In 2019, 298 bolt-on transactions worth £21.5bn made up 56% of UK mid-market private equity deals, according to the KPMG Mid-market PE Report 2019. In Europe, bolt-on deals in Q1 2020 accounted for a majority of total deal volume, a Q1 decade peak. We anticipate this trend to continue against the challenging market backdrop following Covid-19, given the relative attraction of strengthening existing portfolio companies.
Bolt-on acquisitions can represent a significant opportunity for mid-market businesses, and, done well, can materially accelerate growth and shareholder value. At 3i, we take a systematic approach, bespoke to each of our businesses, and work with our management teams to agree a shared vision for the company’s growth across all areas, including through acquisitions. We also ensure this ambition around M&A is cascaded throughout our companies, as the internal organisation is often the best source of identifying attractive bolt-on targets.
For example, in 2015, when we acquired UKheadquartered Aspen Pumps – a business that specialises in the removal of condensate water from air conditioning units – we saw a clear opportunity to strengthen its position in the distribution channel and add new complementary products. During our investment, we supported the management team to complete six acquisitions across four different geographies. Critically, our local teams on the ground were able to provide hands-on support to help manage the relationship with the local vendors and then get several of the deals negotiated and completed.
There is often little correlation between the size of an acquisition and the amount of work required, so it’s important to be clear upfront about the management team’s bandwidth and whether additional resource is required. A regular source of debate in many of our portfolio companies is whether to build a dedicated M&A capability and while the answer depends entirely on the specific situation, it is often a discussion worth having. In the case of Aspen, the recruitment of a corporate development director was a great catalyst to accelerate the acquisition strategy
Bolt-ons are not a shortcut to growth and it’s essential to really understand the potential target company to identify where the opportunities, as well as the potential pitfalls, might lie. Spending time with the potential target and the leadership team is invaluable, to help understand the key people, products, operations, local markets and nuances in style or culture to establish whether it’s a suitable fit and/or how much work will be required post-transaction.
Understanding these dimensions is typically much harder if the target business is based in another market. Every country has its idiosyncrasies; commercial and cultural variances can often be more difficult to grasp than the obvious legal or regulatory differences, but they are equally important. Even a neighbouring country can be surprisingly different. This is where an investor with an existing local network and deep market knowledge can be invaluable.
Integrating companies can be complex, so it’s critical to have a rigorous but pragmatic integration plan that is well communicated to all those involved, with clear ownership of tasks and responsibilities.
It’s also important to ensure any integration plan is tailored to and appropriate for the specific situation, aligned with existing business capabilities and that disruption is minimised. Establishing “buyin” early on is key to avoid misalignment, confusion and poor decisions.
With any M&A plan, you need to be willing to be opportunistic and test, learn and refine. There is rarely a perfect deal, nor a perfect time to do an acquisition. Mistakes along the way can often be the best source of learning. We have found that establishing feedback loops, focusing on continuous improvement and fast reactions is a hugely valuable part of developing a repeatable winning formula around successfully executing M&A. With many of our most successful buy-and-build strategies, we have re-set and significantly increased the M&A ambition part-way through the investment to ensure we appropriately support our portfolio companies to deliver on their full potential.