The Power of Buy and Build
Buy and Build is an attractive and potentially lucrative private equity investment strategy that, when used effectively, can significantly increase investor returns. Tom Purkis, Investment Director at Maven Capital, discusses the key attributes that can make or break a Buy and Build plan.
Buy and Build typically involves acquiring an initial platform company with a well-developed infrastructure, stable underlying business and strong management team capable of running a much larger business. Through leveraging these existing capabilities additional companies are acquired in the same sector to deliver value accretion and gain a competitive edge. This strategy can be used to build scale in existing and new markets, expand product or service range and facilitate cross-selling or even help with rolling out a new technology. The core investment principle is that the whole (the group) is greater than the sum of its parts (the individual businesses on a standalone basis).
As the UK is essentially a mature economy, it is often difficult to grow businesses which are more traditional in nature, or which operate in a congested market-place. Although organic growth is always a core part of any strategy to improve shareholder value, making judicious acquisitions at the same time can help generate accretive value in a business and improve investors returns at exit.
Maven’s positioning as a lower-mid market investor means that potential portfolio businesses are often operating in fragmented markets where there are typically no dominant players. These markets present ideal conditions for consolidation within a wider industry. The businesses being acquired are often subscale and may not have had sufficient investment in technology and operations to compete and maintain a competitive advantage. As a result, owners frequently choose to sell to an acquirer which can take the business to the next level. Smaller companies can often be acquired at attractive multiples compared to the higher expected exit multiple of the enlarged group, which often provides a compelling ‘arbitrage’ opportunity.
Completing an acquisition is the relatively easy part. The real challenge and skill in a successful Buy and Build is to integrate the acquisition, including key people, without adversely impacting existing operations. At Maven we have a rigorous and disciplined approach to any acquisition, supported by input from the members of our Investment Committee. Whilst it’s often easy to identify the financial arguments for an acquisition, it’s crucial that the management team can set out clearly at the outset of the acquisition process what they are trying to achieve operationally, whether this is an improved skill base in the workforce, a wider product range, better client service or enhanced technical capability.
The role played by the management of the initial platform businesses is key. They must be a highly skilled team who are fully committed to the strategy and have sufficient bandwidth to complete appropriate due diligence, manage the subsequent integration and focus on delivering the full value potential for the enlarged business. At Maven we actively support management teams throughout this process by dedicating resource in the form of an Investment and Portfolio professional. This is especially relevant where management may not have previous M&A experience or are constrained by resources due to the focus on the development of the core business.
At the outset of our investment in Indigo (Maven led the MBO of Indigo Telecom in 2016 and supported the business with the strategic acquisition of Belcom247 in 2017), the Belcom acquisition was already identified as a strategic target that could transform the group. Belcom offered instant access to Asia Pacific and US markets, as well as expansion and diversification into the data room services market, adding customers such as Facebook and Google. It was important for us to meet the Belcom owners early in the investment process and support the management of Indigo in a very thorough due diligence and legal process. Following the acquisition an appropriate earn-out agreement ensured that all of our interests were fully aligned and that the vendors of Belcom were equally incentivised to continue to grow the enlarged business.
There are many potential challenges in any Buy and Build strategy and minimising the impact of such risks is the key role for any management team or private equity investor. These range from the distraction of management from the core platform business, to technical, operational and commercial issues. Cultural integration is often the most challenging aspect for the acquirer in successful corporate consolidations. The more aligned the cultures of both businesses, the higher the probability of success. For integration to succeed post acquisition it is important for the executive management to hold open and transparent meetings to present the vision and opportunities that consolidation will bring to the key teams within the target business. The full integration plan should be documented and measured with a specific set of KPIs and performance milestones post deal. It is important to ensure that the acquired business is properly monitored and that its specific business focus is not lost in the wider group.