More and more private equity firms are focusing, in addition to financial engineering, on explicitly enhancing their portfolio companies’ operating results in order to create value. They often do this through ‘add-on acquisitions’, in other words adding a series of companies to a larger growth platform. This is what researchers of the The Boston Consulting Group (BCG) stated in a recently published article entitled ‘How Private Equity Firms Fuel Next-Level Value Creation’.
The authors say that carrying out mergers and acquisitions (i.e. the buy and build strategy) is currently the approach equity firms use most often (91%) to increase the value of their portfolio companies. They build and strengthen their market position through the targeted acquisition of smaller companies. These buy-and-build deals prove to be an effective means of accelerating growth in revenue and margins. A well-conducted buy-and-build strategy can furthermore lead to improved market appreciation for companies, which in turn translates into better exit conditions.
BCG collaborated with HHL Leipzig Graduate School of Management to analyse 2,372 deals executed between 1998 and 2013. The aim was to gain insight into the growing importance of buy-and-build deals. The survey results reveal among other things that the share of deals with add-on acquisitions rose from 20% in 2000 to 53% in 2012. The average number of add-on acquisitions per deal increased from 1.3 in 2000 to 2.7 in 2012.
Conditions
Bart Coopmans, Investment Director at NPM Capital, also recognises this trend and sees that two-thirds of investment now goes to follow-up investments at portfolio companies. But he also points out the pitfalls: ‘Strong companies with a well-thought-out buy and building strategy are not a dime a dozen. A good business case is decisive for the success or failure of the strategy. What is appealing about putting the two intended companies together? It’s not just about growth, but above all about value creation. So our first question is what will it produce in terms of revenue synergy, cost benefits, innovations and economies of scale and how certain is it that these advantages can actually be realised? These aspects are vital in order to also be able to realise value creation.’
The full article is available on the BCG website.
