I don't like roll ups / heavy M&A deals
Not sure if I am the minority in this forum by stating this, but I've never been a fan of roll up strategies. They can work really well in certain sectors, like dental clinics and car washes but I've often found there to be significant execution risk. Same goes for deals really heavy on M&A...just not my cup of tea.
Lately I am really into growth equity stage companies - just starting to generate EBITDA but revenue growing 50%+ YoY with no debt. Organic growth is the focus.
A very small minority of PE deals are ever purely organic. The math just doesn’t work to avoid inorganic growth altogether. The growth equity space is dominated by buy&build strategies or “roll ups”.
Not sure I agree with that. Look at a firm like Insight, TA Associates, or General Atlantic. They're not doing a ton of M&A.
TA does a boatload of add ons
TA has done several messy, slap-it-together roll-up’s.
This simply isn't the case. I see it about 20% of the time as the strategy, but it's certainly not "dominated" by these strategies.
The math doesn’t look good at SOFR + 700
That's actually cheap for this market. I am seeing lower mid market senior credit for m&a deals trade at A+13-14
In consumer, there are a lot of very bad LMM + MM size platforms floating around. IMO these will tank valuation wise as they can't get big enough to IPO, and aren't strategically interesting.
It’s all about multiple arbitrage and reducing your effective cost basis.
True but also a ton of execution risk if you don't know how to integrate businesses.
Does anyone know if any firms that focus more purely on organic growth? My sense is the earlier stage stuff / VC
Not much execution risk from integrating mom and pop shops.
Also ‘integration’ can be a very loose term. Many buy-and-build plays run with decentralised operating models which means very little work needs to be done to add new bolt-ons to a platform.
My dude, totally agreed, organic growth stories are the absolute tits. But let's be real, who among us doesn't get at least a solid half chub to the thought of rolling up half a dozen $3m-5m small cos on your $30m+ rev platform at 2-5x and selling the whole kit and caboodle at 7x-10x+? Organic growth is the true ruler of valuation no question (sans synergistic silliness) but M&A done right is so capital efficient it's frankly a disservice to your LPs (and yourself, just think about carry) if you don't keep yourself open to leveraging it wherever it makes strategic sense.
We've got a portco bought for <$50m, added another $20m-30m in add-ons + organic growth and now we're fielding inbounds in the half a B+ range 5-6 yrs from initial investment. Sure, organic growth for the original product would've been great and all, but adding several other offerings that had accelerated trajectories in their own segments and natural opportunities for cross-selling is what turned it into a home run. Sometimes it's truly just easier to let someone else do the work and buy it afterward.
No risk, no reward my guy. All about the type of risk you want to take. What is in your (or rather your fund's) DNA, and what type of risk can you create a value creation strategy around? If you want an organic growth story, you are taking on risk around sales execution, industry / macro, and purchase multiple. If you are taking on an M&A roll-up, you are taking on risk around acquisition integration, M&A actionability, and oftentimes management / people. The diligence and value creation playbook for each of these looks different, so in many cases the same investor or even firm does not excel at both of these. I spend a lot of time with roll-ups in the IT space, and we have developed a good playbook around integrating acquisitions, building platforms to plug in mom and pop acquisitions, and are willing to get our hands dirty on diligence for a smaller acquisition. It's a sustainable value creation strategy for us, and we are very comfortable with the risk profile that carries.
I think you are seriously underestimating the execution risk for high organic growth. Plenty can go wrong, and often does.
In LMM consumer, I always see piles of turds stapled together.
IMO, NOT a good sign in LMM if something is like 10 brands and only doing sub $150m - $200m in rev
So brave!! Sound like my IC man why don’t you go deploy some capital then STEVE
I'm working on a few buy and build type deals at my Software Growth Buyout shop. A lot of firms are following this buy-and-build model and have had great exits; but there's been some pretty significant concerns from more senior folks at my firm where there's belief that a lot of the software roll-ups are going to be discounted at exit.
These strategies revolve around multiple arb, but when the industry is more complicated than buying shitty car washes and "integrating" them is significantly more complicated, buyers will have some serious concerns. Two of our larger roll-up co's got heavily discounted by potential buyers last year, and sure maybe it was a bad market, but there's also a huge risk that buyers are wising up to multiple arb and will use bad integrations as a justification for lower multiples.
A lot of these roll-ups are not even one integrated business but a "brands" Parent Co (a la PSG's Ministry Brands) that is literally just 50 companies under one umbrella and aren't necessarily an integrated business.
I think a lot of PE firms are underrating the risk that buyers will not give the same 18-20x EBITDA multiple on software roll-ups in the next few years. If that happens, then the "turds mashed together" (as has been described to me) will end up trading at much lower valuations than what the firms are underwriting to. I personally think the roll-up model is a bit fucked if there isn't heavy emphasis on integrations and making sure there is industrial logic in the M&A that occurs.
Curious what others think as well!
In Europe the dentist roll-up has actually failed already. Too much key man risk with a market full of 1 or 2 owner-led dentists that don't like to work for a big corporate. If labor market is tight, you can't easily replace either and your stuck with many clients and 0 execution power.
In my opinion roll-ups work best with products (including software, all sorts of production companies, machine-based services, etc.) rather than people-based services (accountants, dentists, general practitioners, cool online marketing companies that cool people want to work for that don't like to work for a big corporate after the roll up).
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