Private Equity Roll Up Strategy

A private equity roll-up is the process of acquiring and merging multiple smaller businesses in the same industry into one larger consolidated company. This strategy is attractive because the market generally rewards scale with a higher valuation. More specifically, the market is generally willing to pay a higher multiple of EBITDA to acquire a larger business. This means that the sponsor (i.e., private equity firm or independent sponsor) behind the roll-up is likely to benefit from multiple arbitrage at exit.

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To initiate a roll-up strategy, many sponsors will first identify an ideal “platform” company with an excellent management team. This platform is generally purchased at a higher multiple of EBITDA than the smaller businesses that follow. But once an add-on acquisition has been successfully integrated, the combined platform’s earnings are valued at the higher multiple (multiple arbitrage). If that sounds a little abstract, the example that follows should provide clarity.

In this video, we are going to explore how this process works by looking at four acquisitions, including a platform and three add-on acquisitions. Most roll-ups take time. A private equity firm will identify an attractive platform and then source add-on acquisition targets to create scale over the course of the hold period.

To emphasize the value creation realized with multiple arbitrage, we are going to assume that all four transactions take place in chronological order on a single day. This allows us to eliminate variables like interest expense and debt amortization, which makes it easier to focus on the benefits of multiple expansion.

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