According to our Portco IQ Index, 53% of technology portfolio companies exited between Q1-Q3 2024 used M&A as their predominant strategy for growth and value creation. The outcomes of these exits, however, were varied.

Privitas’ analysis found that 40% of these companies achieved a “Grade A” exit, meaning they were top performers across financial performance, operational efficiency, market positioning, and talent and governance. Meanwhile, 20% achieved a “Grade B” (moderate performers) and another 40% a “Grade C” (underperformers).

On average, surveyed companies using M&A as a value creation strategy exited at a 3.4x enterprise value expansion – the second highest performing result, behind companies who chose market expansion, which garnered a 3.5x EV expansion on average. 

And market expansion more consistently delivered returns – according to our report, 100% of companies who chose this strategy for value creation achieved a “Grade A” exit. So why was it the least-used strategy alongside restructuring?

The answer could lie in the fact that PE firms see M&A as a means to market expansion. 

“If you're a private equity professional and you want to grow a business, [M&A] is perceived as the easiest to execute approach to get into a new geography, a new product area,” explained Kevin Lehpamer, a partner at law firm Clifford Chance. A large portion of his work focuses on private equity-backed M&A. 

He added: “There's probably some perspective that most of the people running private equity funds are deal professionals. So they're very familiar with an execution strategy of doing add-on M&A. You acquire the portfolio company but you want to get into a new geography, product line, or expand the business. You can add on to the existing business in a way that they'll get and can action pretty easily [using M&A].”

And, according to Lehpamer, this has been a trend he has seen throughout his 20-year career. 

“M&A being the most common, that is not a blip…I think it's probably the most actionable,” he said. "Other strategies may be perceived to take a little bit more time to develop and play out.”

What might be a blip, however, is how strong M&A has been recently. According to Lehpamer, this is due to higher interest rates.

“If you look at the last decade of private equity, you've seen a lot of roll-up, add-on acquisitions,” he noted. “We've been in a higher interest rate environment and it's harder for funds to raise debt financing. It can be easier to build over time with a series of add on acquisitions where you don't necessarily need large debt financing. If you look at the last few years you will have had more add-ons than if you were to look at the data from, let's say, a dozen or more years ago.”

He added the caveat that M&A tends to be less common in subsectors where there are regulatory barriers to mergers or permitting. However, tech is not one of those industries – indeed, most aren’t.

Cooper Smith, managing director of Privitas and the author of the report, anticipates that this will likely be reflected in the findings of future reports: “40% of PE exits across all sectors in our Portco IQ Index pursued an M&A strategy in 2024. We’re excited to share in future reports how value creation strategies differ by industry, geography, and company size.”

The report is the third research report from Privitas, a business intelligence firm for private equity operations, using its proprietary platform. Subscribers can read the full report here. Future reports will tackle portfolio company benchmarks using our proprietary Portco IQ index, as well as sector-specific and cross-industry trends.