Deal volume defying economic headwinds for private equity investors
Bolt-on deals are driving significant deal volumes across the mid and small-cap sector despite, or perhaps as a result of, the turmoil of economic slowdown, higher inflation and geopolitical uncertainty.
The transactions – also known as tuck-in deals – are centered on the acquisition of a company by private equity that is subsequently integrated into one of the investor's platform businesses.
Bolt-on deals are seen as offering strategic value for the buyer through expanding markets, product lines and capabilities, whilst boosting the target company through economies of scale, increased resources and expanded reach.
This is what makes bolt-on transactions so attractive going forward – a low-risk option that turbo-charges intellectual property both within, and across, sectors despite widely-acknowledged economic headwinds.
This trend will come as no surprise to those currently navigating the dealmaking landscape, according to Marcel Vlaar, Financial Due Diligence Director at RSM Netherlands. “There are certainly a lot of investors looking to bolster their existing core businesses, bringing in another company to consolidate their position in a certain market or to target new areas – sometimes both.”
Although, there are some twists to the established tale; "The size of these deals is changing," says Vlaar. "While interest used to start at an EBITDA level of around €5m, a number of private equity investors are now focusing on companies with an EBITDA starting at €1m. They aggressively acquire six or seven companies a year on a specific platform to create significant scale through integration both horizontal and vertical."
Bolt-on deals require both expertise and experience, and their increasing volume has created challenges that, according to Vlaar, are well worth overcoming. "These serial transactions can be quite resource intensive, in terms of advisory services including engagement and due diligence, but the rewards are obvious."
“Given the slowdown of organic growth, it will affect external growth initiatives and continue to waterfall in the dealmaking landscape”, says Eric Fougedoire, Partner at RSM France, “it should come as no surprise that more and more investors are entering this particular space.
"Bolt-on deals are definitely an option for clients looking to expand internationally, based on an existing platform or to be acquired. And it can often be about thinking outside the box in order to maintain momentum – deployment across adjacent sectors and of course introduction into new market segments.”
The formula makes sense to a wide range of private equity interests, according to Lee Castledine, Partner at RSM UK and member of the RSM Global Financial Due Diligence Leadership Team.
"For investors building up a platform company, they will know the sector from their existing operations and may well know the potential targets available as their trading competitors, so activity can be that much more targeted – and we have seen correspondingly high levels of interest, across a broad range of sectors, not least technology, media healthcare and business services."
Bolt-on deals are seen as a win-win in the current economic landscape: the high volume of dry powder in the market is matched with the continued interest from founders and start-ups in strategic development through investment and/or disposal.
"We are in a market where investors are looking to mitigate risks, which is one reason why bolt-on deals are so attractive at this exact minute as investors reduce risk through a portfolio effect. That is likely to remain important in the coming year", says Castledine.
While he warns that uncertainty in the global economy would not make deals easier, it is not the same as ruling out activity altogether: "There continues to be attractive alternatives in the small and mid-cap market in some industries areas and bolt-on strategies remain attractive. ”