Acquisitions by Portfolio Companies Are the Surest Way to Create Value, Says a New Report from the HHL Leipzing Graduate School of Management and BCG—If the Acquisitions Are Done Right
Munich -- Operational improvement has become the main source of value creation in private equity, increasing its share from 18% in the 1980s to 48% in 2012. When PE professionals were asked their most frequently used approach to operational improvements in portfolio companies, more than 90% answered that they conduct buy-and-build deals.
Buy-and-build activity has increased from 20% of all PE deals in 2000 to 53% in 2012. The reason for the surge is clear: buy-and-build deals generate an average internal rate of return (IRR) of 31.6% from entry to exit, compared with 23.1% for standalone deals. That’s one of the highlights in a report by The Boston Consulting Group (BCG) and HHL Leipzig Graduate School of Management. The report, The Power of Buy and Build: How Private Equity Firms Fuel Next-Level Value Creation, is being released today.
“The strategy is most successful when the portfolio company is small or medium-sized, has a PE sponsor with operational and buy-and-build experience, and is in a low-growth, low-profitability, highly fragmented industry,” said Michael Brigl, a BCG partner and a coauthor of the report. “Value in buy-and-build deals often results from traditional synergy levers—such as scale effects in procurement and in selling, general, and administrative expenses—and from improved sales force effectiveness and pricing.”
The report’s authors analyzed a set of 121 deals, about 40% of which involved buy-and-build transactions. They selected deals for which they could obtain consistent sets of performance data, such as IRR, and detail on the levers employed to create value. They used this sample to analyze the relative contribution of each value-creation lever (deleveraging, multiple expansion, and operational improvements) to deal performance. The authors drew several conclusions from their analysis:
As experienced PE professionals know, successful buy-and-build deals hinge on a range of factors. To capture the opportunity that buy and build presents, every plan for a portfolio company should include a clearly defined set of potential add-on acquisitions.
A copy of the report can be downloaded at www.bcgperspectives.com.
To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or firstname.lastname@example.org.
Founded in 1898, HHL Leipzig Graduate School of Management was the first business school in Germany. Currently, HHL is one of the country’s leading graduate schools, offering a variety of academic executive programs for different graduate degrees, including MSc, MBA, and PhD. The Center for Corporate Transactions, headed by Prof. Dr. Bernhard Schwetzler, is HHL’s major research unit in the field of mergers and acquisitions. It is designed to bring together scientists of HHL and its research partners working in the areas of corporate finance, accounting, law, and game theory to analyze and discuss problems in corporate transactions. For more information, please visit www.hhl.de/finance.
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