How Private Equity Funds Can Use M&A to Create Outsize Returns

Beyond the Buyout: How Smart PE Funds Use Add-On M&A to Fuel Outsize Returns

In today’s competitive market, generating strong returns is more challenging than ever for private equity funds. The old playbook of financial engineering and operational tweaks is no longer enough. So, what’s the new strategy dominating the PE landscape? Equip private equity funds with M&A and Strategic add-on acquisitions.

A recent McKinsey report highlights a seismic shift: add-on deals made up a staggering 70% of all PE deals in 2023, up from 57% in 2017. This isn’t a temporary trend; it’s the new core strategy for growth and value creation.

Role of M&A in Private Equity Funds' Strategy

But success isn’t guaranteed. Simply bolting on companies isn’t the answer. The real magic lies in how these acquisitions are executed. Based on McKinsey’s insights and our experience at NeoForm, we’re breaking down the five essential levers that separate the top performers from the rest.

Why Add-Ons Are the Cornerstone of Modern PE Strategy

Private equity funds are pursuing add-on M&A for three powerful reasons:

Capturing Synergies: The most direct path to value. Add-ons drive revenue synergies through cross-selling and market expansion, cost synergies via operational consolidation, and capital synergies through better asset management. One enterprise software company, for example, programmatically acquired six add-ons, expanded its service offerings, and consolidated back-office functions, leading to a significant boost in EBITDA and valuation.
Achieving Higher Valuations at Exit: Add-ons don’t just grow the business; they enhance its story. By driving higher Return on Invested Capital (ROIC) and demonstrating greater organic growth potential, portfolio companies command higher exit multiples. A software company that strategically acquired hardware firms integrated them into its SaaS offerings, boosting its future growth profile and, ultimately, its exit valuation.
Attracting and Retaining Talent: A larger, more diversified company offers greater career mobility and opportunities. This makes the portfolio company a magnet for top talent. One oil and gas company retained a key executive by promoting them to COO after a series of acquisitions provided the scale for that role.

The 5 Levers for a Winning Add-On Strategy

McKinsey’s research identifies five critical practices that private equity funds and their portfolio companies must master to capture the full value of add-on M&A.

1. Front-Load Acquisitions

Time is the most valuable currency in a holding period. The inherent risk and effort of integration mean that deals should be targeted and executed early—typically within the first three years. This allows maximum time to realize synergies, stabilize the enlarged business, and build a platform primed for a successful exit. Delaying integration eats into the time needed to prove the new, combined company’s value to the next buyer.

2. Focus on the Top Value Drivers

A common pitfall is either leaving an acquired company entirely separate (leaving money on the table) or applying a one-size-fits-all integration template. Instead, success comes from identifying and relentlessly focusing on three to five key value drivers from the start—ideally during due diligence. Whether it’s cross-selling to a new customer base, creating an end-to-end service offering, or consolidating manufacturing, this focus sets a clear, value-oriented direction for the entire integration.

3. Build a Repeatable Process

Serial acquirers don’t reinvent the wheel with every deal. They develop a repeatable, rigorous integration playbook. This means evaluating integration decisions (like which IT system to use) against ROI and payback time. Adopting a stage-gate process ensures that decisions are backed by strong business cases, especially for larger one-time costs. This repeatability speeds up future acquisitions and reduces risk.

4. Rigorously Track Value Delivery

PE funds and portfolio companies must implement rigorous performance tracking with a “single source of truth” for integration KPIs. Cloud-based solutions are increasingly used to monitor margin expansion, revenue synergy capture, and other critical metrics. This transparency isn’t just about celebrating wins; it’s about identifying “dis-synergies” and correction measures, creating a feedback loop that refines the M&A process for the next deal.

5. Build Sustaining M&A Capabilities

M&A excellence is a muscle that must be built and maintained. This goes beyond the deal team to include operating partners and portfolio company management. Top funds invest in capability-building through M&A integration training, on-the-job coaching, and post-integration analysis. For instance, one PE manager brought together the leaders from all 20 portfolio companies for a dedicated M&A training session. This institutional knowledge ensures each acquisition is faster, more efficient, and more effective than the last.

The NeoForm Perspective: Navigating the New Landscape

The McKinsey report rightly notes that increased regulatory scrutiny, particularly in the U.S., adds a new layer of complexity. A robust diligence process is no longer optional—it’s essential for compliance and de-risking transactions.

At NeoForm, we see these five levers not as isolated tasks, but as interconnected parts of a holistic M&A strategy. Building a repeatable process (#3) is impossible without rigorous tracking (#4). Front-loading acquisitions (#1) only works if you have the internal capabilities (#5) to integrate quickly.

Add-on M&A is a powerful, flexible tool that allows private equity funds to deploy capital effectively and build stronger, more valuable businesses. By mastering these five levers, funds can transform their portfolio companies into market leaders and consistently achieve those coveted outsize returns.

🔗 Links for More:

Inspired by the McKinsey & Company article “How private equity funds can use M&A to create outsize returns” (September 2024). Read the full article on McKinsey website or NeoForm LinkedIn page.

📌 About NeoForm:

At NeoForm Business Partners, we partner with private equity firms to navigate every stage of the deal lifecycle, from sourcing to seamless integration.

Visit our blog for more insights on private equity, M&A and financial transformation.

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