April 12, 2018 / 4:02 AM / 7 months ago

U.S. private equity firms turn to 'bolt-on' deals for an edge

* Record 70 pct of U.S. private equity deals add-on buys in Q1

* Underscores need to merge companies to achieve outsized returns

* PitchBook found U.S. private equity dealmaking slowed by 1/3

By Joshua Franklin

NEW YORK, April 12 (Reuters) - More acquisitions of U.S. companies by private equity firms are being done through companies that are already owned by buyout funds, rather than the funds directly, a market report showed on Thursday, indicating this "bolt-on" strategy is catching on.

Private equity firms have traditionally sought to buy companies using just their own funds. This often puts them at a disadvantage when competing for assets against companies, because a corporate acquirer that does business in the same sector as the acquisition target can derive cost synergies from a deal that are not available to a buyout fund.

In response, many private equity firms have turned their companies into acquisition platforms. Once they buy a company, they use it to acquire more companies in the same sector, giving their holding increasing scale and pricing power in its market.

In the first three months of 2018, 70 percent of leveraged buyouts were bolted onto private equity portfolio companies, the report by funding database PitchBook found, beating the previous high of 67 percent two years ago.

Rising deal prices, record amounts of private equity fundraising, and leverage-curtailing regulation have caused many private equity firms to seek a competitive advantage when bidding against other buyout firms and companies for assets.

"These strategies have become more common in the last decade as competition has intensified for private assets, rendering the paydown of debt and multiple expansion less useful than they once were," PitchBook analysts wrote in its report.

One private equity executive who sits on an investment committee said it was rare 10 years ago for an investment case to be predicated on making additional acquisitions whereas now it is common in deal pitches.

Examples of buy-and-build deals include Apollo Global Management's purchase of U.S. security company ADT Inc , which it merged with Protection 1, and KKR & Co's acquisition of WebMD, bought through its Internet Brands business.

Overall, in the first quarter of 2018, PitchBook found private equity dealmaking in the United States slowed by almost a third year-on-year to $88.8 billion.

"Despite the slowdown, we expect reported deal flow figures to tick upward in the coming months due in part to the 124 deals worth an estimated $94.3 billion that have been announced, but not yet closed," PitchBook said. (Reporting by Joshua Franklin in New York)

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