An article on Axial points to growing value from buy and build strategies. The article quotes Gretchen Perkins from Huron Capital:
"Pursuing a buy-and-build strategy and employing add-on acquisitions is a solid way to achieve above market growth and shareholder value in a 3% GDP environment”
In growing markets with fragmented competitor landscapes, PE investors increasingly employ a buy and build strategy by first acquiring a "platform" company -- typically a larger company with established management team and operations -- and then add smaller acquisitions that tend to trade at lower multiples compared to larger companies.
Bain Capital's 2019 Global Private Equity Report further defines the buy and build strategy not as just doing a couple add-ons, but a deliberate strategy with a steady pace of acquisitions:
"We define buy-and-build as an explicit strategy for building value by using a well-positioned platform company to make at least four sequential add-on acquisitions of smaller companies."
And increasingly, add-on details are part of an overall strategy based on M&A, as evidenced by the following table:
DFW Capital Partners has acquired a controlling stake in IT Services contractor Sev1Tech.
“The Sev1Tech management team sought out DFW as a partner to enable growth both organically and through acquisition..." says Bob Lohfeld, CEO of Sev1Tech. From their public announcement:
"Sev1Tech plans to leverage this investment to add new services, support new and existing customers and strengthen our mission capabilities."
A 2018 survey and report by Citrin Copperman shows the continued growth and development of the independent sponsor model in private equity investing. Independent sponsors are gaining popularity due to their flexibility, focus on quality of individual investment opportunities, and strong alignment with capital partners.
“YOU CAN’T PLAY PORTFOLIO THEORY WHEN YOU ARE AN INDEPENDENT SPONSOR. EVERY DEAL HAS TO STAND ON ITS OWN MERITS.”
Most significantly, in our opinion, is the continued trend of independent sponsors with backgrounds in industry. The report shows that 50% of independent sponsor principals have a background in Operations/C-Level Management, as opposed to the earlier days of sponsors coming predominately from PE and IB backgrounds.
Success of the independent sponsor model has generated increased interest and even competition from capital providers, with strong participation from family office investors, especially early in the life of the sponsor. In fact, 70% of independent sponsors in their first 2 years of operations are working with family offices and high net worth individuals. By the time they are more than 5 years in operations, many still retain family office relationships but have brought on capital from traditional PE firms (41%) and Mezz Funds (51%).
Of course, independent sponsors, like their private equity counterparts, face the challenges of competition for deals in a sustained sellers' market, as well as the pressure of sufficient deal sourcing activities at attractive valuations despite the limited internal resources for independent sponsors. Many, though, will continue to thrive by focusing closely on a specific sector where the principals have a proven track record and an established professional network.
With over 20 years of industry experience as senior operations executives, FRAMCOR makes direct investments and works as an independent sponsor for private equity investments into defense and government contractors providing critical professional services to the U.S. both domestically and overseas. See more about our investment focus here.
Triumph Group, Inc. (NYSE:TGI) has announced the sale of its Triumph Fabrications business units to aerospace and defense private equity firm Arlington Capital Partners.
“Triumph Fabrications consists of four independent companies, which operate in five locations throughout the US. These sites encompass more than 1 million square feet of factory space dedicated to the aerospace industry by supporting complex sheet metal components and assemblies for fixed wing and rotorcraft platforms… Combined, the businesses generated revenues of approximately $150 million during Triumph Group’s fiscal year ended March 31, 2018.”
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