Roll-up acquisition PE questions
Quick questions regarding roll-up acquisition strategies in PE
Let’s say a sponsor acquires a new portfolio company and then uses that portfolio company to roll-up another business of a similar size.
How is that roll-up being financed on the equity side? Is the sponsor writing another check as if it’s just a separate lbo? Or do they try to use cash from the portfolio company to acquire the new business?
Also, do sponsors model out and consider the IRR of potential roll-ups on a stand-alone basis, or do they just build it into the platform companies’ model to see the affect it has on IRR?
To go back to your question about how roll-ups are financed, I wanted to give you a couple of real life examples of what I personally worked on:
1) Roll-up as a part of the original buy and build strategy: you agree an "acquisition facility" with the bank upfront as a part of the original deal. You pay a commitment fee on it, but don't draw on it until you identify suitable acquisitions. Once you want to pursue a roll-up acquisition, the bank will check that you are still ok on your covenants and that the acquisition makes sense (strategy, industry, size). Then you can draw on the acquisition facility and typically do not need to put any additional equity at all. Why? Because roll-ups are typically smaller, cheaper and command lower entry multiples.
2) Roll-up that looks more like a more substantial M&A (i.e. you buy a target of similar size): if you decide to pursue this, then you refinance the whole combined entity and put additional equity.