An exploration of buy and builds
Buy-and-builds have always been popular private equity strategies. Done well, they provide a shortcut to growth and increasing value on exit. But there will be new reasons for turning to buy-and-build platforms as businesses get through the COVID-19 crisis, reports Marc Mullen
Buy-and-build strategies have been around as long as PE has been around, but the dynamics of many sectors and high valuation multiples have seen the number of build strategies increase in recent years. PE portfolio platforms look to acquire new products, new technologies, new markets and new skills, and look for ‘synergistic’ cost reductions – which may, in some cases, include reducing the overall number of people employed. Revenue growth can be achieved faster than by organic growth alone.
“The ultimate aim is to buy a business that meets a key strategic need, and that could be a need for new products, customers, new markets, technology or getting the benefit of scale. When you make such bolt-on acquisitions, the platform business becomes more attractive and more resilient, and therefore could command a high valuation compared to some of the smaller bolt-on acquisitions,” says Naveen Sharma, UK head of private equity at KPMG. “But bolt-on acquisitions should always be made with a focus on the strategic need of the business.”
Good money after good
According to KPMG’s UK Mid-market PE review (published in January 2020), bolt-on acquisitions made up 56% of all UK mid-market deals in 2019 – an ‘efficient and low-risk’ strategy for PE houses.
David Collins, head of UK corporate and co-chair of the global M&A group at Dentons, says: “There will be more acquisition opportunities for buy-and-build PE-backed businesses as we get through and emerge from the crisis. But the availability and quality of those opportunities, and the ability to exploit them, will depend on a whole host of factors and considerations.”
Potential changes in the capital gains tax regimes of different countries, including the UK, or changes to personal circumstances around work-life balance highlighted by lockdown are both expected to bring businesses to market that will be (relatively) stress-free opportunities for buy-and-build platform businesses.
Paul Joyce, head of Mazars’ M&A team in London, says: “If you’re a PE investor, it’s much lower risk to invest and follow your money investing further in businesses with management teams you’ve already backed.” Indeed, PE investors may be a bit more cautious about creating new platforms for the time being and put their focus on building existing portfolio businesses.
Robert Moran, who leads restructuring M&A at PwC in the UK, sees carve-outs also providing deal flow for buy-and-build platforms. “The business might have been marginal for some period, it might not be financially stressed, but it might be seen as something that’s not core, and the parent is having to focus on its core business,” he explains. “PE may see an operational improvement story under independent ownership and tighter cost control by using their buy-and-build platform.”
About the article
This is extracted from the Corporate Financier November 2020 edition. Read the full article, exclusively for Corporate Finance Faculty & Faculties Online members. You can access our award winning magazine in its originally designed form, and our extensive archive brought to you by the ICAEW Corporate Finance Faculty.