Is Add-On Velocity Structurally Increasing?
Has add-on velocity structurally increased across the PE-world versus 5 or 15 years ago? Are you finding that small, crappy businesses are able to get multiple bidders at stupid multiples?
It seems like a lot of firms have pivoted to "we do buy and builds" because there is very little alpha to find elsewhere in the market. This is further exacerbated by the proliferation of fundless sponsors competing on small, shitty businesses, PE funds using buyside calling groups at scale, and lenders automatically giving out DDTLs. I'm convinced this is the case but wondering if others agree.
Does anyone have good data on this phenomenon?
Commenting to avoid bot.
Don't have actual data but definitely feel like this is the case as well. A lot of LMM PE firms seem to focus on buy and builds. I see a lot of corp dev opportunities for PE-backed roll-ups
Absolutely. Was growing in certain pockets before, but since rates increased I would argue it's the primary strategy you see in the MM now. Pretty difficult to pencil a >2.5x w/o M&A these days.
Anecdotally, we have a roofing roll-up and pretty much every business owner we talk to says we're the 10th PE-firm thats called them (even at sub-$1M EBITDA). They all want a platform multiple too lol
Theoretically yes but as noted above everyone is looking at the same add ons with the same business brokers and the multiple arbitrage is significantly compressed vs. 5-10 years ago. There are a handful of firms that are focusing on high velocity micro cap roll-ups (add ons $1mm EBITDA) but this has its own set of challenges.
How do you even get to 2x without “acquiring 5m every other year” or whatever lmao
Is pendulum going to swing back to just buying scaled, strong businesses with organic growth prospects and operational value creation opportunities? To me it feels like those cleaner strategies are almost undervalued on a relative basis. Could argue it's actually lower execution risk.
If I brought forward this idea to my IC I would be treated like a heretic BTW... so much group think nowadays...
Seems to me there has rarely been a better time to build, rather than buy, particularly with the goal of ultimately selling to one of the existing platform consolidators.
Round up a modest amount of capital and build a $1-2mm EBITDA business in a highly targeted industry that is seeing meaningful consolidation activity. It's possible that certain businesses (e.g., residential roofing) could scale relatively quickly, say over a 3-5 year period.
Small check size, but the return profile could be compelling.
Yes. The problem is that building one of these businesses is significantly harder, requires different skills than PE, and is relatively high risk. It’s also a very different looking day to day life which may be tough to stomach socially.
The people that are well positioned for this are technicians who understand the intricacies of the service and what it takes to operate. If you can find a good technician that you fully trust (challenging) and bring capital and business development skills, than this is possible and potentially very attractive.
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