Add-on acquisitions have consistently made up the bulk of buyout transactions since 2016, according to Pitchbook data. In 2022 alone, they accounted for 77% of all buyout activity. And for good reasons – add-ons are cheaper, easier, and a solid way to deploy capital in a less-than-stellar dealmaking environment.

Despite the popularity of the model, The Riverside Company has found a way to put its own spin on it by thinking small.

“We are a pretty unique animal. Most people, when they raise more money, they just continue to move upmarket and write bigger checks because it's easier. In many ways, we've come downmarket,” said Jeremy Holland, managing partner in origination for The Riverside Company. 

Holland explained that of Riverside’s current portfolio companies, most initial assets in a roll-up strategy were valued at between $1 million and $2 million upon acquisition, as are most of the secondary assets. 

“By the third or fourth add-on, we find something with some scale. But due to deep industry specialization, we don't need to wait for that $5 million EBITDA threshold,” Holland added. He explained that while the multiples on those initial smaller companies are lower, the ultimate acquisition of an asset of scale brings the multiples up. In essence, patience is key.

“It is a much more efficient way for us to grow the business, to buy them smaller and bring in all those tier-one resources,” he said. “It's a very active part of our investment thesis. I'd say about half of our portfolio companies are very active with add-ons.”

An International Appeal

Holland says a lot of Riverside’s add-ons come through the skilled trade sector, such as fire safety technician services. He also says there are opportunities in the software sector. 

“Many of those are really a customer acquisition play. These are often vertical B2B SaaS where it's about capturing market share before somebody else comes up with a competing technology. It varies quite a bit based on industry,” he said.

One such example of a software roll-up Riverside has done is Energy Exemplar. According to Holland, the firm started as a much smaller business out of Australia. Then, via an acquisition in Utah, Riverside was able to open up a whole new customer base in the United States – and a whole new market of buyers. The firm was bought by Blackstone and Vista Equity Partners for an undisclosed amount at the end of 2023. 

“People think the add-on acquisition world is about efficiencies only. And for many of us, it's really about growth. And so leveraging our global footprint, we've been able to really make some transformative add-on acquisitions,” Holland said.

He pointed out that US-based assets typically have more intense bidding wars than assets overseas – however, few low- to mid-market players have the global presence that the assets’ off-takers (large-cap PE firms and multinational corporations) typically have.

The Importance of Integration

And of course, none of this nuanced approach would be possible without a dedicated operations team.

“The pure roll-up folks that are not integrating, that was very common in the heyday a couple of years ago because there was somebody else willing to pay you a full price for the asset and take on that integration risk. Increasingly, if you want to get a full multiple, you need to do that integration work,” Holland said. “Operational depth to handle all the integration work is critical. Of the 300+ people at Riverside, dozens are operating folks.”

These operating folks typically have a CFO’s background, so they can work better with Riverside’s portfolio companies. 

“A lot of global giant strategic buyers don't think you need two CFOs, so if they were not kept around, we jumped at the opportunity to bring some of those home to Riverside and help out our portfolio companies because they have walked in CFOs’ shoes,” Holland said.

Holland says that is key when it comes to building trust with portcos’ leadership – something crucial for success in the mid-market.

“We're going to hold your hand through this. We're not just going to tell you to switch systems; we're going to help you directly to convert to a more robust system,” Holland explained.