Market Observations: Add-on Activity
As valuations continue to increase in the market, deal volume is predicted to decline. In Pitchbook’s most recent M&A report for 2Q 2017, they predict that the United States is “on pace for 18.5% and 23.6% year-over-year decreases [in total deal volume and value], respectively” from 2016 to 2017. While high multiples are deterring strategic buyers from making acquisitions, PE and other sponsor-backed buyers must continue to strengthen their portfolios.
Pitchbook reported “sponsor-backed acquisitions have grown steadily from 24.7% of all transactions in 1Q 2016 to 29.8% in 2Q 2017”, up more than five percentage points in a little over a year. A primary driver of this growth is strengthening add-on acquisition activity which continues to increase in share of deal flow—now at 57% of all deals, continuing a seven-year increase (see chart below).
More and more PE buyers are holding onto and growing their current investments instead of pursuing new platforms. As a result, we’ve seen our clients are focusing more on add-on acquisitions for their existing portfolio companies versus new platform investments.
We see a lot of opportunity to build stronger platforms through add-on acquisitions, but it requires a different approach. At Normandy, with our knowledge and resources, we can successfully research and contact strong target companies to grow your portfolio companies in this increasingly competitive market.