Buy and build in the recovery: new opportunities for midlands mid-market firms to scale through acquisition

Richard Thomas, Senior Investment Director and Head of Palatine’s Midlands office and Tom Hustler, Investment Manager.

In any market, significant disruption creates a fertile breeding ground for consolidation. And few disruptions are as deep and far-reaching as the COVID-19 pandemic has been. Over the last 12 months, business resilience and ingenuity were placed under intense pressure as ongoing macro shifts in the way we live and work, in train since before 2020, were accelerated, seemingly overnight.

Amid the challenges an environment ripe with potential for well-thought-out buy and build strategies has emerged, presenting opportunities for businesses with the right backing to capture opportunities to bolt-on complementary service lines, or geographic reach.

There are a number of drivers.

Entrepreneurial management teams will be able to find diamonds in the rough in industries recovering from coronavirus – particularly in the form of businesses which may have struggled during the pandemic, due to a lack of resources, but whose fundamentals remain strong.

There’s also a fatigue factor at play which is bringing more acquisition opportunities to market. The last 12 months of turbulence followed a long period of political and economic instability in the UK. Businesses have had to weather three ‘once-in-a-generation’ macro-economic shocks in relatively quick succession: the financial crisis, Brexit and now COVID-19. As the country emerges from the pandemic, many vendors are re-examining their priorities and, understandably, looking to realise some value.

Buy and build has long been a core component of how we approach value creation at Palatine – around 80% of our portfolio companies benefit from this strategy, and the pandemic has only served to increase the case for strategic acquisitions.

Castle Donnington-headquartered Construction Testing Solutions (CTS) is a case in point. We took a majority stake in CTS (then CET) in late 2018. The business provides a range of professional services to the infrastructure and construction sectors with buy and build central to our approach, completing two successful bolt-on acquisitions in our first year.

While the on-set of the pandemic in early 2020 saw many infrastructure projects put on pause we have continued to support the business with acquisitions, knowing that the recovery will bring strong opportunities, particularly given the Government’s commitment to build back better with investment in infrastructure.

During the various national lockdowns the CTS team has completed two acquisitions – Leicester headquartered Nicholls Colton Group in February this year and Surrey-based CGS in December 2020 – adding valuable capacity, capability and new geographic reach to CTS’ skill set, as the market rebounds.

Over the last decade, Palatine has completed more than 200 successful acquisitions for our portfolio companies. We know that successful integration is where acquisitive growth aspirations stand or fall. Buying new businesses and continuing to operate them as separate entities is not buy and build. A failure to properly integrate businesses into a complementary group to unlock synergies and economies of scale, is where many poorly executed strategies fail.

Successfully implemented, buy and build can be one of the most effective approaches to value creation; it is a smart strategy in disruptive times and one which dynamic mid-market firms in the Midlands have an opportunity to take advantage of as the recovery progresses.