PE Add-on Acquisitions and a Bifurcation of Asset Prices

Man before a bifurcation

With market uncertainty hitting a bit of a crescendo, it’s not surprising to see transactions take a hit in both volume and size.  We’ve all heard a lot by now about transactions volumes falling in 2023, but the nature of the transactions that have been going through have changed as well.  In the real estate business, this shift has been so dynamic that pricing for smaller deals is now growing while larger deals continue to fall.  Of course, part of this is about access to capital, but the other part is, people just aren’t willing to jump out over their ski tips with a big deal right now.  

On the Private Equity side of the world, this same set of risk factors has large transactions largely off the table.  However, one thing that is happening right now is that Add-On acquisitions are growing (if not in absolute numbers) as a percentage of deals that are being completed.  To us at WCP, we love seeing these transactions.  Roll-up strategies, add-ons, tack-ons….whatever someone wants to call them, these transactions make the market healthier.  While their presence as a higher percentage of total deals may seem unnerving because investors can’t access enough debt capital to go bigger, these deals generally exhibit far more value creation than their larger brethren.  

One of the problems with large platform deals is that there are only so many levers to be pulled.  This is a gross generalization, but large deals include mild streamlining of operations, heavy focus on top line growth, and significant financial engineering as their main drivers.  The smaller, add-on or roll-up deals however, contain all of those AND the hopes of major cost synergies from management consolidations, sharing of best practices and economies of scale.  And perhaps because of these synergies, much of the fat that exists in many markets gets cut and the companies become inherently better operators. 

Sources: Pitchbook, CoStar

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