Private Equity Roll-Up Strategy: Firm Considerations

Private Equity Roll Up

From my previous post, you should now have a good feel for the characteristics of industries where a roll-up strategy will stand a fighting chance of success. But what are the characteristics of individual private equity firms that correlate to a skillful and lucrative roll-up? That is what I will cover today. Unfortunately, there is not a one-size-fits-all strategy for success. Nor is there a cookbook recipe I can give you that is guaranteed to lead to a successful roll-up. But firms that do roll-ups well definitely offer some patterns to study and emulate. Let’s take a look at them.

What Are the Characteristics of Great Roll-Up Firms?

Sales guru Jeb Blount characterizes failure as “a direct result of a collapse in self-discipline to do the little things every day.” I think this applies to almost any endeavor, but especially to private equity roll-ups. Consider the list below to be those “little things” you want to do consistently and faithfully, every single day, until success seems to arrive overnight.

1. Established & Constantly Updated Pipeline

Whether you call it a pipeline, funnel, or as Peter memorably has, “turning over rocks,” searching for and sourcing businesses to acquire is the fundamental, irreplaceable task of any private equity firm. And an active, flowing pipeline of such businesses is especially critical to roll-up strategies, because the alternative is that investor funds (whether yours or someone else’s) are sitting idle, opportunities for multiple arbitrage are being lost, and ground is potentially being ceded to competing consolidators. Conversely, a constantly updated pipeline filled with a diversity of potential targets, whether brokered or proprietary, keeps your strategy on track, even in the face of sobering realities such as average search times of six-months or more to source an acquisition. A pipeline full of interesting targets also lowers the pressure on any hoped-for deals that may not pan out for whatever reason.

2. A Point Person for Deal Activity

With rare exceptions, making sure pipelines are updated and deal activity is flowing smoothly is not a part-time job. It should be at least one person’s virtually full-time responsibility, whether they are employed at the PE firm, the platform portfolio company, or both. And it should go without saying that this person must understand the roll-up strategy to its core. In many ways, they will be the hub at the center of a spinning wheel, communicating, coordinating, and nurturing relationships between a variety of stakeholders while serving as a single point of accountability. Depending on the size and complexity of the roll-up in question, there may often be additional team members to support sourcing and especially diligence, but a dialed-in deal point person at the head of a lean, close-knit team is crucial to moving fast, which matters more in roll-ups than almost any other private equity deal context.

3. Streamlined Diligence and Integration Process

Keeping a roll-up strategy successfully moving forward is serious work, requiring virtually constant due diligence, so it’s imperative that a firm streamline its process into something repeatable that will not overburden key resources. The most important best practice here is having a crystal clear investment thesis, and a limited set of focused value drivers and “deal killers” around which every diligence will center. Beyond that, developing checklists, work-plans and presentation templates that can be recycled from process to process, leveraging rapid benchmarking, and establishing consistent ways to quickly calculate key synergies are all great ways to ensure quick, fruitful diligence processes. In addition, many firms are increasingly relying on technology such as generative AI to help streamline diligence processes even further.

Similarly, on the integration front, having an easily replicable process for ensuring the realization of synergies and successful meshing of new acquisitions into the overall platform is crucial. As with pipeline management, having a designated integration “SWAT team” made up of a single project management leader and a few other key individuals is a common best practice. Establishing a detailed integration plan, ensuring clear and regular communication across the organizations, and developing a plan to retain key talent are all also vital to ensuring that value anticipated in diligence isn’t lost through integration (Link to McKinsey & Company: Winning at Private Equity Integrations).

4. Strong Management Team Experienced in Deal Execution and Integration

This is probably the single most important characteristic to a roll-up’s success. PE firms lucky enough to find trusted managers will want to work with them consistently across different deals. There is quite a lot of pattern recognition and acquired skill in the process of managing diligences, executing acquisitions, and integrating the acquired companies. And these activities happen within a relatively compressed time horizon, one that often feels even more compressed than it is. Acquired companies often have a patchwork of org charts, computer systems, and human cultures. Integrating them into a single value-creating machine is not for the inexperienced.

Roll-ups require big-picture thinking, operational excellence, and exceptional people skills. Unlike with characteristic number two, though, these fortunately do not all have to be contained in one person (that would be a truly remarkable find), but rather a team of hyper-competent individuals. This team must know exactly where the strategy’s value creation levers lie and be capable of working them quickly and repeatedly, while potentially integrating five or more businesses per year. If you want your roll-up to work, don’t settle for less than a dream team.

5. Clear and Present Exit Strategy

You should have a good idea of your future exit for any roll-up strategy upfront, whether that exit is expected to come by way of an IPO or selling out to a larger competitor or PE firm. Depending on which of these routes you believe your strategy is likely to go, there are different relationships and value drivers you’ll want to be focused on cultivating from day one. It is also important to understand the criteria that will signal when the door is open to a profitable exit, while maintaining the flexibility to adapt to changing market conditions, alternative time frames, and varying exit plans.

Conclusion: The Ultimate Goal of a Roll-Up

To explain the ultimate goal of a roll-up, I love the metaphor of a coral reef. These are created by a fusion of the limestone skeletons of many, many small sea creatures known as coral polyps. As a reef expands, it forms a living whole, attracting a diversity of life rivaled only by tropical rainforests. The world’s largest coral reef, Australia’s Great Barrier Reef, stretches over a thousand miles and is thought to have been growing for some 9,000 years.

Ideally, your roll-up strategy will plan for a quicker exit than that, but I cannot overstate how important it is to integrate the individual businesses into a functional, living whole, becoming a true platform for growth rather than simply a holding company. Advantages of scale and higher multiples for larger companies mean nothing if they cannot be achieved because the whole does not measure up to the sum of its parts, with the component businesses continuing to operate in a disjointed, chaotic fashion. A decisive strategy, an industry that is ripe for consolidation, and a consolidator with the characteristics above are how you avoid that outcome. And whether it’s in choosing a sector or building out a playbook for diligence and integration, planning upfront is key. As Abe Lincoln said, “Give me six hours to chop down a tree, and I will spend the first four sharpening the axe” – a maxim any would-be pursuers of roll-up strategies would do well to remember.

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