Exactly how do rollups create value?
HoldCos exist to create value for rollups, which in turn exist to create value for their investors. Ignoring “passive” rollups that hold minority stakes in multiple companies (and are therefore more administrators / custodians), an actively managed rollup has three main value levers:
Unlocking multiple arbitrage. Most investors do not have access to highly profitable, capital-efficient small and medium businesses – and are willing to pay premium for serial acquirers with best-in-class ROIC and organic growth parameters
Allocating capital more efficiently than the companies themselves. This comes in part through having a broader investment opportunity set, in part through leverage, and in part through unbiased monitoring
Delivering operational improvements through active ownership. As we will see, this third lever is the most contentious as it often “competes” with the first two
We’ve written extensively about the decentralised operating models employed by Swedish serial acquirers, and a variation of these we’ve seen at Chapters Group and Judges Scientific (link).
Does that mean that other models aren’t viable?
Absolutely not!
Below, we compare and contrast the 3 prevailing organisational models.
Hungry for more insight? Check out Part 2, in which we discuss topics, such as:
How does one measure the shareholder value generated by a rollup?
Why should investors allocate capital to rollups?
When does a HoldCo allocate capital more efficiently than the companies themselves?