Private equity bosses have found a way to keep deals flowing during the economic crisis: going small.
With blockbuster buyout activity hit by the pandemic early in the year, the industry has turned to smaller acquisitions that are aimed at expanding their stable of companies. These purchases are another tool in the arsenal that private equity firms have to build their portfolio companies before selling for a profit.
Add-on transactions from firms including Cinven and HarbourVest Partners comprised 51% of global buyouts in the third quarter, a new high, according to data compiled by PitchBook. These transactions, where private equity-backed firms acquire businesses using their owner’s capital, are also on pace for a record year.
“You’re seeing most investors working more closely with their existing relationships, focusing on assets and segments they know,” Brian Gildea, head of investments at alternative asset manager Hamilton Lane, said in an interview.
Fastest Rate
Cinven of London has been among the most active European firms in this arena this year. The 34 portfolio companies in its fifth and sixth funds have made more than 300 add-on deals since the funds began, according to a company spokeswoman. In October, Cinven almost doubled the size of Dutch ingredient distributor Barentz International with the purchase of Maroon Group, a North American supplier of specialty chemicals.
Investcorp has completed 23 such transactions this year globally. Among them: portfolio company Fortune International, a seafood and specialty food distributor, acquired Neesvig’s Inc., another seafood, meat processor and distributor.
HarbourVest, based in Boston, has done 33 add-ons this year through the third quarter, a record pace, according to managing director Ian Lane.
These purchases are becoming popular because they can be less risky than larger deals. They don’t require obtaining outside financing and they allow executives to capitalize on trends in their industries.
Buyers can also take advantage of a value arbitrage as smaller target firms often trade at lower multiples and there’s less competition for their assets.
“Market leaders are seeing it as a window to consolidate market share and snap back very hard when the macro environment returns to normal,” Sam Shah, Macquarie Capital’s co-head of U.S. industry coverage and global head of software and services, said in an interview.