Building a Stronger Buy-and-Build

Bain & Company's 2024 Global Private Equity Report argues that buy-and-build remains a core private equity strategy, but a sustained period of higher interest rates has made it considerably harder to drive returns. Bain defines buy-and-build as an explicit strategy in which a well-positioned platform company makes at least four repeated add-on acquisitions of smaller companies to capture the benefits of scale and scope. Historically, the strategy has relied on multiple arbitrage, in which smaller add-ons are bought at lower multiples than the larger platform's valuation, lowering average acquisition cost and boosting exit returns.

Higher rates disrupt this model in two ways. Bain notes that the cost of financing today is roughly double what investors were modeling in 2020, which makes servicing variable-rate debt and funding further acquisitions more difficult. Rising rates also pressure asset prices, particularly for leveraged assets, which can erode the multiple-arbitrage gap that platforms were counting on. Bain says many platform deals launched in a low-rate environment remain incomplete, and that the share of add-on deals representing at least a fourth acquisition has climbed from 21% in 2003 to close to 50% today, while the total value of add-ons has declined over the last two years.

Bain's analysis of 44 buy-and-build deals made between 2010 and 2019 found that deals relying on multiple arbitrage alone averaged a 1.4x MOIC, compared with 2.2x for deals driven by accelerated organic growth or meaningful margin improvement. Bain says top-performing deals must be able to articulate what value is actually captured by a particular set of acquisitions with a particular platform, and that a sector with growth potential and acquisition white space is only a baseline requirement.

Bain illustrates successful approaches with three examples. Audax Private Equity carved out a noncore distribution business from Genuine Parts Company in 2019 and kept two units as platforms. For Engineered & Industrial Solutions (EIS), Audax recruited new executives, focused on core OEM customers, and used targeted acquisitions such as Norberg and Power Grid Supply to access aftermarket segments. According to Bain, EIS's earnings have grown threefold since Audax's involvement, and its gross margin continues to improve. Hellman & Friedman's Caliber Collision, which now has more than 1,700 US centers, pursued a cultural transformation focused on customer service, using 'tiger teams' to train staff and install systems at each new shop, while scale helped attract insurance company volume and enabled expansion into auto glass and maintenance. Cinven's Partner in Pet Food, acquired in 2018, used a dedicated M&A capability to pursue four objectives: manufacturing efficiency, branded-product margins, new channels, and geographic scale, including the 2020 acquisition of Sweden's Doggy.

Bain concludes that strong returns in the current market will depend on organic value creation and an especially compelling exit story that shows continued outperformance.