Why do private equity firms perform buy-and-builds? : an empirical analysis of Nordic platform companies

Abstract

This thesis seeks to expand the knowledge of why private equity firms are performing buy-andbuild as a strategy in the portfolio companies they invest in†. More specifically, we examine characteristics of buy-and-build strategies through in-depth analysis of Private Equity transactions across the Nordic region, and test whether Private Equity firms conduct this strategy in order to 1) increase market power, 2) exploit multiple arbitrage, 3) achieve operating synergies, or 4) reduce financing costs. Currently, relevant research on the topic is lacking, which may be explained by the strategy being relatively new in the Private Equity market. The findings of this thesis will be helpful in understanding how buy-and-build strategies affect portfolio companies, and what Private Equity firms aim at achieving when investing in a portfolio company. The underlying data consists of 176 platform companies and 775 add-on acquisitions. The control group consists of 1,667 companies owned by Private Equity firms that have made zero acquisitions during their holding period. The findings showed that portfolio companies with a large size relative to other portfolio companies, were more likely to be utilized in buy-andbuild strategy. Further, the analyses showed no evidence that Private Equity firms perform buy-and-builds in order to exploit multiple arbitrage, nor to consolidate a market. In direct contrast with the hypothesis, the analyses showed that buy-and-builds increase their financing costs during the holding period, thus indicating that the hypothesis of reduced financing costs is untrue. Lastly, the findings suggest that buy-and-builds reduce their relative cost-level during the holding period, which supports the hypothesis of operational synergies as a motivation for applying this strategy.