Private equity and investment banking firms are seeing a post-COVID boom of inbound interest and deal activity like never before.Unfortunately, history tells us a “bust” likely isn’t far behind.
In the first half of 2021 alone, deal volume exceeded $2.2 trillion — a culmination of unprecedented market conditions including rock-bottom interest rates, increased dry powder,emerging sector growth, and high valuation averages. But what happens when the music stops?
Add-on vs. Platform Investments
“Platform companies” refer to foundational investments firms make in high-growth industries or emerging categories. They typically have decent market shares, resources, and revenues in their given space.
In contrast, “add-ons” refer to faster, cheaper, and lower-risk investments firms make in smaller companies to help enhance the value and accelerate the growth of platform acquisitions.
This makes add-on investing a perfect strategy for firms to not only maximize the boom of post-COVID inbound deals, but to also fill their pipelines in preparation for an inevitable bust.
However, traditional processes for identifying,researching, and closing add-ons are highly manual and time-consuming —something no firm has time for when overrun with active deals.
That’s why new school dealmakers are turning to the latest technology to take a data-driven approach to add-on investing. Building accelerated, purposeful, and precise add-on strategies can be broken down into two distinct parts: before a platform investment and after a platform investment.
Before Platform Investment
A good add-on strategy actually begins in the thesis development stage. Instead of building a thesis around a specific company, more firms are gravitating toward a top-down thesis approach. This requires holistically researching markets to first understand the entire industry landscape, justify an investment, and then narrow focus to specific targets.
It involves detailed market mapping and segmentation based on size and health to determine strategic acquirers, platforms, and add-ons. Getting a clear picture of potential add-ons prior to platform investment is key for establishing long-term market strategies, planning future platform growth, and making more competitive offers.
New school firms are using new data services that offer a wealth of information about non-transacted companies, including 9 core data signals that indicate investment readiness. Some tools are even able to surface companies with comparable signals to help build out market segments in minutes.
After Platform Investment
Add-on strategy re-enters the picture once a platform company has been sourced, vetted, and closed. It’s critical at this point to determine whether your add-on goal is to grow revenue, enter a new market, gain additional product functionality, or expand geographically.
Pinpointing the add-ons that best fit your goal has historically meant dredging Google and making hundreds of phone calls. Newer approaches take a page out of the new school dealmaker’s playbook and use lead scoring to automatically rank add-ons according to how well they match your criteria.
The latest technologies not only empower firms to enter their investment criteria and assign values to each corresponding datapoint, but they also automatically apply these scores and sort lead lists accordingly. This allows you to spend more time on opportunities with real potential.
Keep the Momentum Going
What goes up must come down, as the saying goes. But your firm doesn’t have to ride the post-COVID rollercoaster. Developing a data-driven add-on strategy lets firms to proactively fill their pipelines and keep the post-pandemic momentum going.
To learn more and get step-by-step guidance on how to take control of your post-pandemic deal flow, download our free guide: How to Amplify Post-COVID Momentum with a Data-driven Add-on Strategy.