Deal shows benefits of corporate compounder model

The recent acquisition by BIL Group demonstrates the advantages of PHD’s structure compared to the traditional private equity model, says Pete Horton, PHD Acquisitions Manager.

BILGroup

BIL Group – a leading castor and wheel manufacturer – was acquired by PHD Industrial Holdings in June 2022. Last month it made its first acquisition – that of a family-run distributor Varley Castors – to create the largest group of its type in the UK. The deal demonstrates four ways in which PHD’s corporate compounder model makes it easier to create the right environment for long-term sustainable growth:

  1. Taking the long view

Because of PHD’s structure, it is not restricted by timelines and can be constantly investing in future growth. It took seven months to complete the acquisition of BIL Group in 2022, followed by almost two years of ownership before the Varley acquisition. We have a detailed integration plan, but it could take another 18 – 24 months before both businesses are fully aligned.

From start to ‘finish’ – if there is such a thing – it could be four or more years, at which point a typical PE house might be coming to the end of its fund life and looking to exit the business. From our point of view, we’ve done all the hard work getting to that point, so it makes sense to continue to benefit from the ownership of the two companies and recycle the profits into further growth, either within the wider PHD IH group or through further acquisitions or investment within the BIL Group.

  1. Seeing the results of integration

Compared to a typical PE house, we can be much more selective and less time-pressured with our bolt-on acquisitions. We have seen a number of potential targets for BIL Group over our two years of ownership, some of which may well have worked out well; however, our model means that we are responsible for the full integration and success of the combined group. In some scenarios, a PE house may acquire a bolt-on target but not go through the full integration process before it is time to sell the business, either due to time constraints or investment strategy, as it can be beneficial for their returns to leave some integration on the table for the next owner.

Under our structure, we try to ensure that the acquisition benefits both companies for the long term to create a better quality combination going forward for all stakeholders – vendors, management teams, employees, and PHD. If we’re successful with our bolt-on acquisitions, then the new combined group is in a much stronger position to benefit from further investment in the future, whether that be subsequent acquisitions, development in people, investment in plant and equipment and so on. We believe this creates a better-quality business overall.

  1. Right deal at the right time

PHD’s philosophy is about doing the right deal at the right time. We are not fixed to a 10-year fund life, and businesses and the world don’t work in 10-year cycles. The BIL Group team had seen a number of potential targets before Varley became available – they were waiting for the right one.

Once conversations started with Varley, it became increasingly obvious that this was the ideal business combination at the right time for both businesses. The two companies have an extensive trading history with each other, mutual respect within the industry, complementary product ranges and geographies, and a like-minded culture.

We look forward to helping both businesses develop over the years to come and benefiting from the ownership of the new group. As Warren Buffet once said, ‘When we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever’.

  1. Management autonomy

Our acquisition criteria are to find good businesses run by good people and to help them grow as part of our group. Typically, we are looking for successful, profitable, low-risk businesses that are a small part of an overall supply chain. They are successful in their own right, and we don’t want to make changes just for the sake of it because it is surprisingly easy to undo decades of hard work.

That is why we empower management teams to run the businesses autonomously and use us, as well as the other management teams in our group, as a sounding board for ideas that will help improve the quality of the business. We have created a group with a decentralised management structure, who are appropriately incentivised within their businesses, which drives ambition and entrepreneurship at each of our current subsidiaries.

Taking BIL Group as an example, the management team had been running the business day-to-day before we acquired the company and had a long-term growth plan, which included making bolt-on acquisitions. To date, they have delivered on that. Tim Murrow, Chris Davies, and James Craner understand the sector much more than we ever will because it has been a part of their lives for decades, so we trust them with running and growing the business and provide support to help them achieve their goals.

Our corporate compounder model allows us to go on this journey with the BIL management team because we are not restricted by timelines and can wait for the right acquisition to deliver on the original business plan. We can spend time developing and supporting the management teams to run their individual businesses by leaning on our own experience, as well as that of the other management teams within the group. Because we are not pressured into short-term gains, we can create an environment of collaboration and promote long-term growth.

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