In private equity, we make primary or platform investments and bolt-on investments. A primary investment is a direct investment of cash into a new business (often in a new industry). A bolt-on investment is an investment via an existing portfolio company into a business that presents strategic value (usually in the same industry).
Primary investments get most of the press. But, many private equity funds spend just as much cash on bolt-on investments. And, bolt-ons have the potential to create much more value (I’ll explain why later). So, it pays for a private equiteer to give up some of the glitz and glamour of primary investments to become a quiet achiever through bolt-ons. Here are a few of my thoughts:
- Bolt-on acquisitions are usually smaller businesses, which attract lower multiples with better terms
- Bolt-on acquisitions provide the chance to create instant value (by acquiring lower multiple businesses using a higher multiple vehicle – see Public versus Private multiples)
- Bolt-on acquisitions often require less work because they are smaller and attract less competition
- Bolt-on acquisitions offer strategic value (revenue and cost synergies), meaning you can pay a little more and be more successful in an auction process
- Bolt-on acquisitions provide for easier due diligence since you have access to industry experts in your primary investment vehicle (access to this experience is invaluable)
- Bolt-on acquisitions owners are more likely to do a deal with a larger industry player, since there is prestige in being part of a leading firm (compared to being gobbled up by financial vultures)
- Bolt-on acquisitions give you access to a whole new market of potential investees as certain mandated restrictions (regarding size) don’t apply
With that said, there are countless studies lamenting the destruction of value that occurs daily via mergers and acquisitions. So, it’s imperative to maintain focus on likely integration issues and ensure there’s a cultural fit. See my post in which I describe most bolt-ons as clip-ons (citing their failure to integrate and lack of strategic fit.)