Buy and build remains a popular private equity strategy across Europe and last year the number of transactions reached an eight-year high.
During the financial crisis, when organic growth opportunities were more limited, private equity firms increasingly turned to buy and build as one strategy to enhance the value and performance of their portfolio companies. Now, we are seeing additional factors drive the number of transactions including an improved debt market, which is helping to provide the necessary capital to facilitate acquisitions, and increased corporate confidence, which is spurring boardrooms to consider more ambitious growth plans.
Before embarking on a buy and build exercise it is crucial to assess whether the company’s management team has the expertise and experience to implement such a strategy. Delivering organic growth requires very different skills to pursuing mergers and acquisitions, so if there is a doubt in this regard then recruiting senior managers with strong acquisition experience is advisable.
Below we identify three key approaches that often underpin buy and build strategies: enhancing product and service offerings, increasing supply chain performance and expanding into new markets.
Enhancing product and service offerings
Companies looking to stay at the forefront of their industry need to develop new product and service offerings and this is particularly true for businesses operating in rapidly changing sectors such as technology and retail. Acquiring a new company with both complementary and new generation offerings can help lessen R&D spending and allow businesses to move away from declining product markets and tap into new pockets of demand.
LDC recognised an opportunity for its portfolio company Driver Hire (now known as Specialist People Services), a provider of corporate client drivers for cars, vans and LGVs, to further expand operations and boost its existing offerings through the acquisition of Infra Safety Services Labour limited, a specialist provider of services to the rail industry. The transaction resulted in Driver Hire becoming the UK and Ireland’s largest specialist supplier of drivers and non-driving staff to the transport and logistics industry.
Increase supply chain performance
Acquiring another business in order to vertically integrate can help companies to increase efficiencies and gain greater control of operations and costs through bringing together different aspects of their supply chains. This strategy is particularly relevant for companies operating in sectors such as manufacturing and retail, where there are clearly defined operational channels that can be merged together to deliver stronger supply chain and overall performance.
Expanding into new markets
Buy and build can also facilitate geographic expansion, whether into new regional or overseas markets. Since LDC invested in Angel Springs, a national supplier of water dispensers in the UK, some four years ago and backed its buy and build strategy, the company has expanded into new regional markets with a total of nine acquisitions. As a result Angel Springs has enhanced its competitive position, with a 35% increase in turnover in the past three years, and LDC made a 3x money multiple when exiting last year.
In terms of international expansion, acquiring a local company with strong existing management teams in the target overseas market, rather than setting up a wholly owned subsidiary or operating through an international agent/distributor, can be very advantageous in terms of benefitting from the local company’s knowledge of the market. A good example from LDC’s portfolio company is A-Gas, a leading supplier of refrigerants. LDC backed the company’s buy and build strategy to accelerate its expansion abroad and since 2011, A-Gas has completed five acquisitions moving into both the US and Australian markets and as a result turnover has increase 47% in the last three years.
At LDC we have invested over £140m in our existing portfolio since 2011 and these success stories show the crucial role ‘buy and build’ strategies can play in driving growth and enhancing value.