PE players beat the buy-and-build curse

As mentioned by author Olivier Gottschalg throughout the study, many academic research papers published in the past 20 years have come to the conclusion that bolt-on acquisitions initiated by industrial acquirers have experienced failure rates of more than 50%.

To measure whether private equity players are able to buck the trend and conduct successful buy-and-build strategies, the study assembled a dataset comprising 2,000 realised European private equity deals spread over more than three decades, of which 504 transactions were clearly identified as build-ups. All the information regarding the performance of these investments was gathered directly from PPMs shared by European and US-based LPs.

The results are quite clear: out of the 504 buy-and-build private equity transactions, less than a quarter (22.6%) returned less than 1x in capital – a result deemed by the study's author to be much lower than that experienced by strategic buyers. Of these 22.6%, only 6.2% were complete write-offs.

PE players outperform corporates in buy-and-build success rate, says study

Pick your battles
French GP Industries & Finances reached a €60m first close for its third buy-and-build fund earlier this week. Managing director Pierre Mestchersky (pictured) is not surprised by the study's results. He notably points at the fact that fund managers tend to be less prone to the "conquering army" syndrome that can see corporates embarking on ill-conceived build-up plans. "Private equity players can be much more selective when choosing potential targets for a buy-and-build platform – notably based on the profile of the platform's management team – while industrial players can be tempted to buy assets simply to prevent their competitors from doing so," he says.

As the study itself points out, this cautious approach can also be attributed to the time constraints inherent in the private equity model: with less than 5-6 years to exit and generate value, as well as a need to identify a suitable exit route from the onset, fund managers might be more careful in the assessment of synergies when sizing up potential build-up opportunities.

Management teams – both existing and incoming – are also a crucial factor of a bolt-on acquisition's eventual success. There again, Mestchersky beieves the approach favoured by industrial players is not necessarily designed to foster cohesion: "The incentivisation system favoured by private equity players (that is, management packages) combined with their requirement of a clear exit time-frame does ensure a greater alignment of interest with the incoming managers in the medium-term."

Finally, Mestchersky notes that private equity backers and industrial acquirers tend to follow different integration strategies when consolidating companies. "We would argue that most of the value created in private equity buy-and-builds comes from the sharing of best practices in the enlarged group," he says. "Industrial M&A tends to result in either the acquirer's culture being uniformly imposed from the top down, or in each unit fighting for its corner and resisting synergies."

Acquired taste
With fresh evidence of private equity's ability to conduct successful build-up strategies – and given the strong demand for solid value creation currently expressed by LPs – launching a fund dedicated solely to buy-and-build sounds like a sound move.

But Mestchersky highlights that the specificities of buy-and-build are not necessarily suited to all managers. "Focusing exclusively on buy-and-build is by nature much harder to do in the mid-market – the opportunity to merge two businesses valued upwards of €250m doesn't present itself very often," he notes. "Aiming for a steady dealflow requires focusing on small businesses instead. Few private equity players are inclined to do this, judging that the time and effort versus reward ratio is not attractive enough."

He also warns that while overall failure rates are low – actually lower than regular private equity-backed LBOs on a deal-by-deal basis according to the HEC study – just one bad investment can spell trouble much more quickly for a GP. "The risk profile for buy-and-build-focused funds is very different to vanilla private equity. You might end up with only five or six platforms as opposed to 15 lines in your portfolio; if something goes wrong with one of the platforms, it is harder to compensate at fund level," says Mestchersky.

Meanwhile, careful managers are statistically more likely to end up with a home-run, according to the report: 34.5% of the build-up transactions studied returned between 2-3.5x against 32.2% for regular deals, and 16.9% returned between 3.5-5x as opposed to 13.3% for vanilla buyouts.

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