Panoramic provides a variety of transaction types for entrepreneurial businesses seeking funding. We invest in development capital, replacement capital and management buy in/buyouts, among others. Here we discuss ‘buy & build’ investment strategies, which have become increasingly ubiquitous in the private equity industry in recent years.
What is a buy & build?
Buy & build strategies in private equity are where a PE house invests in a well-positioned platform company and looks to add value to that company through carefully executed additional acquisitions, such that the final value is greater than that of the individual parts.
Rising popularity of buy & builds
While buy & builds have long existed in the private equity industry, they are currently as popular with investors as they have ever been. Data from S&P Global Market Intelligence shows that platform acquisitions in Europe have increased by a year-on-year average of over 10% since 2005.
In recent research, data provider Pitchbook revealed that now almost 30% of private equity-backed companies make at least one additional ‘bolt-on’ acquisition. The report goes on to indicate that private equity funds who were prominent users of buy & build strategies outperformed private equity performance benchmarks across all conventional performance measures.
Reasons for increased popularity in buy & build investments are varied. The private equity industry is currently sitting on an estimated $1.3 trillion of uninvested capital. As competition intensifies amongst private equity investors, investing capital in a prudent and pragmatic manner can become extremely challenging. Under pressure to deploy funds, investors are forced to look for alternative sources of value creation. Bolt-on acquisitions can offer an appropriate and effective investment for both an investor and a portfolio company.
What are the benefits?
There are a range of attractions to buy & builds. Larger companies typically trade at higher multiples on their revenue and earnings relative to smaller companies. The idea is therefore, that the combined final company can be sold on a high multiple of earnings at exit. This reduces the acquirer’s average acquisition cost while simultaneously increasing asset value through scale and scope.
While organic growth can take time to realise, buy & builds typically take less time to shape. Growth comes from a variety of avenues such as improved market share, increased product base and expansion across new geographies and sectors.
As with all mergers and acquisitions, there are the usual expected benefits of increased synergies, economies of scale and the elimination of inefficiencies.
What are the challenges?
A successful buy & build strategy requires careful understanding and execution. A fragmented sector with ample space is necessary, leaving plenty of room to expand into. This ensures that no single, dominant player exerts control over the market. Given that value creation stems from successive acquisitions, a rich supply of adequately-sized targets and a stable environment in which to pursue them is required.
The correct choice of platform company is key. The strategy rests on the assumption that the company will generate a steady and sufficient free cash flow to fuel future acquisitions. It must have a reliable and proven management team behind it who are capable of integrating additional companies in the future. Likewise, the appropriate foundations and infrastructure must be in place so that the company can be used as a building block in order to incorporate others. Finding all of these attributes in one go can be difficult.
What experience does Panoramic have?
To date, Panoramic has used buy & builds with success. In 2013, we backed the management of Specialist Tours, a niche multi-brand tour operator. Over the period of Panoramic’s involvement, the business successfully integrated three other niche travel businesses. Andante Travels, the UK market leader in archaeological travel, was acquired in 2013. Historical Trips, a business offering history-themed tours led by expert and celebrity historians, and New York-based company Archaeological Tours, were both integrated in 2014. This allowed Specialist Tours to more than double its revenue to £9m and it now provides a service to almost 5,000 holidaymakers a year, visiting more than 80 destinations. The group was subsequently sold to mid-market private equity firm Kings Park Capital, realising our investment and allowing the MD further financial firepower to continue expansion via acquisition.
More recently, in July 2019 we invested into Belfast-based managed services provider, CMI, in order to fund the acquisition of London-based BTA, another provider of IT-managed services. The rationale behind the acquisition of BTA includes the potential for increased scale which will enable them to tender for larger customers, expand their market share, and provide access to a strategic London location.
Finally, Midlands-based Precision Technologies, a manufacturer of specialist components, is currently pursuing bolt-on acquisitions in order to expand its presence in the market and foster further growth.