What is an add-on acquisition in the context of private equity?

An add-on acquisition in private equity refers to a situation where a portfolio company (which is a company owned by a private equity firm) acquires a smaller company to enhance its growth, capabilities, or market presence. This strategy allows the portfolio company to expand its operations, integrate additional services or products, and achieve synergies that can lead to increased profitability.

In this context, the correct choice reflects the nature of add-on acquisitions as they are typically aimed at building upon an existing business rather than divesting or forming new partnerships. By acquiring smaller companies, the portfolio company can leverage its existing resources and market position to create a more valuable entity. This approach is common in private equity because it can lead to a significant increase in the overall value of the portfolio firm through consolidation and expansion strategies.