![]() Buy-and-build depends in part on creating scale advantages. Supplier or customer consolidation can also upset the best-laid plans. Buy-and-build was a brilliant strategy in the magazine business until the Internet plundered print advertising and completely changed the industry’s economics. The potential for large-scale technological disruption is another factor. In an industry like oil and gas, for instance, ping-ponging demand can wreak havoc on free cash flow, crimping a platform’s ability to do deals. Sector issues can disrupt cash flow in a number of ways-cyclicality being the most obvious. Importantly, the platform company usually makes the add-on acquisitions-not the PE fund-so it’s critical that the company generates consistent free cash flow to finance deals in succession. Value creation depends on a steady cadence of acquisitions, which means a sector has to provide an ample supply of targets and a stable environment in which to pursue them. Sector dynamics can have a huge impact on the success or failure of a given buy-and-build strategy. The most effective buy-and-build strategies share several important characteristics. ![]() Every deal is different, of course, but there are patterns to success. ![]() We’ve seen buy-and-build strategies offer firms a number of compelling paths to value creation, but we’ve also seen these approaches badly underperform other strategies. Having coinvested in or advised on hundreds of buy-and-build deals over the past 20 years, we’ve learned that sponsors tend to underestimate what it takes to win. That number is closer to 30% in recent years, and in 10% of the cases, the add-on was at least the 10th sequential acquisition (see Figure 2.1). In 2003, just 21% of all add-on deals represented at least the fourth acquisition by a single platform company. But you can get a sense of its growth by looking at add-on transactions. Measuring this activity with the data available isn’t easy. We define buy-and-build as an explicit strategy for building value by using a well-positioned platform company to make at least four sequential add-on acquisitions of smaller companies. We also aren’t referring to onetime mergers meant to build scale or scope in a single stroke. When we talk about buy-and-build, we don’t mean portfolio companies that pick up one or two acquisitions over the course of a holding period. As the strategy becomes more and more popular, however, GPs are discovering that doing it well is not as easy as it looks. Buying a strong platform company like Berlin Packaging and building value rapidly through well-executed add-ons can generate impressive returns. The reason is simple: Buy-and-build can offer a clear path to value at a time when deal multiples are at record levels and GPs are under heavy pressure to find strategies that don’t rely on traditional tailwinds like falling interest rates and stable GDP growth. While buy-and-build strategies like this one have been around as long as private equity has, they’ve never been as popular as they are right now. The objective: more acquisitions in North America and Europe. In November 2018, they attracted $500 million in new capital from the Canada Pension Plan Investment Board. Since then, Oak Hill and Andrew Berlin, the company’s well-regarded CEO, have doubled down on the buy-and-build strategy with four more major acquisitions and a scattering of smaller ones. Yet seven years and four strategic acquisitions later, Investcorp sold out to Oak Hill Capital Partners for $1.43 billion, creating a better than three times return. When Investcorp acquired Chicago’s Berlin Packaging for around $410 million in 2007, it was already a strong player in the container business. Explore the contents of the report here or download the PDF to read the full report. This section looks at how a growing number of GPs are facing down rising deal multiples by using buy-and-build strategies as a form of multiple arbitrage. ![]() This article is part of Bain’s 2019 Global Private Equity Report.
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