How are add on acquisitions funded?
Are add on acquisitions funded by taking cash off the balance sheet of the platform company or from raising additional debt financing?
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Both ways work. Additionally, incremental equity from the sponsor. Common for companies to have DDTL as well so they don't have to raise new debt funding every time (acts almost like a revolver for doing add ons)
Very situational - but usually our fund looks to lever to an agreeable PF leverage multiple, assuming a) we’ve paid down some debt, b) we’ve grown organically, or c) the acquisition will de-risk/improve the platform (or any combination of the three). We usually do this with our existing lender and it’s generally a mix of D/E (anywhere from 90/10 to 50/50). We usually reserve cash on BS for organic growth initiatives.
One flag - if you don't have a DDTL, there are additional risks in today's market from raising more debt by upsizing an existing facility. Given rising interest rates, many lenders will look to either reset the economics of an entire facility upon upsize (given existing facility likely bears a much lower interest rate vs. today's market) or apply an outsized interest rate to the incremental debt to blend up the overall interest rate, resulting in significantly more cash interest expense. For this reason, many sponsors are over-equitizing deals to avoid messing up the terms on their broader debt facilities and actually costing themselves more money.
Varies - but typically funded via DDTL or incremental sponsor equity. Most groups will shy away from the incremental sponsor equity and will run the DDTL down and then go shop for debt when they have another opportunity come up.
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