(Charlotte, NC – June 26, 2018)
In this six-part newsletter series, we highlight key practices that private equity investors put in place during the M&A process and address ways in which strategic buyers can borrow and/or adapt these practices to create value through acquisitions. This week we will look at the fifth key practice: portfolio building.
Many private equity firms today use aggressive portfolio building or “buy and build” strategies to speed up growth and speed up exits. Buy and build refers to the buying of a scalable platform company with a well-developed management team and infrastructure, and then using those capabilities to acquire one or more add on companies to build out and grow the platform. Revenues can often be driven higher by making acquisitions versus organic growth; thus, PE firms often look to this strategy for rapid growth. (1)
Because the ownership window for value creation for PE is short, the platform building strategy begins during diligence. Areas considered include market dynamics, depth of existing acquisition pipeline, opportunities for synergies and market expansion, and strength and experience of management. Oftentimes, PE will already have a pipeline of potential add-on targets identified before completing the initial platform acquisition. PE will also apply their disciplined approach to diligence and integration to achieve the value benefit from add-on acquisitions as soon as possible.
With portfolio building, PE is acting like a corporate buyer, seeking to realize operating synergies and cut overlapping costs from an add-on acquisition(s), albeit usually on a shorter timeframe. But, unlike some corporate buyers, PE firms have built a repeatable model for success. Corporates should act like PE firms and take a disciplined approach to developing and pursuing add-on targets to build stronger and more valuable operating segments. Likewise, if pursing a transformational acquisition, corporate buyers should also consider a portfolio building strategy to drive further growth, identifying add-on targets as soon as possible.
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