Age of add-ons: 4 portfolio value creation strategies for PE money managers

4 Min Read

Many people believe that emerging from pe due diligence with a fresh deal is the most exciting moment in the day-to-day experience of private equity portfolio company management. While new acquisitions do get most of the media focus, they have stiff competition from the portfolio manager who discovers new add-on value creation strategies for a portfolio company. After all, it’s their responsibility to generate successful returns over the life of each new investment.

As a money manager looks for new revenue growing opportunities, it serves them well to think outside the box to find new opportunities for additional value – an expanded use of a product, service or an add-on acquisition can be the key to steering a company through a stagnant period, like a recession, or navigating an operational transformation requiring fresh capital or a technology implementation.

Add-ons may not make the headlines, but they can add the fuel needed to propel a PortCo to new heights. They are a key ingredient in delivering a strong exit. While the road to a solid add-on can have many twists and turns, there are four key portfolio value creation strategies that deserve close examination.

4 PORTFOLIO VALUE CREATION STRATEGIES

Enter New End Markets

When evaluating the acquisition of a new PortCo, understanding its existing market potential is essential. This initial review often provides sufficient insight to determine whether a deal is promising or not, guiding the investment decision. While the investment pulls the firm into a ripe market, it also can unlock the exploration of new end markets.

In a recent engagement, we worked with a private equity firm whose PortCo is widely known as the world’s largest manufacturer of independent precision creep feed grinding. They serve the industrial gas turbine and aerospace industry sectors, and wanted to explore new end markets. While they were deeply rooted in their existing customer segments, they needed to find advisors from OEM manufacturing facilities to help them better understand what they look for in suppliers. The advisors that we provided helped them to position their business and sales strategy by assessing the target market and identifying quick wins to accelerate market entry. This capability was essential for aligning internal operations with a holistic growth vision.

Connecting with advisors outside their immediate network and who focused on value creation allowed them to see new end-market opportunities with a fresh perspective and mitigate the risks of a new investment.

Purchasing Power

Purchasing power comes with the ability to purchase in ever-expanding quantities – the more you buy, the cheaper the pricing gets. If a PE firm has a PortCo that purchases widget/ingredient A on a regular basis, it might make sense to look for other verticals that also use widget/ingredient A.

We recently worked with a private equity client that was exploring cost synergy expansions for their thermal paper PortCo. By recognizing challenges in their industry’s ability to grow, based on a reduced demand for receipt paper, they were considering a market consolidation strategy. Apex Leaders helped them connect with a broad range of small-roll paper suppliers to gauge market acceptance of combining two major brands. That could allow for purchasing synergies, delivering paper from mills at a greatly reduced cost. This also opened the door to implementing a capital-efficient procurement process supported by advisory insights into merger strategies.

Connecting with advisors helped the firm find a less conventional path to expanded profits.

Cost Synergies

Every PortCo has a long list of resources, be it personnel, services, or actual goods. These resources often hold significant value for an add-on acquisition, leading to crucial cost-saving synergies. For instance, consider Yum! Brands, a powerhouse with thousands of KFC, Pizza Hut, and Taco Bell franchises worldwide. All these brands operate storefronts and kitchens. Why not leverage these shared assets to create multi-brand fast-food restaurants, realizing significant cost efficiencies?

We recently worked with a private equity client who owns a major fast-food franchise holder. They were exploring how their existing businesses could expand into new franchise opportunities. While they had strong knowledge of their own franchise brand model, they wanted to identify new brands with similar business models that could unlock further cost synergies. By connecting them with former owners and competing franchises, we helped them achieve just that, paving the way for post-close strategy development and operational alignment across their diverse brand portfolio.

Insights from competitors are invaluable. They often hold nuanced understandings of the business that external observers miss, revealing new cost synergy strategies crucial for firms acquiring new entities or expanding into strategic markets.

Cross Merchandising

Just like a grocery store strategically places salsa next to tortilla chips on an end-cap, portfolio add-ons allow companies to cross-merchandise complementary services to both current and potential customers. This strategy extends far beyond chips and salsa.

For instance, we worked with a client who owns a pest control company. One of their products had potential applications in the agricultural chemical sector. By strategically positioning themselves, our client was able to capitalize on the increasing demand for new agricultural chemical combinations, enabling them to package pest control solutions with biological products for farming operations. Our ability to connect them with experts on implementation and investor response provided the client with the clarity and efficiency needed for faster go-to-market execution.

From Deal Close to Value Creation

The period immediately post-close is one of the most important, and often overlooked, moments in a deal’s lifecycle. It’s when firms have the opportunity to invest in the right improvements, align multiple stakeholders, and set the tone for what comes next. A clear assessment of the portfolio company’s asset base, value chain, and operations can reveal where margin gains are possible and which initiatives will drive the greatest impact. With the right advisors in place, firms can move quickly, take advantage of early incentives, and execute with confidence. It’s a chance to build organizational momentum and unlock long-term value immediately.