COVID and the ensuing economic downturn have pressed on accelerator pedals far and wide; in the world of private equity this has manifested in a penchant for bolt-on acquisitions.

Funds are keen to deploy their record levels of dry powder. Now is the time for focused bolt-on acquisitions to take advantage of competitors that may have fared less well. They’re easier to finance that a full buyout and present a perhaps more stepwise, targeted approach to increasing portfolio value.

To put that into context, a recent PitchBook report revealed that in H1 2020 bolt-on acquisitions represented 61.2% of total buyout deals completed by PE. Make no mistake, that is a staggering percentage.

A large majority of PE funds that we are in dialogue with view bolt-ons as high up on their priority list. For one, as the pricing comes off, it presents the opportunity to grow portfolio businesses non-organically, acquiring businesses or platforms that might not have been achievable six months ago at an attractive price point.

Some recent examples include:

• Cairngorm Capital backing Grant & Stone’s acquisition of 3Counties Timber & Building Supplies
• NorthEdge Capital backing Orbis Protect’s acquisition of Optosafe
• Lonsdale Capital backing Cross Rental Services’s acquisition of Acclimatise

Tech to be key sector

This trend in bolt-on acquisitions lends itself very nicely to most sectors. That said, our expectation is very much that technology will be the key sector in the current climate and we predict a surge of activity over the coming 12 months.

Over the next 12-18 months we expect high demand from businesses that simply need to upgrade the technology that underpins their operations. The bolt-on strategy in the current pricing climate removes some of the risk of acquiring such technology and implementing it quickly and efficiently.

The ESG equation

A key consideration within this equation is that of ESG, always topical for the private equity industry. Indeed, DFIs allocate millions to ESG investments and it is clear that ESG considerations are an essential element of the due diligence process. As we move forward, and regardless of whether or not a fund has a proactive approach to ESG, there will inevitably be vastly increased focus on the factors that govern ESG – especially governance – and its impact on portfolio companies. While times are undeniably tough, the ability to adapt to change and create resilience, which are themselves central tenets to a proactive approach to ESG, will dictate the success of GPs in getting back to their required levels of return.

Fundraising for growth funds

With the renewed focus on bolt-on strategies and their propensity for maximising efficiency, companies that are growing faster and can withstand the economic downturn are naturally finding their time in the spotlight. As such, in the first half of 2020, buyout funds had 80% of the fundraising share, and growth equity funds had the other 20%. But that ratio is expected to level out as fundraising for growth funds picks up in the next quarter. We will see a shift from large private equity funds to growth funds.

All this is encouraging on a grander scale. Private equity as a sector is well prepared and funded to take on the challenges of an economic downturn, looking to create resilience in its portfolios and positioned well to stimulate the economy and more importantly create employment and growth in certain sectors. And while fundraising may be down overall as a result of the COVID crisis, few are still seeing funds close and lots nearing their final close which signifies that the institutions are still hot for the asset class. This is highlighted by the recent fundraising closes of Tenzing, Nordic Capital and Bridgepoint Development Capital.

Over the coming months and years that money is likely to follow entrepreneur-backed businesses that can make use of better technological solutions that maximise efficiency, turnover, create jobs and ultimately drive the economy forward.