In particular, there has been a noticeable uptick in the number and value of add-on deals completed over the last two years as a proportion of the market. In the first quarter of 2023 alone, almost 80% of all deals in the US private equity market consisted of portfolio company add-ons.
M&A can serve as a powerful tool to strengthen a company's position in the market – by adding complementary products to a company’s range, helping it reach new geographies, access a wider array of customers, and bring economies of scale to the business. Acquisitions can also bring about synergies that result in improved processes, optimised resource allocation and operational efficiencies – ultimately increasing profitability.
Amidst challenging economic conditions, it’s no surprise that private equity groups are exploring M&A as an engine for growth; it’s necessary to improve and sometimes transform companies in order to generate requisite growth. In the current market environment, as the numbers above show, M&A has maintained or increased in importance and platform companies are in a strong position to acquire or ‘add on’ companies, where sellers may potentially be increasingly motivated to strike a deal.
Within NBPE’s portfolio there are numerous examples of recent M&A, whether this be systematic or ‘roll-up’ mergers or strategic, transformative acquisitions. Within our Top 30 companies alone 70% of the companies have successfully completed M&A transactions.
Rewards of Rolling Up
Systematic or roll-up mergers involve the acquisition of a number of smaller companies within the same, often highly fragmented, industry. The end goal is to integrate the businesses and create a company of higher value than the sum of its parts. As roll-up acquisitions typically involve smaller businesses, these acquisitions often occur at relatively lower multiples. Providing the acquisitions are successfully integrated and well managed and the company continues to demonstrate good organic growth, it should be worth more than the sum of its parts and as a larger platform, may have a higher strategic value to the next owner.
USI and Monroe are two portfolio companies that demonstrate this strategy in action, with USI successfully completing both strategic and roll up acquisitions.
USI provides consulting and brokerage services across property, casualty and employee benefits, mostly to mid-market US companies. NBPE co-invested alongside KKR’s core private equity strategy when it acquired USI in 2017. USI operates in a highly fragmented market, with thousands of small independent insurance agents, and over the last six years has completed numerous acquisitions under KKR’s ownership, growing revenue by 2.5x. In addition to adding scale, USI has leveraged M&A to extend its geographic reach and build out its product capabilities. Key transactions to date include the acquisitions of Wells Fargo Insurance Services USA in December 2017 and Associate Benefits & Risk Consulting in July 2020 – two complex carve outs of insurance brokerage businesses from banks. Alongside its acquisition strategy, USI management continues to execute organic growth initiatives through investment in producer hiring and technology to enhance sales effectiveness, improve client experience, and streamline training processes.
Monroe operates in a very different industry and is a more recent investment for NBPE. Monroe is a leading provider of mission-critical, often custom, component hardware to a diverse set of original equipment manufacturers (“OEM”). Monroe provides a broad suite of engineered components (~65,000 SKUs) across various product categories, including cable assemblies, wires, fasteners, casters, hinges and seals, that are critical to customers’ final product performance and require technical consultation. The majority of products are custom designed to an OEM’s needs, and the Company has a broad one-stop-shop product offering, which is important to customers looking to simplify their component design and procurement process. Monroe has a clear, differentiated value proposition centered on its extensive customization capabilities, technical expertise and product breadth and depth, which is validated by strong customer retention and historical growth rates well in excess of its markets. NBPE invested in Monroe, alongside AEA Investors in December 2021. Over the five years prior to our investment, Monroe successfully acquired 11 add-on businesses, expanding into new markets, customer types, and product categories. In the 18 months since AEA and NBPE invested, Monroe has continued to execute on its successful acquisition playbook and has integrated an additional 10 businesses into the “OneMonroe” platform. These acquired companies help accelerate the organic growth of the company, in both the base platform and the acquired entities, through a variety of proven and data-driven sales and marketing strategies. We believe that Monroe is well positioned to continue to grow via this acquisition strategy, as well as organically.
When Opportunity Strikes
While roll up M&A can be central to the investment thesis of a transaction, quite regularly strategic or transformational M&A is contemplated at the time of the investment, but is not included in base case underwriting assumptions or returns. This type of M&A tends to be focused on adding complementary products and go-to markets to a business, and can significantly increase a company’s breadth and depth. Solenis and Renaissance, two of NBPE's portfolio companies, provide good examples of transformational M&A.
Solenis is a manufacturer and distributor of speciality chemicals and solutions, focusing on water treatments for industrial and consumer uses in 130 countries. Solenis was acquired by Platinum Equity in 2021, with NBPE co-investing alongside Platinum at that time to help support the acquisition and midlife merger with Sigura, an existing Platinum portfolio company. In turn, the company recently announced the $4.6 billion acquisition of Diversey, a provider of hygiene, infection prevention and cleaning solutions. This merger makes Solenis a more diversified company with significantly increased scale, broader global reach and the ability to offer a ‘one-stop shop’ suite of solutions that meet customer demand and address water management, cleaning and hygiene issues on a global basis. NBPE made a follow on equity investment into the company as part of this transaction, because of the growth opportunity we saw in the combined businesses and it is now NBPE’s 5th largest company.
Renaissance is a software company focused on analytics and content for K-12 schools in the US (ages 5 – 18 years). NBPE originally invested in Renaissance in 2018 alongside Francisco Partners. Since then, Francisco Partners has focused on building out the technology platform and making a number of targeted add-on acquisitions, which have increased the breadth and depth of Renaissance’s learning products, complementing the company’s core assessment engine; 40% of K-12 schools in the US now rely on Renaissance solutions. More recently, Renaissance completed the acquisition of GL Education, the leading provider of formative assessments to schools across the UK and Ireland. This acquisition not only increased the company’s product offering, but also extended its international footprint, with its products now being used for learning in more than 100 countries.
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