Add-on acquisitions as a strategic tool for LBO value creation

: an analysis of return drivers and market dynamics

Abstract

Following a massive wave of leveraged buyouts (LBOs) which took place in the 1980s, the private equity asset class started gaining mediatic resonance both for its uncommonly sharp risk return profile and the meticulous exploitation of structured finance. Due to the increasing maturity of the LBO industry and the consequences of the covid pandemic, LBO firms have been progressively looking at buy and build strategies (BaBs) as a strategic tool to generate value for their limited partners, with the volume of add-on acquisitions increasing at a CAGR of 13,2% in the period 2006-2016. Through thorough research and analysis, this paper shows how PE firms can generate returns and value through BaBs and what are some distinctive features of the market for this peculiar type of transactions. Among its most interesting findings, this paper demonstrates how the increased volume of add-on activity has been driven majorly by mid-market operations and characterized by an increased focus on ICT industries and on the financial services industry. Furthermore, it provides evidence on how large cap platforms appear to be keener towards performing cross-border consolidation processes which, according to existing literature, should deliver the highest IRR. Finally, this paper demonstrates empirically the positive impact of performing add-on acquisitions on multiples expansion even after controlling for financial cycle conditions, which are the element with the largest impact on the multiples expansion achieved by PE firms.

Date of Award	8 May 2023
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Fátima Shuwaikh (Supervisor)