Private equity (PE) funds face a new economic reality, defined by higher costs of capital and challenging macro conditions. BDO’s 2023 Private Capital Survey, which surveyed hundreds of PE fund managers and operating partners, showed that the current environment has forced funds to focus on tending to their existing portfolio companies instead of pursuing new platform investments. This has played out in the market in the months since the survey launched. According to PitchBook’s Q3 US PE Breakdown, PE deal value declined for the second straight quarter, cratering to the lowest quarterly level since the Great Financial Crisis (GFC).
However, add-on transactions — smaller deals executed by PE-backed portfolio companies — have helped keep overall PE M&A volume afloat. Because of this, there has only been a modest drop in the number of PE transactions even as the value of PE M&A has steadily declined since the high watermark of Q4 2021. According to data, 76% of PE deals by volume in Q3 2023 were add-on transactions, a number that has steadily climbed year-over-year. A WSJ story attributed this trend to larger funds shifting focus to smaller transactions. As these funds face longer holding periods, smaller deals can add incremental value to their investments as part of their buy-and-build strategies.
More of these deals are on the horizon, and integrating these companies to deliver scale and create value should be top of mind for PE funds.
37% of fund managers see tuck-ins, a form of add-on deal, as the primary driver of M&A activity, according to BDO’s webinar poll.