International expansion – buy it, or build it?

05 March 2019

Jamie Roberts
Partner, YFM Equity Partners

Private Equity houses invest across most sectors and industries, and at different stages of business life cycles.  The one thing that all the businesses invested in by Private Equity will have in common is they are run by ambitious management teams with strong plans to deliver growth.  That growth will often include international expansion.  Perhaps that isn’t surprising given that a 2018 Mckinsey report suggests that cross border commerce is going to double to $4bn over the next 2 years as the world gets more connected through technology and movement gets cheaper and more efficient.

A lot of time will be spent by Private Equity investors working on international growth plans with their investee companies – and the biggest debate will be whether to buy into a new territory with an acquisition, or whether to  take the time to build it from scratch.  As you would expect there is not a one size fits all answer, it will often depend on the business, where it wants to expand, cultures, customers, capex requirements etc etc.

A classic example of this buy or build decision was made by GTK.  In 2013 YFM led the MBO of a cable manufacturing business in Basingstoke.  The business made around 1/3 of its cables on site in the UK and outsourced 2/3 to the Far East.  When YFM invested the strategy was to support the team to continue their organic growth through growing the customer base, doubling the capacity of the Basingstoke site and growing the existing Far Eastern relationships.    By 2016 it became clear that GTK was missing out on a lot of work from existing customers who wanted a lower price than could be delivered from a UK facility but did not want the long shipping times and IP issues of their designs being sent to Far Eastern manufacturers.  GTK therefore looked for a near shoring solution and Romania was the natural place to go due to geographic position, business friendly regulations and infrastructure.   We knew that potential acquirers of GTK would value the business more highly if there was a higher percentage of in-house manufacturing vs outsourcing, so we began a project to explore whether it would be better to buy an existing manufacturer or build something from scratch.

It was a tough decision. Having explored both options in detail we concluded with the team that given the availability of property and skilled work force it would be cleaner to build a facility from scratch.  Identifying a local business agent was key.  They helped to source a site and work through the red tape, they also helped with recruitment and found a great facility manager.  The site was operational within 6 months and it broke even within 12 months with over a dozen staff all sourced from the local town.

As with many fast-growing business in the UK, international expansion is going to be key to their success. Many businesses will face this classic buy it or build it decision.  For GTK, building from scratch turned out to be the right decision.  When GTK was acquired by Volex Plc late last year one of the key attractions was the double-digit percentage growth in UK manufacturing and the in-house Romania site which is on track to double capacity in the next 12 months.

Private Equity investors will always work with their investee companies to determine the best option for each company to address the best way to achieve international expansion.

 

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