Most of the private equity-announced acquisitions are companies added on to an existing private equity-backed “platform” investment. The platform is the original investment that sets the foundation for a private equity fund’s investment thesis.
A component of many investment theses is “rolling up” other competitors in the industry to achieve ever-increasing economies of scale and reducing duplicative expenses. The skill sets required to lead a roll-up for a private equity-backed platform investment compared to aggressively growing a platform through organic growth are very different.
Being a part of a private equity-backed portfolio company has the straightforward challenge of having to do everything faster to achieve the return expectations of investors. Going fast is harder and riskier than going slow, and CEOs of both organic growth and roll-up will need to handle this challenge.
A roll-up requires a CEO with a different set of skills to be successful because they are continuously acquiring other businesses, needing to integrate them quickly and maintain alignment around a cohesive strategy. The private equity partner will manage the transaction and the financing, negotiation and have a list of acquisition targets, but will rely on the CEO to prioritize the targets, participate in the communication with the target company leadership team and help assess valuation.
The integration process is constant, and these strategies do not work unless integrations are timely and achieve the expected synergies. Synergies — eliminating duplicative expenses and achieving economies of scale — are crucial to the process because they help increase operating margin and generate more cash flow, which supports the acquisition engine and ultimately is the driver of value at exit. A lot of this, however, is “adjusting” for savings that are likely only partially realized in the financials shared with funding sources who rely on the trailing 12-month for underwriting. But roll-up strategies move faster than one every 12 months, so estimating and adjusting to achieve a truer measure of real operating profit is crucial.
Aligning leaders and employees alike around a clear strategy is another constant. CEOs need to inspire confidence in employees who recognize that with every acquisition, they could be replaced or have their path to the next promotion clouded by new and talented employees from a recent acquisition. The CEO needs to assure employees that if they do the job well, there are always opportunities in the roll-up strategy as the company aggressively expands.
Culture is the final key element that the CEO needs to get right to execute the roll-up strategy. In a strategy where hundreds if not thousands of new employees are onboarded on a regular basis, the original culture can get diluted without intentional effort on the part of the CEO to ensure that those employees who assimilate into the culture have a home within the larger organization. They also must quickly exit new or existing employees who are culture-killers and create divisiveness that can spread quickly, causing a great deal of doom and unhappiness. That can be very damaging and slow an integration down or stop it entirely.
CEOs of roll-ups need to be experts in M&A, communication, integration and leading an inspiring culture. These are attributes that all effective CEOs should have, but the pace, intensity and repeatable nature of these activities in a roll-up require a special talent.
Jeffrey Kadlic is Founding Partner of Evolution Capital Partners
