Deal making activity set a record in the first half of 2021. A combined $456.6 billion worth of total deals in the U.S. closed in the first six months of the year, accounting for nearly two-thirds of all deal value recorded in 2020 (Pitchbook Q2 PE Breakdown). Likewise, add-on activity continued to increase as 74.5% of all buyouts in Q2 were add-on acquisitions, an all-time high. The buy-and-build strategy can take on different forms. Some involve large-scale roll-ups in highly fragmented markets. Others seek opportunistic M&A transactions that allow portfolio companies to pursue specific product, geographic, or operational goals.
There are many reasons for the growing interest in add-on acquisitions. In addition to the multiple arbitrage opportunity, additive deal making presents the opportunity for a platform to expand geographically, diversify its product offerings, and expand in new end-markets. When executed properly, this strategy enables a platform to leapfrog organic growth. The buy-and-build approach also increases the likelihood of a platform being sold in a sponsor-to-sponsor transaction. A company’s track record of successfully completing acquisitions under the first sponsor represents an attractive selling point to the second sponsor. Platforms may be passed between buyers focused on successively larger deal sizes, acquiring add-ons as they go.
The most popular industry for buy-and-build strategies has been financial services. In 2020, 84.8% of all acquisitions within financial services were add-ons (Pitchbook Q2 Analyst Notes). This is in line with general trends for deal making. Based on YoY deal count growth, insurance is the most active sector with 52% deal growth, followed by communications/networking (40%) and IT services (40%) (Pitchbook Quantitative Perspectives). These trends are undoubtedly persisting in 2021. Normandy Advisors has also seen strong growth and interest in the tech-enabled services space, which has, in part, been spurred by the pandemic, and represents an attractive, asset-light opportunity with the potential for margin expansion and add-on acquisitions.
In speaking with industry professionals and well over 300 business owners this year, Normandy recognizes the heightened interest in M&A from both sides of the table. The uncertainty surrounding proposed capital gains tax increases is causing some owners to rethink the timing of their succession plans. Investment banks are staffing up in anticipation of a busy second half to 2021, and middle-market PE firms are looking to act on a potential increase in acquisition opportunities. The second half of 2021 should see deal making, and specifically add-on acquisitions, continue to pick up speed as sponsors put excess capital to work market conditions incentivize transactions.
