Does a search fund work for roll-ups?

searcher profile

February 17, 2019

by a searcher from Stanford University - Graduate School of Business in Palo Alto, CA, USA

I understand that one desirable characteristic of a target industry is one with a high degree of fragmentation. I’m curious as to how tuck-in / roll-up acquisitions of meaningful size are financed? Would existing investors contribute additional equity for subsequent acquisitions? If no appetite there, would you raise equity from new investors (and how would this be accounted for in the cap table)? I guess I’m really wondering if a traditional search fund is an appropriate vehicle for a consolidation play (vs going independent sponsor / fund / single sponsor). Would appreciate any thoughts / guidance on this!

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commentor profile
Reply by a searcher
from Stanford University in St. Louis, MO, USA
I would imagine that as long as the roll-up growth strategy is made clear to initial investors, a search fund could be a great way to find a first well-run company in an industry from which to start building a platform. I would try to skew my investor base toward more deep-pocketed investors (in case additional equity to fund acquisitions may be needed later) and try to skew my target company characteristics toward more free cash flowing companies (even if you have to pay a higher multiple to acquire) so that additional debt financing for roll-up acquisitions would be accessible.

p. 3 of this (http://www.scancorp.com.au/_dbase_upl/Anatomy_of_a_Business_Rollup_Scancorp_Overview.pdf) also offers a decent overview of deal financing for a more traditional roll-up. In this document, "controller" would refer to the HoldCo/initial fund investors from the perspective of the acquiring shareholders.
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Reply by an intermediary
from Dartmouth College in Solebury, PA 18938, USA
You don't necessarily need debt or equity to do a rollup. At Tuck Advisors we have a model for what we call an OAR (owner aligned rollup). We basically use owner equity as the currency. Yes, it's like herding cats, but under the right circumstances it can be worth the effort. An example of an industry ripe for an OAR is craft beer - fragmented, saturated, over-capacity, with distribution issues, where many passionate owners know more about hops than balance sheets. In terms of how this fits into a Searcher's model - well if you had a company, you could use yours as the anchor for the OAR. If you anyone has any specific questions about the process we have created, feel free to ping me.
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