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Private Equity

Carveouts, add-ons key as PE firms strategize for 2024

Dealmakers expect PEs to focus on portfolio management next year, using strategies like add-ons and carveouts to bolster their portfolio companies.

It has been a tough year for private equity managers, who grappled with a series of headwinds including a slump in private market valuations and difficulty securing cheap debt for new deals.

With the expectation that these conditions may linger into 2024, PE sponsors will continue to rely on tools that optimize their existing assets rather than seek out new platform investments.

We asked advisors to share the strategies PE firms may employ to deploy capital and manage portfolios in 2024. Here’s what they said.


Private equity buyers love to acquire a good carveout, but next year they are also expected to increasingly dice up their own portfolio companies and sell non-core businesses from their holdings to bolster balance sheets.

One reason is that PE firms have shifted their focus to strengthening the operational efficiency and EBITDA growth of their portfolio companies, as the prohibitive cost of debt drives up expenses in running businesses.

Through selective carveouts, PE managers can trim underperforming appendages of a portfolio company, help it concentrate on its core strategy and generate cash to pay down existing debt or fund add-ons for inorganic growth.

Additionally, in a market with wide valuation disparity, it’s easier to align expectations between buyers and sellers in carveout transactions, according to Matthew T. Simpson, co-chair of the private-equity practice at law firm Mintz.

Buyers for these divested assets are typically strategic acquirers looking to integrate the acquired business into their existing infrastructure and create synergies. They are also willing to pay more of a premium than financial buyers.

In general, strategic buyers are known to pay up for carveouts, with recent research by Deloitte noting they are often willing to spend up to 20% more for these assets than financial buyers.

A recent example of a divestiture by a sponsor-backed company was Crenlo Engineered Cabs’ sale of its Brazilian business to a unit of German manufacturer JOST Werke. The transaction enabled the US auto-part maker, which is owned by lower mid-market PE firm Angeles Equity Partners, to concentrate on its business in the North American market, according to a company statement in August.

More recently, NavaDerm Partners, a dermatology platform owned by specialist manager BelHealth Investment Partners, announced the sale of its New Jersey practices to Schweiger Dermatology Group in December as part of a stated strategy to focus on its core geography of New York.

Further, PE sellers seeking to dispose of non-core assets are less price sensitive than they would be in sales of other assets—for instance, in the exit of a platform investment.

In some cases, this means a buyer can selectively acquire a portion of the assets that the seller wants to divest, rather than pay for the entire unit. At times, this means the seller has to shutter the part of that business not purchased by the buyer.

“Sponsors are increasingly flexible on jettisoning non-core assets,” Simpson said.


In the same vein, dealmakers also anticipate a steady stream of add-ons to continue to drive the lion’s share of PE deal activity, following the pattern of 2023.

The difficulty in accessing cheap debt financing has made it more challenging to carry out platform acquisitions. The add-on—which allows a PE sponsor to integrate a smaller business into its platform to increase the aggregate EBITDA—has become a critical strategy for the PE buy-and-build playbook this year.

Add-on acquisitions accounted for 76.1% of buyout deal count through the first three quarters of 2023, the second highest since 2008, according to PitchBook data. The only year this figure was higher in the past 15 years was 2022, when add-ons represented 76.3% of overall buyouts made by PE firms for the same period.

It is less expensive to purchase an add-on than to acquire a platform, making it easier to execute in an environment where debt is no longer abundant. Buyers typically tap into the cash on their balance sheet or use existing credit facilities to finance these deals, allowing them to avoid seeking new debt.

The bulk of add-ons are valued at less than $1 billion. In fact, only nine add-ons with values topping $1 billion closed this year through Dec. 18, accounting for less than 1% of overall add-on deal count, according to PitchBook data. The aggregate value of these large bolt-on deals totaled $25.2 billion, representing about 7% of total add-on deal value.

The few exceptions included Nordic Capital‘s $8 billion bid for healthcare software provider Amplexor Life Sciences for its portfolio company ArisGlobal, a life-sciences software provider. In another example, Platinum Equity took hygiene and cleaning-products company Diversey Holdings private for $4.6 billion. The transaction was designed to boost the growth of its water treatment platform investment, Solenis.

Private equity managers will keep building within their platforms for the foreseeable future, which means deal activity next year will likely follow the same trajectory, said Omar Lucia, an M&A attorney at Foley & Lardner.

Featured image by Nora Carol Photography/Getty Images

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