Buy and Build Strategies in Private Equity: Boost or Transformation?

Abstract

This paper presents a first examination of how private equity (PE) fund managers actively develop their portfolio companies through so-called “buy-and-build” strategies (B&B), in which a portfolio company serves as a platform for add-on acquisitions. We argue that, because of holding period constraints, PE fund managers face a trade-off between the quantity and complexity of add-on acquisitions. Thus, in comparison to their peers, portfolio companies could do more, but similar, acquisitions (the “boost hypothesis”) or as many, but different, acquisitions (the “transformation hypothesis”). Using a control group of non-PE-owned companies, we find strong support for the “boost hypothesis.” Difference-in-differences estimates show that the probability of an acquisition is almost doubled after PE entry. However, we find no statistically significant differences in the complexity of acquisitions between PE- and non-PE-owned firms. This holds true for several complexity measures of domestic and cross-border acquisitions. Finally, we investigate whether buyers pay a premium for this acquisition boost. We find that deals with B&B yield significantly higher multiples at exit, with this effect being driven largely by cross-border B&B strategies.