James Oyuke, a student at Birmingham Business School undertaking an MBA of Global Banking and Finance, has recently investigated ‘buy-and-build’ strategies for his dissertation, with the sponsorship of Hazlewoods. This article takes a closer look at the results of his investigations, including strategies employed by investors (typically private equity firms) and the key characteristics for effective execution of those strategies.
WHAT IS ‘BUY-AND-BUILD’?
Buy-and-build is an inorganic growth strategy involving buying assets.
(companies) at low multiples and merging them onto a bigger platform that will be valued at a higher multiple at exit. A “platform” acquisition is initially sought, with smaller add-on acquisitions then made to complement and grow the portfolio.
This strategy has gained prominence in the lower mid-market, and is increasingly being pursued by private equity (PE) firms as the primary approach to generating investor returns. Whilst very much PE-driven (due to the level of capital available for fund managers to deploy), this strategy is also being implemented by corporate investors on an increasing scale.
HOW DOES THIS CREATE VALUE?
This strategy creates value for investors in three ways:
- capturing scale economies as the investments grow in size;
- multiple arbitrage – increasing the value of a company between buying and selling it; and
- debt tax shields that derive from the high leverage used in the deals.
Scale economies can be achieved through numerous synergistic benefits including:
- better utilisation of central and back office staff across an enlarged group (thus reducing the impact of fixed costs on total profits)
- creating opportunities to expand diverse care offerings into new regions (within a multi-disciplinary group); and
- increasing ’buying power’ to reduce costs with suppliers and providers across the group.
Multiple arbitrage is achieved by acquiring add-on businesses at relatively low multiples. The value of these businesses are effectively automatically enhanced by virtue of being part of a larger group which can achieve a higher multiple on exit, thus instantly creating value within that business.
WHY THE HEALTH ANDCARE MARKET?
There are several key industry characteristics that determine whether buy-and-build is an appropriate strategy to adopt. These include:
- a high level of fragmentation, allowing consolidation of numerous, smaller players into fewer, larger players who can attract higher valuations. Despite high volumes of consolidation over recent years, the health and care market remains highly fragmented and ripe for further consolidation;
- competition being mainly based on tenders;
- profitability which, although generally seeing a squeeze across the industry, still offers good returns for the right provision;
- ability to operate in multiple geographies;
- availability of the right platform company, the characteristics of which are discussed further below; and
- sufficient volume of add-on targets (which are generally abundant in quantity across the sector, although not always in quality).
WHAT MAKES A GOOD PLATFORM?
Some of the key characteristics required for a platform business to create value for investors include:
- an efficient and innovative business model with the right fundamental infrastructure to support add-on acquisitions;
- an experienced, capable and motivated management team;
- the right cultural fit with the investing PE firm (or other acquirer)
and an aligned philosophy to enable smooth integration at an operating level;
- demonstrable success and potential for future growth; and
- standardised operating procedures.
Secondary buyouts remain the most common form of exit following a successful buy-and-build. In such cases, a PE firm sells its interest in the investment to another PE firm which is then likely to continue to build the group further before, itself, exiting further down the line.
Trade sales are also common, although less so than secondary buyouts, since few trade buyers possess the capital required for investments of this scale.
Whilst IPOs can be used as an exit route for PE investors, this is much less frequent.
WHAT CAN WE OFFER?
Whether you are an investor looking to execute a buy-and-build strategy or a shareholder looking to sell, we have an experienced and dedicated team of Corporate Finance professionals offering expertise and many years of practical experience to help you succeed.
In the 12 months to 31 December 2018, we advised on 209 completed transactions valued at £851 million, compared with 159 completed deals valued at £843 million in 2017.We are delighted to be included as a finalist for Financial Advisor of the Year in the 2019 LaingBuisson awards.