Actionable Ideas: Roll Up Strategies in a Subdued M&A Environment

With a mix of economic and market headwinds prevailing against M&A activity in 2022 and 2023, financial sponsors’ exits have been expectedly muted. As such, many sponsors have resorted to fundamental buy and build strategies to create value over a longer time period. While the roll-up strategy is a time-tested approach for many sponsors, the low interest rate environment that prevailed from 2008 until early 2022 was an accelerant for it. 

Sponsors are active across a range of sectors where they can find an acquisition platform to make attractive strategic add-on investments, ranging from broadly defined physician/dentist/veterinarian practices, and ancillary support services, to HVAC service providers and insurance brokerage and wealth management companies. Despite the increasing interest rate environment, sponsors can still create significant value by leveraging a platform’s infrastructure, coupled with entry/exit multiple arbitrage for add-on acquisitions. Platforms that have seen differentiated success on exit include those that enjoy organic growth coupled with a robust inorganic expansion strategy. While rising interest rates have had some negative impact on the economics of add-on acquisitions, the strategy is still appealing thanks to the potential of economies of scale to enhance margins and the ability to create regional powerhouses in fragmented, but large industry sectors. In addition, we have observed an increase in financial sponsors bringing in partners for substantial strategic minority stakes to both help fuel continued growth through acquisition and to set a valuation benchmark. Recent examples of successful and ongoing strategic roll ups include: 

• Goldman Sachs Asset Management’s investment of over $1.0 billion (through both equity and subordinated debt) in World Insurance Associates (“World”), an insurance brokerage firm, previously owned by Charlesbank Capital Partners. Charlesbank first invested in World in 2020 and since then is rumored to have completed over 100 add-on acquisitions. Goldman and Charlesbank will partner as co-lead equity investors in World with Goldman’s investment slated to support a continued acquisition strategy as well as organic growth expansion. 

• In April 2019, LGP acquired The Wrench Group, a leading provider of essential home maintenance and repair services, specializing in HVAC, plumbing, electrical, and water quality services. Under LGP’s ownership, Wrench completed 14 acquisitions, which led to substantial multiple expansion and an over 3.5x increase in EBITDA. In late 2022, TSG Consumer Partners and Oak Hill Capital made a significant minority investment in Wrench with the intention of continuing the external expansion strategy.  
• In 2019, Ares Management and OMERS Private Equity sold National Veterinary Associates (“NAV”) to JAB Investors. At the time, NAV was one of the largest veterinarian and pet care services globally with over 670 companion animal veterinarian hospitals and 70 pet resorts across 43 states. Under JAB’s ownership, NAV has executed three material acquisitions and over 100 bolt-on acquisitions resulting in a nearly 3x increase in EBITDA.