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?

Private Equity Interview Course

  • 2,447 questions - 203 PE funds. Crowdsourced from 750k+ members
  • 9 Detailed LBO Modeling Tests and 15+ hours of video solutions.
  • Trusted by over 1,000 aspiring private equity professionals just like you.

Comments (14)

Jul 5, 2020 - 1:50pm

Combination of additional debt and equity, depending on EBITDA development and synergies. No problem for a PE (acutally very common) to have smaller additional capital calls to finanance add-ons.

IRR: you want to understand value impact on the whole, as that determines what you can pay. This includes synergies which are a major value driver in a roll up.

  • Intern in Consulting
Jul 7, 2020 - 12:46am

This is helpful, thank you!

One more question on the IRR:

Obviously this is a case-by-case basis, but what kind of an effect would a substantial roll up need to have on IRR for it to be worth the investment?
- for example, if we model in this roll up, and it changes our expected IRR on the platform company from 25% to 28%, do we go for it? I'm assuming yes because that's technically just an NPV-positive project. Or is 3% minimal and would you normally see a much larger impact?

Jul 7, 2020 - 6:41am

Depends a lot on execution risk:
- Availability of targets
- Willingness to sell of targets at certain valuation levels (competition of other competitors in the field?)
- Are synergies commercial or operational (commercial highly uncertain most of the times)

All assuming you keep entry = exit multiple (if not than 3% IRR increase sounds like very little).

Keep in mind that the 3% is also implies 25% on the additional capital probably. We normally rather put additional capital in the same industry (which we know/understand - up to certain thresholds for concentration risk) than in new sectors/companies with unproven management teams etc.

If you make 25% without roll-up than it's just a bonus. Would in that case start with the inverse question: what do we need to believe to make buy and build value accretive (instead of: what is theimpact of my assumptions on IRR).

Jul 5, 2020 - 8:59pm

Another interesting part of roll-up financing is seller rollover equity. It's tough to actually integrate acquisitions in roll-ups so you can usually get people to stick around and roll a decent chunk of their proceeds, or even just require it. As the platform gets bigger, you then markup the value (usually aggressively) for rollover for new acquisitions at entry to the point where it becomes an attractive form of financing. The dilution from the rollover quickly ends up being very little of the multiple arbitrage, allowing the sponsor to retain the rest

Learn More

300+ video lessons across 6 modeling courses taught by elite practitioners at the top investment banks and private equity funds -- Excel Modeling -- Financial Statement Modeling -- M&A Modeling -- LBO Modeling -- DCF and Valuation Modeling -- ALL INCLUDED + 2 Huge Bonuses.

Learn more
Jul 7, 2020 - 3:01am

Yes multiple expansion is the biggest win. Allows you to get more turns out of a platform too.

Jul 7, 2020 - 2:17pm

I'd argue that most PE funds usually use roll ups to lower the crazy multiple they bought their platform at, especially late in the cycle (2017-2019). Agree that whilst it makes no difference regarding IRR but there is 2 ways to think about it.

Most Helpful
Jul 7, 2020 - 11:15am

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.

  • 6
Jul 7, 2020 - 2:15pm

I have also worked on
- Add-ons onto TLB to finance roll-ups, no need to refi, small fee to banks fairly straight forward as it can be done after drawing on the RCF
- Rolling the debt from the TargetCo hence only buying the Equity often with an equity injection from the sponsor or cash that is on BS

Jul 7, 2020 - 3:38pm

Great points. I usually see Add-on TLBs instead of an acquisition facility when it's not a real roll-up strategy and M&A is more opportunistic.

if it's a 'real' roll-up strategy with a super long list of tangible targets, I almost always see the acquisition facility in place to provide certain funds and to act quickly. happened a lot with HG software deals

  • Intern in Consulting
Jul 7, 2020 - 4:38pm

Thank you!

I have another random roll-up question you might be able to answer regarding net working capital.

Let's say the platform company acquires a smaller business at the end of year 2.

Because the platform company is now also acquiring the NWC of the roll-up, how do we account for the "change in nwc" we see post roll-up? Obviously there would be a large spike, but I'm wondering if that is simply a large outflow of cash (which is somewhat offset by the inflows you get from additional revenue), or if we are supposed to do something else with the sudden increase.

Start Discussion

Total Avg Compensation

July 2021 Private Equity

  • Principal (7) $694
  • Director/MD (18) $575
  • Vice President (65) $371
  • 3rd+ Year Associate (67) $270
  • 2nd Year Associate (134) $252
  • 1st Year Associate (276) $224
  • 3rd+ Year Analyst (25) $160
  • 2nd Year Analyst (60) $136
  • 1st Year Analyst (177) $118
  • Intern/Summer Associate (19) $70
  • Intern/Summer Analyst (207) $59