Why Do PE Firms Use Add-On Acquisitions to Grow?

By Generational Equity


From time to time it's important to highlight the acquisition strategies being used in the M&A market right now in order to educate our readers on how to effectively participate in this current seller’s market.

One such strategy you need to be aware of is the current evolution in the growth of add-on acquisitions by Private Equity Firms (PE) to platform holdings. This tactical growth plan is used by PE firms post acquisition of an initial “platform” company; over the course of several years, smaller, very targeted acquisitions are made that complement the platform, allowing it to expand much faster than it would organically.

This strategy allows the PE firm to gradually build a much larger entity and, using various economies of scale, reach new levels of revenue and profit that would be hard to achieve without the add-on program in place. This is fantastic news for owners of privately held companies that are looking for buyers/investors today.

One example was announced at the end of last year by The Sterling Group, a PE firm based in Houston, Texas, that specializes in “building winning businesses”. The firm invested in Camco Manufacturing's Liquids division (Liquids) via its platform company, Highline Aftermarket.

Highline was actually formed in April 2016 with Sterling's simultaneous combination of family-owned DYK and corporate carve-out AAHC, since renamed Highline, which, according to the Sterling website, “created a strong new automotive aftermarket distribution platform”.

The subsequent acquisitions of Service Champ, Levin's, and South/Win increased channel and geographic penetration and further solidified Highline as a market leader. The addition of the Liquids division fortifies Highline's position as the largest and most efficient nationwide network for producing and distributing selected liquids and chemicals for the automotive, RV, and marine markets.

According to Sterling, “Highline has more than doubled in size during its three-year partnership with Sterling and will continue to pursue both organic and acquisition-related growth strategies”. And as opposed to much of the press relating to PE acquisitions, “longstanding Liquids employees are joining the Highline team to provide continuity for customers and to continue building world-class operations to support Highline's growth.”

In most cases, especially in the middle market, acquisitions like this are often a true win-win situation for all parties, including original owners, employees, the platform company and the customers of the acquired firm, because PE firms like Sterling “partner with management teams to grow and build winning businesses in the industrial sector".

Nearly 80% of Sterling’s past partnerships have been with family businesses and corporate carve-outs. Sterling excels as a partner where it can bring its operational focus and expertise to a situation”.

This latter statement is really key in these relationships. Sterling, because of its experience in acquiring and growing businesses, becomes a vital partner in the growth of the platform and the subsequent add-ons. Not only does it bring significant capital to the investment, it also brings marketing, sales, and financial skills not readily available to most owners of privately held companies. This benefits not only existing management, but it also gives employees a career path that would have been unimaginable under existing management.

Here is what a few of our clients have told us about the benefits of partnering with a strategic PE firm:

These are just a few examples of how our deal teams work really hard to find the ideal buyer for each and every one of our clients. In fact, for many of our clients, the idea of being acquired by a PE firm is not even on their radar screen when they first engage us. Most have two common misconceptions about equity firms as buyers:

  • PE firms only invest in “sexy”, dynamically growing industries
  • My company is far too small to be attractive to a PE firm

The first concept is easily debunked by the deal we are reviewing announced by the Sterling Group. I mean I wouldn’t necessarily call “producing and distributing selected liquids and chemicals” a “sexy” industry. In fact, I would venture to guess that there are PE firms actively investing in companies in your industry niche that you are not even aware of.

As for size, for add-on acquisitions, most middle market PE firms will look at very small companies to add to their platforms. In fact, according to Sterling, “Sterling is focused on making majority investments in manufacturing, distribution and industrial service businesses and is interested in exploring partnerships of all sizes.

The critical issue that you face, and one of the important reasons to hire an experienced M&A advisory firm, is that you need to speak the language of the PE industry in order to get their attention. Keep in mind that these firms will literally look at dozens and dozens of opportunities to narrow the options down to a handful they really pursue.

Generational Equity’s success is largely due to our talented deal teams having the experience and technical know-how in approaching these types of buyers. If you would like to find out how our team could benefit you in your exit journey, please call us at 972-232-1121 or visit our website and provide us with your contact info.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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