August Equity has built a reputation for successfully executing buy and build strategies. Our portfolio has completed more than 350 bolt-on acquisitions across healthcare, education and technology services to create some of the leading businesses in their respective sectors.
How does a buy and build strategy work?
Private equity (PE) firms in the lower mid-market have historically used a strategy known as “buy and build” to create businesses that are attractive to both trade buyers and larger PE funds.
A number of funds, including August Equity, have become renowned for their ability to execute this strategy, backing ambitious management teams with an investment into a suitable platform. The fundamental thesis of the play is that smaller companies can be bought at a certain multiple and that the combined organisation attracts a higher multiple at exit because of the scale achieved, with the hard yards being covered by the earlier sponsor.
The larger organisation then has the financial and management resources for investment in further growth capital expenditure, technology, facilities and marketing to increase organic growth and enable larger acquisitions.
M&A isn’t always buy and build!
Many PE portfolio companies will use mergers and acquisitions (M&A) for growth, taking on new geographies or complementary service lines. However, buy and build is a distinct strategy that uses a platform investment as the base for a management team to identify and acquire companies that generally perform the same function. It’s a moot point as to when one blends into the other, but it’s worth thinking of buy and build as a state of mind with organisational structure and financing designed at the outset to properly address the specific needs of this strategy.
At August Equity, we have successfully worked with great management teams and delivered this strategy across numerous healthcare sectors including dentistry, fostering, elderly homecare, complex care, and veterinary services, as well as in other sectors, such as funerals, tech services, and private schools. We have therefore got a reasonable institutional view of what the characteristics of a successful strategy are and the dynamics of the sectors in which it will work.
Drivers of consolidation
First, there has to be a driver for a sector to consolidate. This may be down to demographic forces such as retiring baby boomers or sector feminisation, both of which have played a significant role in the consolidation of both veterinary and dental services. In healthcare, consolidation is also a function of an increased regulatory burden as the Government makes efforts to improve quality via bodies such as the Care Quality Commission (CQC).
Regulation is a welcome and necessary feature of healthcare and education, but it increases cost and bureaucracy, which has a disproportionate impact upon smaller providers. This regulatory pressure encourages providers to either increase their quality or exit. Smaller entrepreneurial ventures often decide to cash in on their hard work with a consolidator the obvious exit point.
Multiple arbitrage
Smaller businesses as described above can be acquired at attractive multiples, which is important for the multiple arbitrage. Of course, if it’s a sector where big simply means bigger and not more attractive (which can happen for a number of reasons) then multiple arbitrage won’t necessarily follow, so it’s vital at the outset of any investment to identify the buyer universe and their appetite to themselves acquire. August Equity has experience of creating businesses that attract competitive interest from both trade and PE buyers, and this is one of the key elements of the investment thesis that we debate at the outset of any sector investigation.
The platform
A buy and build strategy usually starts with an investment into a platform company. This is a company that’s of sufficient scale to support the infrastructure of a capable management team. Often, but not always, it’s the ambition and vision of the platform management team that has brought the wider opportunity to market. Sometimes the management team works directly with the PE firm to identify and acquire a platform.
The wish to consolidate a sector can be thwarted if the sector itself doesn’t have a platform of sufficient scale or availability. My colleagues at August Equity have been remarkably and repeatedly creative in creating our own platforms in sectors that we see as attractive, but where we can’t see an “in”. This may be because the sector hasn’t yet seen the potential itself and we are market-making, basing our thesis on what has happened in other geographies or adjacent markets (we call this “looking round corners”), or we just can’t find the right asset to back. For portfolio companies such as IVC, Vet Partners and The Dermatology Partnership, we started at the outset by simultaneously acquiring three businesses that were on their own sub-scale for a platform, backing management teams to create exciting new growth opportunities.
Before securing a platform, we assess whether the sector will have an adequate pipeline of potential acquisition assets that are the right size. We initially look for Goldilocks acquisitions: not too big and not too small.
Once scale is achieved, the team has the capacity and cash flow to start looking at larger acquisitions and sometimes the M&A machine that they build also allows for multiple small bolt-ons – transactions that might just have disproportionately absorbed management time at the outset. August Equity’s in-house origination team map sectors thoroughly as we develop our investment thesis, and we will have a healthy pipeline of bolt-ons already lined up at the start of any buy and build investment.
In a coming article, I will review how the management and August Equity investment teams work together to successfully execute the strategy once a sector has been identified and a platform has been secured. With buy and build, execution is everything.
At August Equity, we have grown seven companies from platforms with £1-2m EBITDA into companies with an Enterprise Value of more than £100m across a number of sectors. In doing this, we have built a significant institutional understanding of what succeeds and where the stress points can arise.
We see buy and build as a continued strategy for future funds and are always looking for the opportunities to partner with great management teams and put our experience to work.
