Buy, Build, or Both? Trends in Portfolio Company M&A

Add-on acquisition activity in the United States has experienced a steady, near linear growth since the early 2000s. In 2002, add-ons accounted for 43.2% of all buyout activity. Last year, add-ons accounted for a staggering 71.7% of all buyout activity – a 65% increase in less than 20 years.

Any trend that spans two decades with the resilience to withstand multiple financial crises deserves attention and further analysis. In this article, we examine a few of the tail winds behind the consistent growth of the buy-and-build strategy. We also feature a list of the most active Axial members and their portfolio companies pursuing add-on opportunities via the Axial platform.

Discounted Deals on the Decline

A recent survey of private capital fund managers revealed that 91% of respondents expect there to be a significant hike in asset prices over the next 6 months. This sentiment comes on the heels of an already historically high EBITDA multiple environment, according to data from Bain & Company. After a year rife with uncertainty and economic volatility, investors seem more ready than ever to put their capital to work, contributing to the increase in valuations and competition. Industries such as payments, IT services, and vertical software have been especially competitive due to their insulation from the fallout of COVID-19 and recession proof characteristics. GPs have had to consistently pay up for businesses in these industries, and in turn, are doubling down on inorganic growth strategies to remain competitive.

Multiple Arbitrage

Multiple arbitrage is one of the most oft-cited reasons and strategies that PE buyers will use to offset the effects of rising valuations. The logic behind multiple arbitrage is fairly straightforward. Larger companies often demand higher EBITDA multiples than smaller ones do. Rolling up a group of smaller, but cheaper companies can therefore more cost effectively increase the net exit value of an investment over time.

Buy-and-build strategies also give GPs access to less competitive segments of the market that would normally be considered too small due to minimum equity check requirements. This approach has shined a light on the lower middle market, specifically companies generating between $5-100M revenue, where there is no shortage of targets to pursue (364,900 as of February 2021).

Data from the Axial Platform

The Axial platform specializes in connecting the lower middle market’s entrepreneurs and their advisors with a diverse group of capital partners. Our unique position in the LMM M&A economy has given us a front row seat to the growth in add-on deal activity over the last few years. Add-on mandates on the platform have grown an average of 55% every year since 2015. 2021 is on pace to record the highest number of net new add-on projects on the platform.

Industry Breakdown

The buy-and-build model traditionally favors any fragmented sector where the sponsor and/or management team at the portfolio company level have expertise in executing and integrating new acquisitions. The pie chart below displays the most popular industries among Axial members currently pursuing add-on acquisitions:

The Top Acquisitive PE Portfolio Companies on Axial

Breakwater Solutions

Portfolio company of JLL Partners
Year acquired: 2021

Breakwater Solutions helps enterprises mitigate risk and gain insight from sprawling information by combining technology and human expertise. The Company empowers organizations to locate, access, analyze, and manage information by making data transparent and actionable. Breakwater’s solutions are comprised of expert consulting, AI-infused technology, and ongoing managed services, all of which address the myriad of challenges within information governance, disputes and investigations, regulatory compliance, privacy, and cybersecurity.

JLL Partners invested in Breakwater Solutions in February 2021, and is partnering with the company to acquire companies that provide information governance consulting services including: traditional information governance, cybersecurity, privacy, risk, investigations & regulatory response, and litigations & disputes.

ReFocus Eye Health

Portfolio company of Zenyth Partners 
Year acquired: 2018

ReFocus Eye Health is an ophthalmology practice management platform based in the Northeast and Mid-Atlantic formed in 2018 by Zenyth Partners.

ReFocus is actively seeking add-on affiliations within its target regions. ReFocus is focused primarily on partnering with ophthalmology practices and ambulatory surgery centers, but it is also open to partnerships with certain optometry groups.

Sciens Building Soultions

Portfolio company of Huron Capital Partners
Year acquired: 2016

Sciens Building Solutions is a holding company focused on the fire detection and security services sector. This includes the design, installation, and provision of maintenance services for fire detection and clean agent fire suppression systems in a variety of commercial, institutional, and government facilities.

Formed in partnership with industry veteran, Terry Heath, Huron Capital is executing on a buy and build strategy to assemble a national service organization by investing in companies whose geographic footprint, service offerings, and customer bases are complementary.

Creative Foam

Portfolio Company of Industrial Opportunity Partners  
Year acquired: 2017

Creative Foam is a manufacturer and supplier of custom-engineered die-cut, formed foam, nonwoven and multi-material component solutions to the transportation, healthcare and wind energy markets. The Company was founded in 1969 and is headquartered in Fenton, Mich. Its 12 facilities across North America, including in Michigan, Indiana, Colorado, Ohio, Tennessee, Pennsylvania, and Mexico, feature over one million square feet of production space.

Industrial Opportunity Partners invested in Creative Foam in 2017, acquired Aetna Felt Corp in 2020, and is seeking additional add-on opportunities to grow the Creative Foam platform.

Chromascape

Portfolio company of Heartwood Partners
Year acquired: 2018

ChromaScape is a specialty chemicals manufacturer of pigments, colorants, and additives for the landscaping industry and pigment dispersions markets. Chromascape operates four manufacturing and distribution facilities throughout the United States and brings these products and services to market under four well-recognized brands: Amerimulch, ChromaPave, Innotech, and Solution Dispersions.

Heartwood Partners acquired Chromascape in 2018, and is seeking add-on acquisitions of producers of colorants and additives for the paper, mulch, and asphalt markets as well as producers of solution dispersions or asphalt sealants.

Teamvantage

Portfolio company of Graham Partners
Year acquired: 2020

Headquartered in Forest Lake, MN, Teamvantage is an outsourced manufacturer specializing in clean room injection molding, precision machining, and assembly capabilities primarily serving the medical device industry.

Graham Partners acquired Teamvantage in October 2020, and is partnering with the company to acquire complementary manufacturing businesses with tight-tolerance, highly engineered capabilities including injection molding, extrusion, precision machining, and value-add assembly, among others. Primary end markets of focus are healthcare, aerospace & defense, and industrial.

Omega Systems

Portfolio Company of Pfingsten Partners
Year acquired: 2021

Omega Systems, based in Reading, Pennsylvania, provides outsourced MSP IT services for small and medium-sized businesses (“SMEs”). Managed services on behalf of their clients include IT software and hardware, cloud services (Azure or AWS) security and cybersecurity, telephony / internet circuits / network connectivity, 3rd party monitoring of IT infrastructure and outsourced management of IT function. Omega focuses on regulated industries including Healthcare, Financial Services, Legal, Government (State and Local), and Education (K-12 and Higher Education).

In February of 2021, Pfingsten invested in Omega along with management to support both the organic and acquisition growth goals of the company. Omega seeks add on acquisitions in MSP IT Service companies thorough the Mid-Atlantic, Northeast and Midwestern regions of the United States.

Registrar Corp.

Portfolio company of Bertram Capital 
Year acquired: 2018

Registrar Corp. is a provider of U.S. Food and Drug Administration compliance software and services to domestic and foreign food & beverage, medical device, drug, and cosmetic facilities. Registrar Corp was founded in 2003 to help businesses comply with U.S. Food and Drug Administration (FDA) regulations. Since opening its headquarters in Hampton, Virginia, USA, Registrar Corp has expanded to 19 worldwide offices and has aided more than 30,000 companies across 160 countries. Employees include former U.S. FDA officials, scientists, and industry experts.

Bertram Capital acquired Registrar Corp. in 2018 and has supported the firm in the completion of five add-on acquisitions including FDA Agents, Registration & Licensing Systems, US Agent Services, Register-FDA, and 22000 Tools.

Keystone Partners

Portfolio company of Silver Oak Services Partners
Year acquired: 2019

Founded in 1982 and headquartered in Boston, MA, Keystone Partners is a leading provider of comprehensive outplacement, career management, executive coaching, and leadership development services. Keystone offers an array of outplacement and talent management services tailored to meet the needs of all employees, from entry-level to senior executives.

Silver Oak Services Partners invested in Keystone in 2019 and is actively targeting add-on acquisitions of outplacement and leadership development businesses as well as other service lines including HR staffing, consulting, and job search services.

Zentech

Portfolio company of Blackbern Partners
Year acquired: 2019

Zentech Manufacturing, Inc. is an engineering-driven electronics contract manufacturer specializing in the design and manufacture of highly complex electronic and RF circuit cards and assemblies. The company is headquartered in its purpose-built facility located in Baltimore, MD, with subsidiary operations in Fredericksburg, VA.

BlackBern sponsored Steve Pudles (former CEO Nu Visions/Oncore/NEO; API; and IPC, Chairman) in 2019 to build Zentech into a high-performing aerospace, defense & medical electronic manufacturing services business. BlackBern and Pudles have acquired four facilities since May of 2019 and are actively pursuing additional add-on acquisitions.

Methodology

The list of featured Axial members above was compiled based on investment activity from the Axial platform. We identified the top 10 member accounts actively sourcing investment opportunities on behalf of a portfolio company, based on the following 3 criteria: (1) the number of add-on deals closed via the platform (2) the number of add-on specific mandates drafted on the platform (3) the number of times the specific portfolio companies were recommended to receive an investment opportunity based on the criteria of their add-on mandates on the platform.

Reach out to Nick Giacco ([email protected]) to learn more about sourcing add-on investment opportunities on Axial.