This article was first published in the Spring issue of Middle Market Dealmaker, the official print publication of the Association for Corporate Growth. As a research database and information services company serving the middle market M&A community for 20 years, Private Equity Info ingest enormous amounts of data surrounding transactions, firms, and executives. In addition, our team engages in many conversations daily across the spectrum of investors, investment bankers, and service providers to the M&A community. This unique combination of hard data from our database and anecdotal commentary from informed thought leaders regularly provides us with “ahead of the curve” observations. Below are several trends we are observing in our data and hearing in the marketplace. Throughout 2024 and 2025, we expect private equity firms to amplify their focus on platform investments, compared to 2023, to heavily weighted investments in select growth industry verticals, thoroughly researching and vetting target niches upfront, and to identify bolt-on acquisitions early in the process, shortening the time required to integrate add-on acquisitions.
Return of the Platforms
Pre-Covid, private equity firms acquired 75% platform investments against 25% add-ons. However, economic uncertainty driven by Covid, inflation, higher interest rates, and fear of recession had PE firms acquiring cautiously, reluctant to deploy substantial amounts of capital into an uncertain economy. Instead, they focused on smaller bite-sized investments with add-ons. The platform-to-add-on ratio has therefore steadily declined to a 50-50 ratio in 2023, according to our data.
In addition to the effects of the broader market ambiguity of 2020 – 2023, the relative mix of platforms to add-ons is influenced by more private equity firms opting for a bolt-on strategy as a primary method of value creation. Lower purchase multiples create a compelling case to adopt an add-on strategy. However, PE firms have too much dry powder for add-ons to add-up.
To deploy accumulated, uninvested capital more quickly, we expect firms to pivot firmly to platform investments, particularly as we move into 2024 with a clearer economic outlook.
Focused Verticals
Those who have been in the middle market PE space for decades recognize the transition from generalist investor to industry-focused investor, and now, in many cases, to the industry subsector investor. While private equity firms invest across a wide spectrum of industries, some sectors are more equal than others.
Consequently, financial buyers are heavily concentrated on select growth industries. The top industries of interest not only get the most PE acquisitions, they are growing as a share of overall PE investments.
We expect to continue to see an outsized share of private equity investments in scalable, low capex, high margin, fragmented service industries and technology companies with PE firms developing a strong industry thesis and deep vertical expertise prior to investment.
Time Compression
With improved technology, continually refined processes and outsourced-partners, PE firms continue to gain efficiency ingesting new platform acquisitions and integrating add-on investments. Consequently, target identification-to-closing cycle times for new bolt-on investments continues to occur earlier in the hold period, allowing more time for growth initiatives, operational improvements, and a bump in ROI. From an acquisition perspective, private equity is moving more quickly and efficiently than ever before.
We see this in our data as well. The average time from platform investment to the first add-on has halved over the last decade and continues to improve.
Over the years, PE firms have developed expertise, often leveraging strategic partners, to professionalize financial and business operations, recruit talent, and upgrade systems, post close. Further, many investors now source add-on investments before the initial platform investment is complete. The implication: PE firms are enhancing capability to develop an industry thesis upfront, commit to that strategy, and execute parallel transactions at an accelerated pace.
It’s now common for dealmakers to put three or four companies together simultaneously, in some cases, creating a platform investment from what would otherwise be a collection of add-ons. The pitch to the sellers is clear.
Exit a majority stake, roll some equity into the larger entity, and see your minority investment benefit from the instant multiple expansion. Ride with us and, in a few years, create a second substantial liquidity event.
Of course, multiple simultaneous deals add significant complexity to transactions. This requires refined systems and processes mapped well in advance to identify targets, structure deals, contend with all the moving parts, and integrate multiple companies post-close. Private equity firms are becoming transactionally more efficient and sophisticated.
We expect the average time between platform investment and the first add-on will continue to decline with technology and process improvements. This is an area where AI will have a significant impact, furthering gains in transaction efficiency.
