- Buy and build strategies remain in favor
- GPs lining up multiple add-ons
- Lack of quality platforms seen in 2017
With lofty purchase-price multiples persisting for the foreseeable future, GPs continue to pivot toward less-expensive add-ons as an alternative. Smaller companies not only cost less due to their relatively smaller revenue streams, they tend to trade at lower multiples than quality platform companies.
That’s one reason buy-and-build strategies remain in favor. Adding up lower-cost small pieces allows GPs to avoid paying premium prices for larger companies. The practice requires skill, however, in finding synergies and stitching companies together.
Specialists in this camp include Audax. Instead of a dozen or fewer platform deals in a fund, the Boston firm often holds more than 25 platforms and as many as 270 add-ons in a single fund. Riverside Co is also prolific, with lots of deals in a given year. For 2017, the firm set a goal of as many as 65 deals including acquisitions and exits.
Another tried-and-true method to finding bargains involves roll-up strategies. Devotees see this approach as a cost-effective way to grow a platform at more comfortable price points.
Prolific deal-makers here include Hub International. The rollup specialist controlled by Hellman & Friedman operates a network of 400 brokerages across North America. Confie Seguros, the rollup of insurance brokers in Hispanic markets, continues to acquire more mom-and-pop businesses with backing from Abry Partners. At last check, Confie Seguros had raised $900 million for its expansion. It counts 100 acquisitions under its belt.
Another price-saving strategy now gaining traction among GPs: planning multiple add-ons before a platform deal closes.
GPs find themselves pressuring sellers or intermediaries or doing the work themselves to identify follow-on transactions to buy down purchase-price multiples. It’s becoming well understood: If an intermediary, like an investment banker, is trying to get value out of a deal, part of his or her work is to identify follow-ons.
Nowadays, it’s not unusual for GPs to line up three or four similar assets and close them simultaneously.
Whether deploying these or other strategies, lofty deal prices continue to force GPs to work harder than ever to find deals.
Angeles Equity Partners typically writes equity checks up to $50 million. It will consider smaller amounts if it sees an opportunity to deploy more capital in the form of follow-on transactions, said Tim Meyer, co-founder and managing partner.
If it’s a buy-and-build strategy, the firm will consider making a smaller equity commitment for the platform acquisition on the expectation that more capital commitments will be required.
Meyer told Buyouts last year that the firm paid single-digit purchase-price multiples for ERP Power and Applied Acoustics, its two platforms. As a specialist in complex industrial transactions, Angeles Equity has managed to avoid double-digit purchase multiples.
But overall, middle-market PE firms continue to face the prospect of paying more than 10x EBITDA.
“This environment has forced us to think more creatively about our sourcing,” Meyer said. “We’re constantly evolving our sourcing capabilities to find unique transactions.”
If a platform buy is a decent-size transaction, chances are good that any dealmaker would pay a decent multiple for it.
“There’s certainly the expectation that you’ll pay a premium for a good-sized asset in this market environment,” Meyer said. “There tends to be a discount for smaller tuck-in assets. That’s well understood.”
Deal-makers seeing fewer quality M&A prospects
As for the overall M&A market, participants expect to see corporations continue to review asset sales for possible carve-outs. Other deals may come from patient owners who have not divested in this time of lofty valuations.
While the pipeline for prospective deals appears consistent with 2016, GPs have been seeing fewer gems. There’s quantity but the quality is not what some GPs hoped to find recently.
As the first quarter of 2017 comes to a close, macroeconomic factors will continue to shape the deal landscape.
The U.S. recovery cycle is moving past the five-to-seven-year mark. Some see more runway ahead. But it depends on whom you talk to.
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