Corporate Finance - Patrick Groarke.
Good, competent management teams have become so scarce that once a private equity house has found one, it is keen to continue to back the team repeatedly.
This attitude has led to the increasing importance of ‘buy and build’ strategies within the private equity community.
Venture capitalists back managers not businesses, and it has become abundantly clear that it is easier, quicker, and often more rewarding to put further money behind a team that has already demonstrated its ability to drive a business forward than hunt for unproven teams.
Hand in hand with a greater appetite for buy and builds is a waning level of interest at the lower end of the mid-market, with venture capitalists preferring deals of over #50m to those in the #5m environs.
It is easy to see why a small deal takes as much time and effort to put together as a large one, but it may not have such attractive returns. Many venture capitalists would prefer to back an existing buy and build vehicle making a #5m ‘bolt-on’ acquisition.
A ‘buy and build’ team must be able to satisfy the minimum investment criteria adopted by private equity houses. It must demonstrate the initial acquisition target will have sufficient organic growth prospects to deliver attractive returns without the acquisition of another company.
Venture capitalists, being pessimists at heart, never assume they will be successful in completing further deals.
And they rightly believe it is impossible to achieve a buy and build based on cobbling together of a few indifferent businesses at the outset.
The foundations must be of rock – not sand.
To offer an attractive opportunity a buy and build team should identify niche sectors within fragmented markets where there is an availability of targets: ideally there should be at least 30 easily identifiable potential acquisition targets, all of which will complement the initial acquisition.
The food industry is a fine example of this.
We are constantly researching the market for additional opportunities as it is essential to be in conversations with as many as ten potential targets at any one time to guarantee the success of the buy and build, so great is the fall out rate on acquisitions.
– Patrick Groarke is a director of Livingstone Guarantee.