rivate equity general partners (GPs) are incredibly busy, although M&A volume might suggest sponsors aren’t as active as they were in 2021 and 2022. Their focus, however, has been on efforts to accelerate and enhance value creation within their existing portfolios.
The data bears this out. For one, the median hold period at exit continues to stretch longer, according to Pitchbook, and exceeded seven years based on exits completed in 2023. Moreover, the proportion of add-on acquisitions as a percentage of total investment activity reached 75%, and the volume of add-ons in the first half of 2024 was easily on pace to eclipse last year’s total, according to data from Pitchbook.
The market, to be sure, is a factor, but sponsors have shown they are willing to extend hold periods if they can continue to drive value from their best investments, and add-ons are increasingly becoming a key ingredient in the private equity playbook.
None of this should come as a surprise, as sponsors are increasingly looking inward to find conviction. While the economic and geopolitical backdrop play a role, another contributing factor is that GPs have never before had so many tools at their disposal to extend the growth runways of their existing investments or navigate the obstacles that often get in the way. In this sense, strategic capital solutions are facilitating mid-hold value creation efforts that 10 or even five years ago were not always available.
Strategic capital can solve complex challenges that would have
otherwise prevented the sponsor from taking advantage
of potential upside opportunities.
Consider, for instance, the roadblocks most sponsors would historically encounter that would limit the extent to which they could re-invest in existing portfolio companies. These might include concentration limits that require LPAC approval; dwindling fund reserves that might restrict a sponsor’s ability to commit more equity; or co-investors with different motivations, investment timelines, or objectives. A traditional secondaries solution or a single-asset continuation fund might provide some relief, but in a capital constrained, difficult fundraising environment, these alternatives offer little certainty and can take a year or longer to arrange and structure.
Enter strategic capital. To be sure, as the market develops, this can still mean different things to different people and currently represents a very large tent that contains sometimes vastly different strategies — from NAV loans to growth capital and a lot of things in between. At ASC, we think of strategic capital as investments in seasoned situations, or mid-hold equity solutions, where we can bring speed and flexibility to bear in building equity value. Our solutions seek to facilitate M&A or organic growth initiatives, cross-fund investments, shareholder consolidation, or other similar initiatives.
While many strategic capital providers pursue a specialization or niche, one common thread is that, by design, the value proposition rests in the flexibility afforded to GPs. For instance, some strategies may be focused on providing liquidity solutions, whereas others are geared for distressed situations. ASC’s specific mandate is centered on minority, non-control investments — alongside existing private equity sponsors — to facilitate tangible opportunities for predictable value creation within their portfolios. Said another way, mid-hold strategies are premised on helping GPs capitalize on the work they’ve already put into their portfolio companies to drive further equity value in the business.
MID-HOLD EQUITY IN ACTION
To appreciate the flexibility, it can help to understand the types of investments these strategies facilitate. For instance, in one transaction last year, ASC invested preferred equity into a private equity-backed business services company that used the capital to complete a priority acquisition. This opened up a new end market, extended the company’s product suite, and unlocked cross-selling opportunities that are driving new channels of organic growth. Audax invested alongside the existing sponsor, which had owned the company for several years, and invested new capital into the business.
In another example, in the education space, ASC’s common equity investment facilitated a transaction that allowed the existing sponsor to invest fresh capital into the company through its new fund, while bringing on a co-control investment partner. The ASC investment, beyond allowing the sponsor to maintain joint control, included an unfunded equity commitment for future M&A.
And in Europe, in an investment in the business services sector, ASC’s common equity equipped the sponsor to execute on an attractive and actionable pipeline of M&A opportunities that can drive product line expansion and geographic growth.
The connection across these investments, beyond the flexibility required, is that ASC is backing strong, performing PE-backed companies seeking to pursue another phase of growth. In each case, too, the investment solved a complex challenge that would have otherwise prevented the sponsor from taking advantage of potential upside opportunities.
As valuations remain historically high, sponsors aren’t generally
counting on multiple expansion unless they’re able
to materially drive top- and bottom-line growth.
Each of the investments also leveraged Audax’ history and track record executing its Buy & Build playbook that brought to bear speed and decisiveness for the sponsor to capitalize on opportunities that could otherwise be fleeting.
Not every investment, however, will necessarily be premised on a specific add-on. In some cases, it can be about re-aligning interests to try to push forward growth strategies already in place. In these situations, the capital is dedicated to clearing a path for M&A and growth opportunities, versus being channeled directly into new transactions.
For instance, in one case, ASC supported a dental support organization through a convertible preferred investment. The investment was premised on helping the sponsor maintain the company’s de novo and M&A growth momentum entering the sixth year of its hold period.
A STRATEGY FOR ANY MARKET
The value proposition of mid-hold equity, generally, is to provide another tool that allows sponsors to drive long-term growth and draw on private equity’s role as a provider of truly patient capital. And while an accommodating monetary policy in the years between the great financial crisis and the end of the pandemic may have fueled an accelerated exit environment, marked by shorter hold periods and elevated IRRs, a higher-for-longer- interest-rate environment, even as the Fed adopts a more dovish stance, is seeing sponsors drill into value creation as the primary driver of returns.
This focus on value creation is also informing new investment decisions, as valuations remain historically high. This means sponsors aren’t generally counting on multiple expansion unless they’re able to materially drive top- and bottom-line growth. As such, many are underwriting their investments with longer hold periods in mind.
Another factor that supports the maturation of strategic capital generally — and the mid-hold equity segment more specifically — is that while financial engineering as a sole driver of returns may be a thing of the past, sponsors are increasingly building out their internal capital markets functions to bring deep proficiency and expertise to fund ambitious theses centered around value creation. And as more sponsors adopt Buy & Build strategies trying to effect organic and inorganic growth, they will require sophisticated tools to engender the financial flexibility required. Mid-hold equity solutions, in this sense, are a way to meet the needs of today’s sponsors in looking to drive long-term value.
While dislocated financing markets and interest rate volatility may accentuate the need for flexible capital solutions, we believe the recent growth of the segment is untethered to the current economic and market backdrop. Instead, it speaks to the evolution of the larger private capital asset class in which sponsors are seeking predictable paths for value creation and want to continue to invest behind the winners in their portfolios.
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About the Authors
Husain Kumber is a Managing Director for Audax Strategic Capital, focused on providing various capital solutions to companies owned by private equity sponsors. Prior to joining Audax in 2022, Mr. Kumber was Managing Director, Head of Americas, for DWS Private Equity and previously worked at Morgan Stanley Alternative Investment Partners, WP Global Partners, and Swiss Re. Mr. Kumber’s experience spans private equity secondaries, co-investments and fund commitments, with the majority of investments being made into concentrated and customized secondary transactions.
Daniel Green is a Managing Director for Audax Strategic Capital, focused on providing various capital solutions to companies owned by private equity sponsors. Prior to joining Audax in 2022, Daniel was Managing Director, Head of Europe, for DWS Private Equity with responsibility for the activities of the business in EMEA. He also previously worked as a Senior Director at Meketa Investment Group where he led EMEA investment activities across private equity and real assets. Daniel spent 13 years with Greenpark Capital, a UK-headquartered secondaries private equity fund manager with $2 billion of commitments, rising to the position of Chief Investment Officer.
Based in New York and London, Audax Strategic Capital (ASC) is a flexible partner to private equity sponsors seeking customized equity solutions to drive continued growth at their portfolio companies. ASC’s capital solutions support add-on acquisitions and organic growth initiatives through bespoke structures that enable PE sponsors to maintain continued control and ownership of performing assets while ensuring interests remain aligned in pursuit of future growth. ASC is part of the Audax Private Equity platform, a capital partner to middle market companies with $19 billion of assets under management, over 270 employees, and 100-plus investment professionals.
DISCLOSURES
The information herein has been prepared solely for informational purposes. Certain statements constitute “forward-looking statements” that can be identified by the use of forward-looking terminology such as “may,” “will,” ”should,” “expect,” “anticipate,” “estimate,” “intend,” “continue,” or “believe” or comparable terminology. Due to various risks and uncertainties, actual events or results may differ materially from those reflected in such forward-looking statements. Opinions expressed reflect the current opinions of Audax Strategic Capital (ASC) as of November, 2024 only and are based on ASC’s opinions of the current market environment, which is subject to change. Certain information contained herein may be based on or obtained or derived from data published or prepared by other parties. While such sources are believed to be reliable, ASC does not assume any responsibility for the accuracy of any third-party information.
Andy Greenberg is CEO of Greenberg Variations Capital, a mergers & acquisitions advisory firm based in suburban Philadelphia devoted to one-off or targeted transactions. Mr. Greenberg was founder and CEO of GF Data©, the M&A data tracking service, prior to its acquisition by the Association for Corporate Growth in 2022. For more information, visit 
Amid a material drop in deal volume, the 2023 private M&A market is seeing more and bigger earnouts. Earnouts can help bridge valuation gaps as strategic buyers get more active. Higher interest rates and uncertainty over future Fed rate increases are key drivers in the disconnect of valuation expectations.
SRS Acquiom has observed a 62% increase in the number of deals with earnouts in 2023.
Kip Wallen is a senior director leading the SRS Acquiom thought leadership practice. He leverages his extensive expertise and SRS Acquiom proprietary data to produce resourceful content regularly utilized by market practitioners. Kip has broad experience in M&A and provides guidance on market standards and trends.
