Assume you're starting a fund this year, and it's LMM. The goal is $100m for your first fund and US based - but that doesn't mean you can only invest in the US!
What kind of product would you be pitching to LPs? Where do you feel alpha is atm?
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At that fund level I'm still pretty bullish on the roll-up strategy. Obviously within certain sectors this has gotten incredibly popular and too competitive such as HVAC/pest control/plumbing in home services or dental clinics within healthcare, but there are still some smaller niches within these verticals. For example, look at Guild Garage Group, a garage door services company. They found a niche within the competitive home services sector that had barely been touched and have executed an incredible roll-up in a short amount of time.
I think there's more opportunity with this strategy, but you have to be willing to move down market to industries with a smaller TAM.
What's an example? I actually think you can't go much smaller because who is the person buying you really going to resell to?
Your options are just some sort of PE backed group doing a broader home services roll up effectively, right?
Personally I do not love the strategy because it's quite reliant on macro.
I agree, that's a valid concern. That is an option if you are in that small of a market though.
As an example, I'm not going to name the exact industry but it's within the home services sector, has a TAM around $6 billion, highly fragmented, and limited existing PE interest. Let's say you execute a roll-up to $20m in EBITDA. That leaves plenty of meat on the bone for the buyer as well as who they resell to.
I am curious to hear your thoughts on why it's reliant on macro?
This has become incredibly depressing to me as a customer. When I sniff out that the plumbing or crawlspace company I am looking at is a PE rollup, I run the other way. Not looking forward to a sleek presentation, a salesman, and worker who hardly cares. I'd rather look around for the guy whose whole livelihood is staked on his reputation.
I needed some simple mudjacking work done and all the local places are PE portcos- gave me the runaround and would not answer if they had a bid minimum. The first wanted $3k for simple work, because he had to bid all kinds of extra work to get to their minimum.
Same with the local optometrist rollup. 20-something year old doctors charging through the nose. I expect if the economy stumbles, many of these things break.
This feels pretty surface level. The intensity of competition for roll ups is incredibly intense. Tiny add ons have outsized valuation expectations. It's not 2019 anymore.
AI-driven value creation regardless of sector HAS to be one of the theses. Especially in smaller businesses there's just too much automation available for those efficiency gains to not be a highlight for juicing EBITDA/integrating add-ons.
I think it's just SOP for operating now. I made a thread about this a few weeks ago and it didn't receive many comments (or maybe 0 lol), but I noticed we are hiring WAY less.
Our teams are increasingly looking like hedge funds > consumer brands.
Do you have any specific use cases/case studies you'd recommend diving into for someone interested in learning more about the value prop of leveraging AI to cost-reduce bolt-ons? I'm curious if there's industry agnostic application potential or if you'd be looking at more tech enabled services.
Back-office automation, basic legal work (cut down on the hourly spent on lawyers), contract/proposal generation, code generation (obviously tech-oriented but also to spin up simple apps if you're in like field services or something consumer-facing), top of funnel customer service, there's a bunch of them.
Law firm Rollup in Arizona (only jurisdiction allowing this); low multiples.
need to be able to incentivise person based biz with egos, but if you can do it in medical space, why not law?
Some articles about KPMG buying a law firm there too.
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Multiple arbitrage on sub-$20M platforms + aggressive add-on strategy. Entry multiples are still low enough at the micro end that you don't need financial engineering to make the returns work.
The real opportunity is pursuing platforms that are under $5m ebitda (3-4m). No one will touch it and there are a lot of good businesses at that scale.
Even at sub $5m EBITDA, aren't most of those companies now using a banker/broker of some type for a sell-side process? I.e. it's still very hard to find a proprietary (non-banked) opportunity where you're not competing with at least a few other bidders driving up the price to some extent
Agree with Associate 3. $1-5M EBITDA has become more heavily competed and you have some fairly institutional LMM/small cap/micro firms all over this stuff too.
True but a lot of these brokers are terrible, the processes are only competitive if there are viable PE backed strategics, and the sheer quantum of businesses is much larger. Still value to be had, but it is more of an opportunistic situation.
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