platforms can run their own modeling. They have their own debt relationships and business development. The smaller companies don’t have these capabilities. That’s where we can help.”

The managing director at a top middle market NY-based firm walked us through their process in more detail. “Our add-on strategy is very active and proprietary,” he said.”We’re not big on roll-ups. And we’re not built to finance companies less than $5 million in cash flow. It’s key having a platform with a well-networked CEO in the space.”