PE firms grow their businesses in two ways — either through expansion of operations like sales and marketing, known as organic growth. Or by adding-on smaller competitors. Usually a little of both.
While organic growth is an impressive thing to see when it works, an aggressive add-on strategy can be breathtaking (when it works, of course).
Take Riata Capital, which was formed by ex-Brazos Private Equity co-CEO Jeff Fronterhouse and former Parallel Investment Partners founder Barron Fletcher in 2015.
Riata has been aggressively growing its eyecare platform, AEG Vision, recently closing 12 add-ons to build its total footprint to 140 practices across 11 states, Sarah Pringle writes on PE Hub. Riata ultimately wants to build AEG to 250 to 300 locations, the story said.
Riata formed the platform, formerly known as Acuity Eyecare Holdings, in March 2017 through the acquisition of three regional eyecare groups. J.P. Morgan Asset Management in January 2019 joined Riata as a minority investor in AEG in connection with some further add-ons, Sarah wrote.
Aggressive buy-and-build strategies only work for certain kinds of businesses. Firms use a similar strategy in insurance brokerage roll-ups.
In this case, the company provides optometric services and offers lenses, frames and contact lenses across its wholly-owned practices, which operate under different regional brands.
Buy-and-build strategies have become more popular in today’s high-priced environment, Bain & Co. wrote last year in its global private equity report. Such deals can allow a GP to justify the high price of a richly priced initial platform investment by growing with relatively lower-priced add-ons.
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Riata emerged from the split up of Brazos, a Dallas firm formed in 1999. Randall Fojtasek, Brazos co-founder, launched CenterOak Partners in 2014 along with fellow Brazos alumni Michael Salim, Lucas Cutler and Jason Sutherland. The other partner, William Henry, had worked as CEO of a Brazos portfolio company.
What happened: Deal activity in the red-hot secondaries market cooled off in the second half of 2019 as many of the largest buyers stepped back after spending big money in the early months of the year.
The value of completed transactions was $39.4 billion in the second half, down 14 percent from the first half of 2019, according to secondaries adviser Setter Capital in its full-year secondary volume report. The number of deals in the second half also declined compared with the earlier period, Buyouts reported.
Overall, total deal volume in 2019 came in between $80 billion and $85 billion, according to full-year volume reports from Setter and Evercore. While a record high for the secondary market, the totals came in under many predictions that put total deal volume over $90 billion.
So what happened? Most sources agree that buyers spent much of their capital in the first half, which tallied around $42 billion of total volume, according to half-year volume surveys published last summer. By the second half, and especially the fourth quarter, many buyers decided to hold off until this year.
This is because GPs don’t want to spend too much capital in any given year out of a fund with a finite investment period, according to Jeffrey Keay, managing director with HarbourVest Partners. GPs try to achieve a certain level of “time diversification in terms of deploying the fund evenly, typically in a three-year period at minimum, you’re comfortable at four years, and maybe even a five-year period,” Keay said.
Deployment pace “is a compass, maybe not a rigid guide, on how much capital they should be investing over a given window of time,” Keay said.
Despite the pullback by buyers, sellers continued to bring inventory to the market, creating a supply/demand imbalance. Anecdotally, this led to a softening in pricing, sources said.
The secondaries market is still growing, and while fund sizes have expanded in recent years, supply still outpaces demand, sources said.
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