Through the first nine months of the year, add-ons to existing portfolio companies accounted for 68% of all private equity investments in the US—the highest annual rate on record—according to PitchBook's 3Q 2019 US PE Breakdown. With deal multiples spiking across the broader buyout market, this inorganic growth is one of the few ways left for investors to find the potential for value creation to which they've grown accustomed.
As with every investment trend, some firms have embraced the strategy more fully than others. In ascending order, here's a look at the six investors who have been most active in the US add-on market during 2019, according to PitchBook data, along with a rundown of the sorts of deals they've been getting done:
T-5. Insight Partners—30 add-onsUntil earlier this year, Insight Partners was known as Insight Venture Partners. That's reflective of how the firm differs from most of the other firms on this list. Instead of focusing almost exclusively on buyouts and other private equity deals, Insight operates across a much broader segment of the private investment spectrum. It's just as well known for its venture deals (or perhaps more so) as it is for conducting control investments.
But those control investments are still a major part of its strategy. And this year, it's led to a spate of add-ons for a number of different portfolio companies, with a seeming focus on deploying new types of software across a range of sectors.
One example is Community Brands, a creator of software for nonprofits and other well-meaning organizations, which earlier this year announced three add-ons in a single day. Another is Enverus, which changed its name from Drillinginfo in August. The developer of software and data analytics for the energy sector has been busy building out its suite of services, acquiring one company that provides maps of the Permian Basin in March and another that makes billing and revenue software for the oil sector in July.
T-5. Harvest Partners—30Harvest Partners, a New York-based firm that's been making private equity investments since 1981, has taken a more diverse approach to its add-on activity in 2019, with no single portfolio company dominating its dealmaking.
In recent weeks, it's been busy with Integrity Marketing Group, a distributor of life and health insurance that Harvest bought into alongside existing backer HGGC in August. (Of note to some, surely, is the fact that the chairman of Integrity's board is Steve Young, the NFL hall of famer who's also a co-founder of HGGC). Integrity was already on an add-on binge before Harvest entered the picture, and it's kept it up in the meantime, acquiring four different insurance marketing companies in October alone, per PitchBook data.
The co-investor relationship with HGGC isn't rare for Harvest. Some of its other portfolio companies that have been busy conducting add-ons this year are also examples of Harvest investing alongside fellow firms, including recycling specialist Valet Living (which it backs along with Ares Management) and insurance brokerage Acrisure (both Blackstone and Partners Group). That likely lightens some of the sourcing, diligence and dealmaking loads.
4. Abry Partners—31Abry Partners and its add-on proclivities were in the news at the end of October, when the Boston-based firm announced plans to sell The Hilb Group to The Carlyle Group. No price was announced, but an earlier Reuters report on a possible deal had indicated that Hilb could fetch an enterprise value of more than $1 billion.
The sale to Carlyle was the result of several years of acquisitive activity on behalf of Abry and Hilb: The two completed well over 50 add-ons since Abry first invested in the business in 2015. We wrote more about the relationship between the firm and company earlier this year.
As that article touches on, Hilb isn't the only insurance business that Abry has used as a platform for plentiful add-ons. The firm has sponsored nearly 80 such takeovers by Confie (fka Confie Seguros) dating back to 2012, although the rate of that activity has slowed in recent years. Hilb also isn't the only major insurance company this year to be sold after years of aggressive add-on activity. In February, Apax Partners agreed to offload AssuredPartners to GTCR for a reported $5.1 billion; Apax and AssuredPartners had teamed on 112 add-ons in the previous four years.
The Hilb Group was behind more of Abry's add-ons so far this year than any other business. One of the firm's next major platform companies could be US Legal Support, a provider of litigation support services that Abry took a stake in late last year. In the months since, US Legal Support has already acquired several other legal services companies.
3. Genstar Capital—40Like both of the previous firms on this list, Genstar Capital has been busy backing add-ons in the insurance space—a trend that indicates just how active some private equity firms have been in attempting to consolidate the industry. The most acquisitive insurance company in Genstar's portfolio is Alera Group, a provider of various insurance, employee benefits and other services that the firm helped create in 2017. Already this year, it's sealed 10 separate takeovers, per PitchBook data.
Mercer Advisors, another Genstar portfolio company, has also had a busy year, conducting more than a half-dozen add-ons of its own. Over the summer, reports emerged that Genstar was seeking a sale of the company; then, in September, the firm and co-investor Lovell Minnick Partners sold a portion of their stake in Mercer to Oak Hill Capital as part of a recapitalization.
For Genstar, a propensity for add-ons has helped fuel a recent surge in growth, which saw both dealmaking and fundraising rates on the rise. Earlier this year, the San Francisco-based firm closed its latest vehicle on approximately $7 billion, a major step up from a $4 billion predecessor.
2. HarbourVest Partners—46HarbourVest Partners is a bit of a behemoth, with more than $64 billion in total AUM and over 500 employees spread across a variety of strategies and funds. It might be best known for its fund-of-funds operations, but the Boston-based firm is also an active co-investor alongside other firms—a strategy that seems to lend itself to being able to participate in a high quantity of add-ons.
Most notable this year has been HarbourVest's stake in Hub International, a global insurance brokerage that Hellman & Friedman acquired a majority interest in at a $4.4 billion valuation in 2013. (Last year, Altas Partners bought into Hub at a $10 billion-plus valuation). In yet another instance of the insurance industry attracting heavy add-on attention, Hub has already completed 18 platform acquisitions in the US in 2019, according to PitchBook data, making for a significant portion of HarbourVest's activity.
1. Audax Group—56When Audax Group closed its sixth flagship fund in August 2018 with $3.5 billion in commitments, the firm said it would deploy all that capital in "the pursuit of a disciplined buy & build investment strategy." In 2019, it's followed through on that pledge. Almost every deal the firm has been involved in this year has been an add-on.
Many of those transactions have occurred in the commercial products and commercial services sectors, with Audax working to build out its portfolio of under-the-radar middle-market businesses that are little known to the wider public. Among the platforms the firm has been conducting add-ons with this year are Colony Hardware, which distributes tools and equipment to job sites; Imperial Dade, which sells disposable foodservice products and janitorial supplies; and Reedy Industries, a provider of HVAC services.
The list isn't particularly glamorous, but the nuts and bolts of private equity rarely are.
It's probably just a coincidence that three of the six names on this list—Audax, HarbourVest and Abry—are all headquartered in Boston. But perhaps there's something in the Charles River we should keep an eye on.
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Related read: Why are add-ons getting so much bigger?