In this company article, David Burnie shares six characteristics of a successful buy-and-build strategy for private equity funds.
Many private equity funds follow a buy-and-build roll-up strategy where they invest in one well-established portfolio company as the platform to add on additional, typically smaller, companies to grow revenue and improve EBITDA through economies of scale. In fact, over 70% of PE deals in recent years were add-on acquisitions in the US and UK, according to PitchBook.
In addition to economies of scale, multiple arbitrage is a key value-add from a buy-and-build strategy. Larger companies are typically traded at a higher multiple valuation than smaller companies. By buying smaller companies at a lower valuation and rolling them up into the platform company, the portfolio asset grows, and the overall asset increases in value through higher multiple valuation when selling it. This strategy is particularly attractive in down markets when traditional value drivers, such as GDP growth or falling interest rates, can drive returns.
Private equity firm – four people working togetherCritical success factors for the buy-and-build approach include:
An industry that is fragmented and has many homogeneous players.
The platform company has a repeatable, efficient, and effective operating model across technology, processes, people, and governance.
A repeatable integration approach to ensure each add-on acquisition adds significant value.
Through our work with private equity funds and their portfolio companies, we have identified six enablers that increase the likelihood of successfully scaling a buy-and-build strategy.
Choose the right industry
The buy-and-build approach is typically more successful in a fragmented industry with many available targets and room for growth. The industry players should be homogenous in their operations, business model, and structure, such as offering the same products and services. The add-on target companies should be close to the core of the platform company, such as having similar channels, customers, capabilities, cost structures, and competitors.
Potential acquisition targets should be incentivized to participate in a platform organization. One main incentive is to centralize administrative functions and benefit from synergies when merging into one larger entity, such as when several branches or regions share one central administration, marketing, and sales unit so that they can focus their efforts on core value-added activities like increasing throughput.
Key points include:
- Efficient and effective processes
- Well-defined governance structure
- A robust and repeatable integration approach
Read the full article, 6 Characteristics of a Successful Buy-and-Build Strategy for Private Equity Funds, on BurnieGroup.com.