Why is budy and build attractive?

analyst third year

zgzg914:

You’re going to get skewered for saying “budy,” but getting past that, the general rationale and underlying benefits look something like:

 

Financial engineering: Buying smaller companies is often cheaper; rolling them into a scaled platform can enable multiple arbitrage.

 

Scale benefits (when real): Depending on the business, scale can drive cost synergies—both COGS (e.g., better negotiating power) and SG&A (e.g., you only need one CEO)—and sometimes revenue synergies (e.g., serving customers with more capabilities, geographies, etc.).

 

“Institutional” synergies: For example, reducing customer concentration, getting to a size where you can access the syndicated loan market, becoming more attractive to larger strategics, and accessing better recruiting pools.

 

All that said, as we’ve seen in recent years, a lot of buy-and-builds have not worked out. Many strategies are undifferentiated: you have dozens of sponsors running the same playbook in the same sectors (HVAC, traffic management, etc.). There’s obviously early-mover advantage (e.g., Investcorp with Wrench Group, ORIX with RoadSafe), but being early is also riskier because the industry hasn’t proven the model out yet. As more sponsors run the same playbook, targets become scarcer and more expensive. Organic growth isn’t getting any faster—the industry is the industry—but now you have a bunch of sponsors who paid teen multiples for labor-intensive, undifferentiated businesses, and in this new world might get a 2–3 turn lower exit multiple on a good day.

 

Add to that: much of the cost and revenue synergy rationale above doesn’t consistently materialize. Many industries simply aren’t built to benefit from scale. Take paving, for example: it’s early days of consolidation, and despite what the banker tells you, there often aren’t meaningful cost synergies. Maybe you get a few high-level G&A efficiencies, but you’ll also frequently see negative “synergies” because mom-and-pops often lack institutional cost layers—like a robust insurance and compliance regime—that a PE-owned platform is forced to build. Sponsors are getting smarter about this and, as a result, are less likely to pay a premium for a platform built via 10 add-ons at 6–8x, especially if there hasn’t been meaningful integration.

 

There was a period where firms like Audax could do nothing but add-ons, with minimal integration beyond the basics, and still find a buyer. Those trades are much harder to come by now.

 

Personally, I’m not a fan of buy-and-build as a central pillar of an investment thesis. I think it can be a moderate lever in a base case, but if your entire alpha is predicated on keeping an M&A treadmill going in a low-barriers-to-entry market—where even fundless sponsors are active—I’d rather invest elsewhere.

Alternatively I think it depends on the market. If you’re doing it in a new, fragmented market and are the first to reach scale you can reach real benefits that will be harder for later entrants (I.e., cemented relationships with key customers, density in certain areas, etc.,)

But what industries haven't been rolled up to death? Especially in services based businesses as well as HC...Said differently is there anything to even be "early" in anymore in this strategy?