Constructive approach: PEs turn to bolt-ons amid exits and debt crunch

The tried-and-tested approach of bolting-on new businesses to increase the value of platform companies is gaining a new appeal as the current debt financing drought creates challenges for deployment and could force sponsors into extending holding periods, according to sponsor executives and advisors speaking to Unquote.

With PE and debt funds still having plenty of dry powder, LPs would like to see capital put to work as they “are not paying management fees to these funds to wait around”, Christian Keller, managing director at Houlihan Lokey’s financial sponsor’s group, told Unquote. “Bolt-ons create value,” he added.

During these volatile times, some sponsors are likely to be more operationally focused, according to Jack Blomfield, managing director at William Blair. Moreover, acquisition finance will already be in place for some portfolio companies, meaning that they will not need to rely on securing fresh bank financing or private debt for add-on deals.

Stefano Ferraresi, a partner and head of industrials at BC Partners, told Unquote that the current market lends itself to more bolt-on deals, with 1Q23 likely to see fewer platform deals across the board. It will be easier to find opportunities through portfolio companies or distressed sellers, he said, given that sourcing platform deals has become more difficult in the current market. “We are making investments, but there is definitely more focus on portfolio [companies], and the primary focus is to manage inflation and preserve margins,” he added.

Some sponsors are drawing parallels between the current market and 2020, when the onset of the COVID-19 pandemic led to similar (albeit short-lived) obstacles to deal-making, with many sponsors opting to focus on portfolio management and cash preservation. That year saw 955 bolt-ons, marking an increase of 62.4% versus 2019, Mergermarket data shows.

Although there are comparisons to be found between now and 2020, the key stats supporting this focus on buy-and-build are likely to be found in the drop in PE exits – which could ultimately lead to longer holding periods and sponsors exploring more value creation options. 2H22 saw the aggregate value of sponsor exits hit its lowest point in a decade for a half-year period, falling 76% year-on-year to EUR 24.9bn, according to Dealogic. Sponsor buyouts also dropped in the period, hitting their lowest value for a half-year period since 2013 at EUR 44.5bn, a fall of 57% from 2H21.

Sizing up
While bolt-ons are often associated with small acquisitions in large volumes, sponsors could now be more prone to explore larger transactions, prioritising quality over quantity.

Large add-ons announced in 2022 include Hellman & Friedman-backed Cordis Corp’s acquisition of Swiss surgical devices manufacturer MA Med Alliance for up to USD 1.13bn, and Blackstone’s Office Group Holdings acquiring Fora Space, a UK-based domestic coworking space provider, valuing the combined entity at about GBP 1.5bn. 

In the current environment, rather than merely looking to bump up the top line, platform companies are likely to go after deals that can deliver synergies and ideally boost cashflows. Florencia Kassai, a partner at Inflexion, a sponsor which has done over 30 bolt-on deals in 2022, told Unquote that such deals need to generate synergies and organic growth opportunities. “With debt being more expensive, we need growing and cash-generative bolt-ons to deliver the cash-flows to service the higher interest costs of the debt used to purchase those businesses,” she said.

In some areas, a cloudy macro outlook is leading to a reset in price expectations, with some sponsors counting on picking up bargains along the way. Gilbert Kamieniecky, a technology partner at Investcorp, said that he is seeing some bolt-on opportunities priced at a fraction of what they would have cost a year ago. “One of our portfolio companies has just bought a business which was EUR 55m last year, and we just bought it for EUR 6m cash and some shares,” he said. “These companies need funding. You see this on the loss-making VC or pre-IPO side.”

On average, Investcorp’s portfolio companies have made at least three bolts-ons each, Kamieniecky said. Over the next six to 12 months, he expects this number to increase as loss-making, pre-bankruptcy companies will come up for sale at reasonable multiples.

Paul Dunbar, a Sidley Austin private equity partner, told Unquote that in the current market, bolt-on strategies are one of the routes sponsors can use to achieve the best valuation on exit. In some cases, creating a larger platform can also allow a sponsor to raise financing more cheaply, he added. 

However, securing reasonably priced leverage might not be possible in all cases, BC Partners’ Ferraresi told Unquote: “If you want to tap financing for acquisitions, the terms are expensive, so you have to use more equity for bolt-ons, which lowers the appeal,” he said. “I expect a focus on buy-and-build but not through the financing market.”

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• Topics
• Investments
• GPs
• Financing
• UK / Ireland
• CEE
• Benelux
• DACH
• France
• Nordics
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• Inflexion Private Equity
• Houlihan Lokey
• Investcorp
• Sidley Austin
• William Blair
• United Kingdom
• BC Partners
• Buy-and-build