GPs turn to add-ons in Q2 in choppy deal environment

  • First half of 2016 trails in deal volume; dollar volume up
  • U.S. sponsor M&A totals $96 bln in first half of 2016
  • Q2 add-on deals proliferate

With U.S. sponsors facing choppier credit markets and higher purchase-price multiples, GPs opted to buy more add-on businesses for their portfolio companies rather than launch new platforms in the second quarter.

Add-on deals in Q2 comprised 52 percent of total deal count, compared with 48 percent for platform acquisitions. In the fourth quarter of 2015, the split between add-ons and platforms was 50-50, and in other periods, platform deals made up the majority of deal flow.

Chris Coetzee, managing director and head of the financial-sponsors group at Baird, said the greater number of add-on deals partly reflects GPs’ efforts to work more closely with industry executives to find deals with synergies. “With more industry-sector specialization, sponsors are identifying an increasing number of actionable add-on opportunities to build portfolio company value,” he said.

Among the hundreds of add-on deals in the quarter, Blackstone Group added three companies onto Optiv Security Inc, a cybersecurity specialist created in 2015 when Accuvant and FishNet Security merged.

In the middle market, ABRY Partners LLC continued rolling up Hispanic insurance brokerages around the U.S. with its Confie Seguros platform, and GTCR closed two add-on deals for AssuredPartners Inc, its brokerage-services platform.

YTD dealmaking lumpy but healthy

Volatility following the June 24 Brexit vote warranted caution for the second half of 2016. But GPs touted their prospects as they looked ahead for some breaks in the pricey deal environment.

U.S. sponsor dealmaking continued at a healthy pace in the second quarter, but remained behind 2015, while total dollar volume rose.

In the first half of 2016, sponsors closed 816 deals as of June 26, down 21 percent from 1,032 in the year-earlier first half. Dollar volume climbed 37 percent to about $96 billion from $70 billion.

Private equity firms completed 356 transactions from April 1 through June 26, down 34 percent from 538 deals in the year-ago quarter.

With the $12.2 billion acquisition of ADT Corp by Apollo Global Management tipping the scales, dollar volume for the second quarter rose 9.3 percent to $37.6 billion from $34.4 billion in the year-ago quarter.

Average purchase-price multiples on LBOs in 2016 increased to 10.23x EBITDA as of May 30, 2016, from 9.68x EBITDA in the year-ago period, according to S&P Capital IQ.

While prices rose, sponsors injected more equity into deals. Leverage levels fell to 5.31x EBITDA as of May 30 from 5.57x EBITDA in the year-ago period.

Credit markets improve

Outside of some hiccups late in the quarter on the heels of the surprise Brexit vote, the debt markets improved from earlier in the year. “The financing market is really good again,” Baird banker Coetzee said. “These windows can open and close quickly, but much of the quarter has been pretty strong.”

In the middle market, he attributed Baird’s stronger pipeline partly to pent-up demand from GPs looking to transact because of sporadic activity in January through March, as well as some spotty months in 2015.

“Firms with really nice or attractive assets are considering going to market today rather than waiting,” he said.

Overall, purchase-price multiples held at lofty levels, with European funds taking part in U.S. middle-market M&A while family offices flexed their muscles and closed more transactions, he said.

Building relationships to find deals

Among deals to close in the quarter, Thompson Street Capital Partners paid an undisclosed sum to recapitalize Global Software Inc, the Raleigh, North Carolina, specialist in Microsoft Excel automation and reporting technology for enterprise-resource planning.

Bob Dunn, managing director at the St. Louis firm, said Thompson Street Capital managed to win a coveted berth as the first institutional investor in GSI. Thompson Street Capital acquired a majority stake in GSI as part of the deal, but the founding family also retained a meaningful equity position.

The deal reflects Thompson Street’s focus on partnering with founder-owned businesses, he said. It landed the deal after building a relationship with executives at the company.

“We actually met the owners at a conference two years ago, well before the business was for sale,” Dunn said in an email to Buyouts. “Those early conversations with the founders put us in a good position to successfully execute a transaction when the company came to market in a formal sale process.”

Summing up its outlook for the rest of the year, Henry McVey, head of global macro and asset allocation for Kohlberg Kravis Roberts & Co, said 2016 is emerging as a year of some choppier waters.

Despite overhang from the Brexit vote, KKR expects more limited upside and more volatility than past years, but no recession or bear market.

“Markets have cut a wide swath so far this year, enticing investors to buy and often sell at what was, in hindsight, likely the time to do the exact opposite,” McVey said. “We stick to our base case that we remain in an ‘Adult Swim Only’ investment environment, as we see more asynchronous growth ahead.”

Action Item: Q2 2016 Deals Charts

Photo of Baird’s Chris Coetzee courtesy of the firm


Additional Data

U.S.-based disclosed deal value for closed deals by quarter, in billions

Top 10 U.S. sponsor deals closed in Q2 2016

The most active LBO dealmakers of Q2 2016

Q2 2016 deals by type

Q2 2016 deals by industry


2006-2016 pending and closed deal number and disclosed deal volume

10 largest announced and pending deals by U.S. Sponsors, Q2 2016