The Rise and Rise of PE investments in Buy and Build Platforms

In the right circumstance, selling a stake in a business to a private equity investor as a platform investment for a buy and build strategy can be extremely attractive for both business owners and management teams. This would typically allow the business owners to personally de-risk by making a partial realisation now, secure significant capital to go on an ambitious acquisition spree and then have a secondary and potentially larger realisation event when the enlarged group is ultimately sold. Since the wider management would likely participate in the rewards from this ultimate exit, it is also a powerful tool for attracting and retaining talented management teams.

Investing in buy and build opportunities has become increasingly prevalent for private equity investors. Even where businesses can trade at relatively high multiples, these opportunities allow private equity to compete successfully with trade bidders but without compromising their required return on capital by providing multiple arbitrage on the acquisitions bolted on to the platform investment. In simple terms, the larger businesses typically have higher valuation multiples. Therefore for example, buy a business at 8x EBITDA, make smaller acquisitions at 6x to 7x and integrate the businesses and sell the enlarged group for 9x. Synergies from bringing the businesses together will further enhance the return.

So what makes a good platform investment ? This really this falls into three broad areas, the people, the market and the business.

• People– ultimately it’s the management team that private equity is backing. The management team will need a track record to demonstrate that they have the skillset and ambition to execute the strategic plan. The business is about to commence a period of rapid growth and change and the whole management team would need to convey commitment to this process. Ideally the team has been established in their current roles for some time, have some acquisition and integration experience and there is a clear succession plan for the principal shareholder/directors;
• Market– typically a buy and build could involve putting 5-10 highly related businesses together to achieve the operational leverage of scale. Therefore, the ideal market will be fragmented with lots of small market participants but fast growing and with the absence of a dominant player. Recent examples of this include dental & veterinarian clinics, cyber security, contract electronic manufacturers and accountancy in the SME sector; and
• The Business– the platform investment will have a track record of successful and profitable growth (both organic and through acquisition) and strong cashflow to support future acquisitions. It should have strong infrastructure capable of scaling including management as discussed above as well as robust IT and financial systems and a strong and repeatable operational model with a key competitive advantage.

Securing private equity investment can be powerful but it will not be the right solution in all circumstances. It is just one of a number of funding options available whether the desire is to secure a partial realisation of a shareholding, funding for the business for growth or acquisitions or indeed a combination of all of these. If this is something that you would like to explore, we would be delighted to hear from you.

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Andrew Thomson

Partner