Dry Powder: The Private Equity Podcast
My colleague Tim O’Connor can’t recall the last time buy-and-build deals were quite so popular. Since 2005, buy-and-build has represented less than 30% of all deals. But, he told me in the most recent episode of Dry Powder, that’s now changed. “Today it's over half of all deals.”
Mind you, Tim has been consulting in this area for more than two decades, so this really is anomalous.
It's also logical. The PE industry as a whole is searching for relief from high multiples. Buy-and-build can gradually drive multiples down, if everything goes according to plan. But the entry price to play this game of multiple arbitrage can be steep, and the payoff highly uncertain.
We've found that some investors enjoy robust and consistent returns from buy-and-build deals, but others have the opposite experience. We've seen capital impairment situations, which tells me that there's a right way to execute a buy-and-build strategy and a wrong way.
So what's the right way?
First, you need to believe that you can buy a platform company, as well as smaller competitors that can be added onto it at lower multiples. You also need to believe that there are synergistic reasons for these pieces to fit together to form one business.
Above all, you need to pressure test each of those beliefs, before you strike your first deal, because a strategy this complex can go to pieces fast. “If you're going to execute a buy-and-build strategy, it needs to be stable,” Tim says.
In this episode, Tim and I discuss the precise conditions that can make or break your deal.