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New research identifies European buy and build opportunities

Buy and Build strategies have historically shown a higher return on capital than standalone deals, with 2018 seeing the multiples paid by private equities for this kind of deal hit record levels.

That’s according to new research by management consultancy and private equity specialist CIL which examines 2,700 sectors to assess opportunities for buy and builds going forward.
 
The analysis focuses on five European regions – the UK & Ireland, Germany, France, the Nordics and Iberia, and identifies attractive opportunities for a Buy and Build strategy, and considers three key factors:
 
Size – target sectors need to be large enough to be attractive for a private equity investor. However, they cannot be so large that acquiring a meaningful market share would be too costly, thus diminishing potential synergies and making a buy and build strategy impractical.  
 
Concentration – the market must have a viable platform, meaning the leading players in the market need to have a minimum scale. However, at the same time, the concentration of the market leaders needs to be small enough that a challenger can be built. Furthermore, several viable bolt-ons must exist and this needs to be enabled by a long, fragmented tail of companies.
 
Viability – some sectors can have both the suitable size and concentration and still not be ideal targets for a Buy and Build strategy. The restaurant market, for example, is large and fragmented, but acquisition of share in the market brings very limited synergies to the owners. Successful private equity investments into the sector have typically been built around expanding footprint and brands. Synergies and barriers to organic growth such as economies of scale (eg. vets), site locations (eg. caravan parks which are difficult to replicate due to size and permits) and customer loyalty (eg. dentists) are key in making buy and build strategies viable.
 
CIL’s analysis also shows that in Europe, Iberia and Germany are currently the regions with the largest potential to develop buy and builds. Both regions have several companies that are family-owned, due to a lack of owner willingness to sell, regulation, or because these regions have a less developed private equity ecosystem, which may be less willing to pay prices for those assets compared to other geographies. Both regions have sectors that are ripe for consolidation which have been tried and successfully completed in other geographies. For example, in Iberia, veterinary services, timber yards and the repair of ships and boats are promising buy and build sectors. In Germany, in addition to vets, specialist and commercial removal services, and landscaping present interesting opportunities for investors.
 
The Nordic region also has capacity for further consolidation, but its smaller size makes it relatively less attractive compared to Iberia and Germany. The key in this market is to ensure that the opportunities pursued have the required size to succeed.
 
Both the UK & Ireland and France are large markets with well-established private equity ecosystems. These regions still present significant opportunities where consolidation levels are lower, albeit higher than in other geographies. Investors seeking the lower risk associated with larger markets may want to stay in these geographies, although it is likely that larger returns can be found elsewhere. In both markets, we have identified sectors such as specialised cleaners of business properties and removal services as ones to watch.
 
Giles Johnson, partner at CIL, says: “Buy and build strategies will continue to offer higher returns than public investments well into the future, albeit slightly riskier and less liquid. Going forward, investors will have to explore sectors and geographies they may not normally consider, however, with the right due diligence and experience, there is plenty of opportunity out there.”
 

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