Private Equity Roll Up Strategy
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- čas přidán 5. 07. 2024
- A private equity roll-up is the process of acquiring and merging multiple smaller businesses in the same industry into one larger consolidated company. This strategy is attractive because the market generally rewards scale with a higher valuation. More specifically, the market is generally willing to pay a higher multiple of EBITDA to acquire a larger business. This means that the sponsor (i.e., private equity firm or independent sponsor) behind the roll-up is likely to benefit from multiple arbitrage at exit.
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To initiate a roll-up strategy, many sponsors will first identify an ideal “platform” company with an excellent management team. This platform is generally purchased at a higher multiple of EBITDA than the smaller businesses that follow. But once an add-on acquisition has been successfully integrated, the combined platform’s earnings are valued at the higher multiple (multiple arbitrage). If that sounds a little abstract, the example that follows should provide clarity.
In this video, we are going to explore how this process works by looking at four acquisitions, including a platform and three add-on acquisitions. Most roll-ups take time. A private equity firm will identify an attractive platform and then source add-on acquisition targets to create scale over the course of the hold period.
To emphasize the value creation realized with multiple arbitrage, we are going to assume that all four transactions take place in chronological order on a single day. This allows us to eliminate variables like interest expense and debt amortization, which makes it easier to focus on the benefits of multiple expansion.
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Always quality and on point. Thanks Peter
I missed this one. Good video as usual.
Very simply explained , thank you!
Thank you!
If I am buying a base company and rolling up additional companies, can I do this all at once or is it better to do one at a time? And for the base company can you only put 20% down to start and have the rest as a balloon loan?
Thank you for the help!!
@ASimpleModel great video! Love to get your thoughts on whether a roll up can be done without a platform company. For example, simply combining smaller same size companies into a larger one and managing the operation with your own management team. Thanks!
It can of course, but isn't it smarter to have it all operate under a Holdings Company? This way you can sell the Holdings Company, or take it into the public sector where people can buy your now highly inflated shares in the Holdings Company
Good. Thank you
Thanks for watching!
What if one were to acquire 3 or 4 businesses in the same space and maintain them as separate entities - good at buying, not so good and ops integration. Will smaller PE firms still pay the premium, albeit lower, to acquire the package of businesses? Or does this only make sense if they are formally integrated, and if so, how far does this need to go.
I recently heard of an operator that got four businesses to agree to sell to private equity before finding the PE firm to transact with. This is a huge win for a PE firm interested in a roll-up because so much of the work has been done for them. It also gave the operator some negotiating leverage on terms, and I think they managed to secure pretty attractive valuations for each of the four businesses. But the businesses were still valued individually (vs a multiple applied to aggregate EBITDA). So while it might give you some advantage, it's certainly not the same thing. Hope that helps!
I don't see how you can only do this with debt?
What are some industries that you think offer a compelling roll up strategy opportunity in today’s market?
Depends on the platform company and their managements expertise. Additionally where you are in the world. Warehousing, Hospitals, Insurance, Rental property (apartment buildings) etc. Even salons can be rolled up.
Basically if cashflow covers debt service with DCR Debt Coverage Ratio of 2+
Generally speaking, your accountants should know.
I know in the UK, mobile home parks are a good one.
In South Africa, agro processing and dairy farming are a good ones.
If you're in a place where coffee shops are popular then they are a good one because operational costs ain't shit compared to restaurants
In the past, washing machines and movie rentals were good.
Oh yea optometrists and dentists are also good.
Again all depends where you are in the world, talk to your advisors, they'll know
great question. roll ups became so attractive as multiples expanded over the last decade ( www.asimplemodel.com/bips/bip-feed/pe-multiples-to-the-moon ), but i'm curious to see what happens in a rising-rate environment. to your point, being early to a new space has advantages (Vista early on software, Capital Spring on franchises, Leonard Green on car washes and Arctos on sports franchises), im equally curious to see what space will be new to the roll up strategy. RIAs are a recent example (www.barrons.com/advisor/articles/echelon-ria-consolidators-private-equity-merger-51633980177). Interest in HVAC business sparked a "do-it-for-me industry" focus on all home services. Success in the QSR space has sparked interest in franchises more broadly (ie outside of food) - for example, recently talked to a group interested in rolling up remediation franchises like ServPro. there's a lot out there!
@asimplemodel “Peter” can you work on a video discussion PE funds for GreenField projects/deals
That's a great topic. I've been seeing a lot more of this. Recently spoke to a family office that was backing operators with experience building car washes for example (motivated by PE's interest and rising multiples: www.wsj.com/articles/private-equity-wants-to-wash-your-car-11660968031 ) If I come across a few more examples Ill get a post up :)
@@ASimpleModel yeah, I’m sure we are about to see a tsunami of these deals in the Energy sector due to the Energy Transition on Power Generation