Roll Up Bubble
Can someone please add to my thesis that PE firms are far too over levered on shitty non-integrated M&A roll up plays and share possible scenarios for the long term burst of this bubble?
plenty of companies will go under, leading PE funds to have lackluster returns (way behind public markets the past 8 years). Given how leveraged PE is to the roll-up game this probably leads a contraction in size of PE industry in $ terms and probably leads to plenty of firms slowly bleeding to death. Have to remember most of the $5b+ funds mgmt companies are owned by 50-75 year old dudes who could quit tomorrow and be rich as shit. There in turn is no succession plan as the PE firm is dying leading a bunch of 35-50 year old's with nowhere to go. All in all the industry shrinks and is better off for it. PE needs to shrink in $ terms and # of people, its capital is purely a commodity right now (any $10mm+ EBITDA business has 20 bids no matter how shitty) anywhere outside of the small side of the LMM.
I’m curious about who the buyer is of these companies. These megafunds are going to have some tough questions I feel like
The larger roll ups are pitching ipos as the path to exit
How do these roll ups trade in the public markets? I'm only familiar with software rollups, and outside of the Constellations of the world (which is it's own unique thing), the ones that have gone public have generally done poorly (eg Upland).
I would think they keep on going with roll-ups
If anything, the demise of PE actually makes roll-ups more interesting. It’s really the standard issue musical chairs game of shuffling 500M-1B TEV “mission critical” businesses between UMM firms that’s at risk. Those multiples are simply too high in this environment so this will be held for too long.
Can you clarify what exactly the value is? Simply cost cutting and more pricing power?
costing power, rather
Economies of scale
And the value of its sum is greater than the parts, synergies all around
To me this just sounds like the industrial logic used 10 years ago (or whenever) when these roll ups began. I question the economic value created in these rolls ups, GP ability to sell off the assets (not in a continuation vehicle), and LP reaction to marked down prices/selling at a loss. The synergies, economic value, and whatever the fuck else were great when you were a new entrant in this market but there is purely too much competition and already so many companies who have pulled these levers. There are some still markets where roll ups work (though a dying breed), but I am bearish on them in 2025
I think what you are missing is these are highly fragmented localized industries.
You don’t have less roll-up synergy in East Kansas because other PE firms have colonized the other 49*4+3 direction-states.
The industrial logic is, forgive the cringe term, timeless
by saying “I question” LP reaction to selling at a loss you’re implying there’s a loss. I’d contest that. What’s an example of a roll up where they didn’t at least break even? These are really, really cheap EBITDA and there’s a platform premium.
Many if not most roll ups have not achieved any material synergies. More common are dis-synergies resulting from the terms of all those deals, the lack of integration between the different add ons, etc.
I would repent and recant my comment about there being no bankruptcy in this category, clad in sackcloth. But I think it’s still a good play with higher odds of survival than an over priced platform deal. If done right you reap benefits of arb. Of course there is execution risk and some industries worse than others for this play
I don’t know about a bubble, but the god damn HVAC stuff is a crowded trade.
I shouldn’t know as many people as I do with an HVAC asset, or in the process of looking for one.
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