Buy and Build Again: Do Add-ons Dominate Certain Industries?
April 11, 2014
Having written up so many Confie Seguros insurance add-on stories for the PitchBook Newsletter over the last year, we decided to investigate the question of whether add-ons dominate certain industries. At first thought, it seems almost certain that more add-ons should happen in certain industries than others. Fragmented industries that largely offer similar products and services should only benefit from consolidation under an umbrella ownership; mom-and-pop insurance companies in small towns that join Confie Seguros can access far more resources and unify product and service offerings, while still retaining a local identity and flavor.
But, of course, the data could present a different story. The PitchBook Platform shows nearly 5,000 add-ons since the start of 2010 across a wide spread of industries. Starting at an eagle-eye’s view of industry sectors, B2B and B2C account for more than half of all add-ons every year (including 2014 deals through April 11). B2B’s size and growth handily beat B2C’s every year, however, rising from 34% of all add-ons in 2010 to 40% in 2013, and holding steady at 41% in 2014. Information technology add-ons have also grown their share of the overall add-on landscape, from 129 deals or 13% of the space in 2010 to 17% last year.
Source: PitchBook Platform
Let’s dive a little deeper to look at industry groups. Commercial services may be the most active group, with a steady 19% to 21% share of the add-ons scene from 2010 to 2013, but commercial products as a group has increased the most in the space, jumping from 11% in 2010 to nearly 16% in 2013. So far, the original hypothesis seems to fit the data: commercial products can benefit from centralizing management and financial operations while localizing distribution and manufacturing to cut down on transportation and distribution costs.
Of course, at this point in our theorizing, we have to ask ourselves whether certain industries simply attract more investor attention and thus account for such a large percentage of deals that they would dominate add-ons anyway. To clarify this matter, let’s look at whether the industry groups in question have accounted for more deal activity overall. Looking at all PE deals completed since 2010, B2B rose from a third of the space in 2010 to comprise 37% in 2013, while commercial products also jumped from 12% to 14%; compared to the percentages of add-ons, it would appear that add-on dominance in B2B and commercial products isn’t solely a function of the overall increase in the B2B space. Rather, it would seem that add-ons of B2B and commercial products companies have grown in popularity.
Does the same hold true for information technology? When looking at all PE deals since 2010, information technology increased its share of deal-flow from 2010 to 2013 by about two percentage points, but when looking at add-ons only, the increase is more than four percentage points. Clearly, add-ons in IT companies have grown more popular over the last few years. What about insurance add-ons, the inspiration for this exploration? Well, although ABRY-backed Confie Seguros may be quite active in the space, as a whole, insurance has hovered around the 3.5% to 5.5% range since 2010. Although with a fair number of insurance add-ons thus far in 2014, perhaps it’ll be a banner year for the industry.
Not to overly self-publicize, but the growing popularity of add-ons in the space further reflects the prevalence of the buy-and-build strategy in PE, which we’ve covered before. Nowadays, when a firm looks at acquiring a commercial products company, an old-school, heavily leveraged buyout doesn’t look quite as appealing as an add-on to an existing platform company. Why? The same reason blockbuster movies are mostly sequels nowadays; leveraging an existing brand and industry-savvy team is far cheaper than incurring debt, and what is more, it not only means steadier growth and returns, but also good PR and lower operating costs.