When a platform team pays more than planned for an add-on, a lapse in discipline is one explanation, and decision research points to another. More often the original investment thesis has become a reference point, and once a thesis is a reference point, each add-on can get priced as protection against losing it. Loss aversion, the tendency to weigh a loss more heavily than an equal gain, can do the rest.
Why the second deal is judged against the first
Prospect theory, the model Kahneman and Tversky (1979) built to describe how people decide under risk, predicts that choices depend on where the decision maker is standing. Gains and losses are measured from a reference point, not from zero. In a platform, the reference point is often the thesis. If the thesis said the platform would reach a certain scale through add-ons, each month without an add-on can read as a loss against plan, and people tend to take more risk to recover a loss than they would to secure a gain of the same size.
This can show up in three ways. The price ceiling can edge upward, because walking away can feel like setting aside the time and fees already invested. The integration assumptions can grow more optimistic as the diligence findings grow more mixed, because the alternative feels like conceding the target does not fit. The strategic rationale can expand to absorb a target that does not match the original criteria, because a broader rationale keeps the thesis alive.
Why a thesis becomes something to protect
Research on escalation of commitment, the pattern of investing further in a course of action that is falling short, adds a useful layer. Nite et al. (2019) proposed that the meaning an organization attaches to a course of action can drive these decisions as much as the psychology of the individuals involved. A platform thesis carries meaning for limited partners, lenders, and the sponsor’s own investment committee. The endowment effect completes the picture. People value what they already hold above what they would pay to acquire it (Kahneman et al., 1991), and a thesis, once announced, is held. Seen together, the two ideas may help explain why a thesis can come to feel less like an argument and more like something the team would be giving up.
What the bias looks like from inside the deal
Inside a live process, the bias does not feel like bias. It feels like conviction. The team has spent months on the sector, the lenders and the investment committee have heard the plan, and each new diligence finding arrives one at a time, small enough to absorb. A price that would have looked high at the outset looks reasonable against the effort of starting over. Every person involved is acting on real information and real commitment, the same conviction that made the platform worth buying, inside a process where the reference point moves with the deal.
The memo and the team
The investment memo records a thesis. The deal team carries the memory of what it cost to reach it, the months on the sector, the lenders and investment committee who heard the plan, and the diligence findings that arrived one at a time. When I read the memo and then hear a team describe a live add-on, the two accounts are often measuring the target against different things. The memo measures it against its own criteria. The team, without deciding to, measures it against the distance left to cover on the thesis.
That is a constructive thing to find, because a named reference point can be moved, and the conviction that moved it is the conviction that made the platform worth buying. Loss aversion shows up in experienced teams because it is part of how capable people weigh gains and losses. A platform that can see where its reference point sits is in a position to price the next deal on the target’s own merits.
No two organizations are in the same position, so there is no single answer to hand you here. If something above matched what you are seeing in a portfolio company or on its board, the useful next step is a short conversation about your situation instead of a general answer.
Request a 15 minute conversation, call 402-230-7473, or write to info@ibconsultingusa.com.
Mel K Meier, DBA is the founder of iB Consulting USA, a woman owned, WOSB certified advisory firm. She serves boards, associations, and executive teams through board advisory, organizational diagnostics, portfolio company diagnostics for private equity sponsors, speaking engagements, and governance assessments. She helps boards, associations, leadership teams, and private equity sponsors see how an organization is governed and how it performs, leading to areas of opportunity to improve performance, clarity for decision making, and support for strategic planning.
