Private equity firms with a record $1.6 trillion in dry powder are leaning heavily on roll-up strategies as a way of avoiding high purchase prices for portfolio companies. Instead, they are buying smaller, cheaper companies — especially in the wealth and alternative investment management and insurance sectors — and merging them for instant growth.
Private equity-backed deals including roll-ups have been on a tear since the fourth quarter of 2020, despite a pause in transactions in the earlier part of 2020 when valuation uncertainties caused by the pandemic drove private equity players to the sidelines. So far in 2021 to July 7, there were 1,741 roll-up transactions (also called add-ons) in the U.S. with a total value of $164 billion, compared to 3,168 roll-ups worth a combined $323.4 billion in all of 2020, a according to PitchBook Data Inc.
"We are in a very unprecedented time in M&A," said Stacy Kirshner, a New York-based managing director with Alvarez & Marsal Holdings LLC's transaction advisory group.
The increase in roll-ups — a growth strategy that has been around for decades — is being driven, in part, by the reopening of the U.S. economy that encouraged private equity managers to get back in the game as well as an expectation that favorable capital gains tax treatment could soon change, pushing business owners to sell now.
"There was a thought going into 2021 that there would be an increase in capital gains taxes, causing volume to increase," Ms. Kirshner said. "There's a significant concern of private equity investors and also a concern of privately held businesses that if they sell next year, they would get taxed at a higher rate."
These factors are leading industry executives to expect that 2021 will be a banner year for mergers and acquisitions in general, and roll-ups, in particular.
"2021 as an overall matter is proving to be one of the most active years in private equity ever," said Marc Lipschultz, New York-based co-founder and co-president at Blue Owl Capital Inc. "Roll-ups are a very, very big theme."
There are a lot of roll-ups partly because "of the high multiples private equity firms are paying," Mr. Lipschultz said. "They have to have a way to generate returns."
Alternative investment firm Owl Rock was formed in May by the merger of Owl Rock Capital Group and Neuberger Berman Group's former subsidiary Dyal Capital Partners with special purpose acquisition company Altimar Acquisition Corp.
For example, on July 7 private equity firm Genstar Capital announced the firm's portfolio company Obsidian Insurance Holdings Inc. acquired Western Home Insurance Co. from Western National Mutual Insurance Co. On June 30, Genstar Capital and TA Associates announced they signed a definitive agreement to merge their portfolio companies, Compusoft Group, a software provider, and 2020 Technologies. The newly combined company will be majority owned by Genstar and TA Associates.