Panning for Gold

In private equity, assets are typically classified across distinct market tiers based on scale, financial performance, and organizational complexity. Sub-scale assets generally operate below the traditional underwriting thresholds of institutional buy-out funds:

Traditional sponsors favour those assets with scale, primarily as an implied protector of risk but also because of the economics of transacting requiring a minimum deal price to accommodate the costs of the fund - and with funds growing the entry point often grows too.

Sub-scale assets present a compelling investment thesis for specialized private equity sponsors for a variety of reasons:

• Broader Marketplace of Assets: The universe of sub-scale businesses is vast, offering a larger volume of potential targets and proprietary deal sourcing opportunities outside of overly intermediated auction processes.
• Reduced Competition: Traditional private equity institutions typically enforce strict mandates requiring a minimum threshold of £2m EBITDA. This creates a structural gap and reduced competitive intensity for high-quality assets.
• Attractive Entry Valuations: Lower entry multiples - in part informed by off market transacting and less informed vendors - insulate downside risk while maximizing potential capital appreciation as assets scale & realise multiple expansion on exit.
• Unpolished Gems: Every market leader was once a sub-scale asset. The buyers who can identify businesses with strong underlying fundamentals ahead of maturity will capture value.
• Tailored Build-and-Buy Deployment: Acquiring sub-scale companies enables highly focused, bespoke build-and-buy strategies without inheriting unnecessary scale, operational inefficiency or redundant infrastructure.

The transformation of IT Farm into Everything Tech Group serves as a benchmark for value creation through targeted sub-scale acquisitions and institutional scaling:

• £1.5m

  revenue

  £0.3m

  EBITDA

  Initial Asset Acquisition: IT Farm was originally owned by a single founder. Though initially hesitant regarding an exit, the founder bought into the strategic vision and institutional capability of the team. The asset served as the cornerstone acquisition (Asset 1) in the broader Everything Tech buy-and-build group, despite being only £1.5m Revenue / £0.3m EBITDA.

• 500%+

  organic growth

  20%

  of the enlarged £42m group

  Exponential Growth: Over five subsequent years of partnership and operational enhancement, whilst integrated fully, the underlying IT Farm assets achieved over 500% organic growth across the next 5 years and underpinning 20% of the enlarged £42m Revenue group despite its initial form being just 3% of its aggregate value.

• Unlocking Latent Value: Integration into a broader platform provided the capital, leadership, and operational scale required to execute on opportunities the founder could not have captured independently - most acutely a series of customers with private equity backing and themselves high-scaling requirements which would have seen them migrate suppliers without the surety of a broader operation enabling growth at the same pace as theirs.

Originating sub-scale targets requires a disciplined approach to ensure the inherent added challenges are mitigated and upside genuinely exists and is not conflated with hope value:

• Target Proposition & Clarity: A precise, differentiated value proposition is critical to ensure only the most accelerant constituent parts are acquired. Where we have seen repeated failure in our buy-build competitors has been indiscriminate opportune transacting not through a deliberate strategic lens.
• Defining Critical Mass: For each sector and build this will differ - in one sector a £1.5m business may be very valuable so long as it has XYZ, in another acquiring below £7m Revenue could be folly for a variety of reasons.
• Identifying Operational Ceilings: Determining where owner-managed businesses (OMBs) reach internal scaling constraints - this is ascertained through the rigour of top-down market data analysis alongside expert determination of the asset's own varied capacities (product, people, processes, liquidity etc). A team with skilled assets, that is capable of plenty more and where customers of merit reside but where a founder has become overwhelmed and under-funded is a good foundational starting point.
• Management-First Qualification: Prioritizing leadership assessment over pure financial modelling, recognizing that financial projections and business plans rarely exist in sub-scale businesses and thus intuitive interpretation of coal-face capability, opportunities and threats are valued more so than spreadsheet gymnastics.

Successfully scaling sub-scale acquisitions within a buy-and-build platform depends on seamless operational execution, this becomes only more acute the smaller the acquired entity as invariably it will have less maturity and higher dependencies:

• Protecting Continuity: Preserving key client relationships, core culture, and operational stability during post-acquisition integration is vital. Change is destabilising to customers, staff and suppliers so needs to be measured, deliberate and communicated clearly beforehand and throughout.
• Targeted Growth Investment: Identifying (top down and bottom up) opportunities and threats and collaboratively prioritising and sequencing a maximised approach to enhancements is vital.
• Group Synchronicity: Driving strategic alignment, shared services, and operational efficiencies across all portfolio entities such that benefit as one but remain sufficiently empowered and enabled to be self determining in their own success.