An in-depth look at the Corporate Compounder M&A model

The Corporate Compounder M&A Model is a strategic M&A-led growth strategy deployed by companies that are highly skilled at acquiring and integrating other businesses in a way that consistently compounds their earnings, revenues and value over time.

Such companies, often referred to as "compounders," use acquisitions as a core growth strategy to create long-term shareholder value by growing exponentially, rather than incrementally.

While, in many ways, operating similarly to private equity acquirers, the compounder model differs in several vital respects, most prominently the fact that acquisitions are made with a view to long-term ownership and investment. This is a stark contrast to PE transactions, which emphasise fuelling rapid growth over a period of typically around five years prior to a pre-planned sale.

Compounders are less prominent M&A buyers than those in private equity, but there are a number of UK acquirers taking this approach. With many UK owners seeking an exit that does not involve selling to private equity, or perhaps not able to attract PE investment, compounders could represent a valuable option for gaining financial backing or securing a profitable sale to a reliable buyer.

The key elements of the compounder M&A model
Disciplined acquisitions
Corporate compounders are typically highly disciplined about the businesses they acquire. Often, they eschew the fashionable strategy of regularly entering new markets through their acquisitions, instead typically focusing on businesses operating in the sector they specialise in, companies in adjacent industries, or companies with operations that are complementary to their own or those of existing businesses in their portfolio.

Compounders will also look for stability and strong cash flow over a number of years. While some buyers and investors may place a greater emphasis on acquiring up and coming businesses in innovative, emerging industries, compounders are typically more interested in companies that can demonstrate a strong track record of performance.

As a result, compounders will most often target businesses in well-established industries that are of perennial value and unlikely to be heavily impacted by changing consumer tastes, technological disruption or economic shocks. While this may mean that they do not generate the kind of exponential returns typically targeted by investors such as private equity firms, this approach ensures stability, security and consistent returns over the long term.

Compounders are also meticulous about ensuring that deals represent good value. While their business model of investing in companies and working alongside management teams in the long-term means that they are highly unlikely to put low-ball valuations on potential acquisitions, they will seek to ensure that the price they pay reflects an accurate valuation of the company and is in line with their expected return on investment.

This disciplined, selective approach means that compounders remain focused on acquisitions that are earnings accretive, align with their long-term vision, don’t dilute their value and deliver scalable, incremental growth.

Strong integration capabilities
A further reflection of this approach is found in the high value that compounders place on targeting companies with strong integration capabilities. The ability to effectively integrate acquired companies is critical to building a strong, cohesive portfolio of businesses.

There are many ways for a buyer to assess whether a target company will integrate well. Compounders are most likely to assess whether there is a strong cultural alignment with the target business, whether there is a strong leadership team that is compatible with its own business, synergies between the two companies, compatibility between financial systems and processes and the cost and revenue synergies that might be derived from the deal.

When conducting acquisitions, compounders are meticulous and adept at selecting potentially suitable target companies and rapidly identifying synergies, such as operational efficiencies, cultural alignment, enhanced market access and cost savings, that the deal could deliver.

Following from this strategic mindset, compounders also recognise the vital importance of having strong post-deal integration systems and processes in place, in order to help them realise the potential synergies as quickly and effectively as possible.

Post-acquisition, compounders will focus on achieving these synergies by either maintaining or improving systems already in place at the company, as well as integrating and aligning the target company with the necessary culture, systems and operations.

This approach aims to ensure a smooth transition and integration that adjusts and improves areas that require bringing in line with the company’s operations, while simultaneously maintaining and nurturing the aspects of the company that attracted the buyer in the first place.

A strong integration process will be a central part of a compounder’s acquisition model and enables them to extract value from the acquisition and grow earnings as quickly and efficiently as possible, while ensuring that the target company is a strong fit with the existing portfolio.

A focus on the long-term
Perhaps the main thing that marks compounders out from private equity buyers is the long-term scope of their M&A growth strategies. Rather than focusing on constantly generating returns for shareholders and growing platform companies in order to secure a profitable exit in a few years, compounders will generally not have an end date in mind for exiting their investments. This long-term approach is similar to that followed by many large family offices.

While earnings accretion and quick integration is important, patience is also a key part of the compounder model. The aim is not to secure immediate, rapid growth, but to build a stronger market position over time and generate sustainable, long-term growth and profits.

For that reason, compounders will target businesses that represent a close fit with their model and processes, but also have a strong culture and management team in place. This enables them to provide investment that gives portfolio companies the power to build on their previous growth and existing strengths without necessarily instituting dramatic changes or diluting the target company’s identity.

For owners seeking a sale or investment that does not disrupt the company’s values and existing business or put jobs at risk, this approach is likely to be extremely attractive. Posing less risk of disruption than a private equity sale, while potentially providing a greater level of investment than an MBO or Employee Ownership Trust may be able to offer.

Free cash flow and return on capital
A major focus for many corporate compounders when making acquisitions will be on generating free-cash flow (FCF = operating cash flow minus capital expenditure). Cash flow is vital for compounders, as it enables them to finance their acquisitions without excessively relying on debt or outside financing.

In order to continue generating this crucial cash flow, compounders will seek to ensure that all acquisitions are capable of generating a strong return on the capital invested. This is a key reason why integration and alignment are so crucial to compounders: if acquisitions are not able to be rapidly, successfully integrated into the portfolio then this will severely impact their ability to be earnings accretive in a timely manner.

Maintaining strong return on capital will mean that every investment the compounder makes generates significant returns, contributing to a constant supply of free cash flow that enables the company to continue making acquisitions and investing in its portfolio.

Reinvestment
The kind of returns that are often generated by buyers such as private equity firms means that they are typically able to drive a significant amount of investment into their platform businesses in order to achieve their aims of growth and a subsequent profitable exit.

The concern, here, however, is that investment is made with a short-term mindset primarily focused on delivering returns for the owner and shareholders, rather than on generating strong, sustainable long-term growth and earnings.

The long-term mindset of corporate compounders, however, means that investment is focused on lasting growth and a significantly greater amount of excess cash will be reinvested into the portfolio businesses in order to achieve this. This is a notable contrast to buyer classes who return the bulk of excess cash to shareholders via dividends or share buybacks.

By reinvesting a significant portion of their returns into their portfolio of businesses, compounders are able to accelerate growth, and, perhaps just as importantly, ensure that this growth is stable, sustainable and drives strong earnings in the long term.

Scalability and incremental gains
When targeting acquisitions, corporate compounders will often seek to enhance their scalability. A scalable business model is important to many compounders, with strong, standardised, repeatable integration processes, scalable IT infrastructure, scalable access to capital, the economies of scale, decentralised management, geographic expansion, product and service expansion, personnel growth and market scalability often the driving force behind their growth.

Scalability helps compounders to ensure that they can grow sustainably and effectively, regularly expanding their business while keeping operational costs low, enabling margin growth and increased profitability as the business grows. Acquisitions, therefore, should fit into this model, being able to align with the compounders standardised systems and processes, while delivering growth and the potential for further expansion.

An important factor in this strategy is the targeting of incremental gains. Like some private equity firms (and private equity platform businesses), compounders most often focus on making regular, smaller acquisitions, rather than a few transformative large purchases.

The aim is not to make a few acquisitions that dramatically transform the business and deliver huge growth, but to make frequent small and medium-sized deals that steadily contribute to revenues, profit and ongoing growth. While individual deals may not have a huge effect, the cumulative impact of making numerous acquisitions in this way can deliver significant growth and often in a more sustainable way than making one or two major acquisitions.

A decentralised model
A well-defined acquisition profile that largely targets companies that already reflect a strong strategic and cultural fit with the overarching business means that many compounders have a decentralised operating model.

While there may be some standardised processes across the portfolio, companies acquired by compounders are often allowed to maintain operational independence, with retaining the existing management teams and workforce often prioritised when making acquisitions.

Compounders will typically only intervene in the way that companies operate strategically. This means that they can strike a fine balance between developing a fully-integrated, cohesive, complementary portfolio of businesses, while retaining valuable expertise and knowledge and keeping the entrepreneurial spirit of target companies intact. A well-documented example of this strategy is the private petrochemical behemoth Ineos, who are firm believers of allowing operators of their acquired businesses a large degree of autonomy.

Effective capital allocation
A key component of the disciplined financial approach of corporate compounders is effective capital allocation. In order to ensure effective distribution of capital and promote continuing growth, compounders will place a great emphasis on deciding how they allocate their capital.

Largely, capital will be diverted to either internal investments in their existing portfolio companies (for example, into research and development, organic growth efforts and even bolt-on acquisitions for companies they own) or on new acquisitions.

Internal investments in their existing businesses and funding for new acquisitions are both hugely important to compounders and, if the compounder is operating successfully, much of its success will likely be attributable to striking the right balance and allocating capital in a way that helps them to maximise ongoing, long-term growth.

Advantages of the compounder model
Growth – A successful compounder M&A model targeting complementary businesses can enable the company to expand their market share, growth geographically and build a larger customer base far more rapidly than they would be able to solely through organic growth.

This can help compounders to build a leading market position, particularly if they are operating in fragmented industries. A stronger market position means the company will be able to offer better pricing, strengthen consumer loyalty, enhance their service offering, accelerate innovation and uptake of key tech and, ultimately, build a major competitive edge over rivals.

Furthermore, acquisitions, of course, provide far quicker revenue growth, meaning that the compounder can quickly begin generating higher profits. Given the fact that many compounders focus on slower-growth and mature industries, the ability to use deals to consistently boost revenues is a particularly valuable asset.

The policy of making smaller acquisitions and targeting growth in an incremental manner, meanwhile, means that compounders can avoid the kind of disruption and risk that is often associated with larger deals. By reducing the size and complexity of deals and focusing on targets that offer a strong strategic fit with the existing business can result in a reduced level of operational disruption and avoid cultural clashes, encouraging growth that is stable and sustainable.

Economies of scale – The synergies unlocked by acquiring a number of highly complementary companies means that compounders can achieve significant cost savings and operational efficiencies that would be far more difficult and time-consuming to build through organic growth.

Synergies also enable significant value creation, such as through cross-selling of products and services, expansion into new markets and geographies and leveraging customer relationships across multiple companies, all while effectively reducing costs.

Diversification – While compounders will often have a less diversified portfolio of companies than, say, private equity buyers, they can build a more diverse, stable business by acquiring companies that have adjacent offerings within the markets they operate in.

As a result, compounders can develop a comprehensive service offering that enables them to build a dominant market position. It also means that they can reduce risk by acquiring companies that give them more diversified revenue sources, improving their stability and resilience against economic shocks.

Vertical integration - While less common, vertical integration can be part of a compounder's strategy, though it generally must align with their long-term goals and value creation objectives. For example, acquiring suppliers can help secure supply chains, which may be particularly valuable in industries with critical dependencies or volatile supply markets.

Flexibility – Having a relatively diverse range of businesses and revenue streams helps to build flexibility across the compounder’s business, while acquisitions can also be used to respond rapidly to changing market conditions or strategic priorities.

This flexibility means that compounders can move quickly to either divest or streamline non-performing assets or acquire new companies that have greater alignment with market conditions or the overarching business strategy.

Recurring revenue – As well as building diverse revenue streams, compounders can also use acquisitions to generate stable recurring revenue and cash flow. Acquiring companies with strong recurring revenue will ensure stable cash flow, predictable financial performance, a greater ability to plan for future investments and, of course, more cash to reinvest in their portfolio.

Scalability – By developing repeatable processes across numerous acquired businesses enables a compounder to efficiently manage their portfolio as it grows without needing to increase costs or complexity proportionately.

Investment in technology and expertise to help support post-deal integration and management means that compounders can operate and grow efficiently, while maintaining strong cash flow and sustainable capital allocation.

Talent and expertise – Compounders will often use M&A deals to bring in industry-leading talent and expertise, which can prove just as valuable as geographic expansion or revenue growth, particularly if the buyer is operating in a highly-specialised, competitive industry.

Bringing in top-level talent can also enhance the compounder’s leadership, bringing in new perspectives and capabilities that can help to increase the depth and breadth of its leadership team.


PHD Industrial Holdings
Initially founded in 2008 as a private equity business, PHD Industrial Holdings pivoted to a corporate compounder model in 2021. The firm characterises itself as a buyer with a long-term, founder friendly investment model that invests in stable, mature SMEs in traditional, even “unfashionable” sectors.

The company is comprised of six trading businesses spanning a variety of industries: tour operator First Class Holidays; fixings and fastenings supplier Olympic Fixings; compounds manufacturer Hylomar; chemicals formulator Technikraft; cables manufacturer Automarine Cables and industrial wheels manufacturer BIL Group.

Discussing PHD’s M&A model, founder Andy Dodd said: “PHD invests in stable and mature SMEs in traditional industries that are highly profitable and cash-generative. It takes time to find good investments and prime them for growth. Where you have a successful business that is increasing in value, it makes no sense to sell prematurely.”

“Our model enables us to hold businesses, reinvest cashflows and benefit from compound growth. Because we avoid the constant cycle of fundraising, investing and exiting, it reduces the proportion of time where the funds are not invested.”

“It also provides greater continuity for the business. Typically these companies have experienced management teams, a skilled and loyal workforce and long-standing customer relationships. We help owners to preserve that legacy. Usually the management team will remain in place and we will work with them to make operational improvements. As many owners are reluctant to sell to private equity, our approach also means we can acquire good businesses at an attractive price.”

Dodd describes the compounder model as “an ideal way” to support SMEs and “preserve British industry”, adding that compounding is a “growing area of the market”.

A core part of PHD’s reinvestment strategy is providing portfolio businesses with the funds to make add-on acquisitions, with several of its subsidiaries having completed deals over the past few years.

Most recently, Goole-based Technikraft acquired a majority stake in West Yorkshire private-label metal working fluids provider Delta Fluid Technology. Technikraft initially secured backing from PHD in 2018, prior to the group’s switch to a compounder model.

Since PHD’s investment, Technikraft’s turnover has increased from £6 million to over £10 million and the firm has expanded its team with key hires in operations, procurement and sales. Managing Director James Clews said that the Delta deal was “a pivotal moment” for the company that would make it “a stronger force in the market”.

PHD Director Philip Price added that the deal demonstrated that the company’s investment model “provides a genuine alternative to a trade sale for owners seeking an exit.”

PHD’s compounder approach is also proving successful for the wider group. In the financial year ending September 2023, despite significant economic challenges, PHD reported an 11 per cent increase in revenue, with sales passing £63 million.

CorpAcq
CorpAcq (Corporate Acquisitions & Investments) is a North West-based compounder that has been operating since 2006. The company boasts a portfolio of more than 40 companies spanning a wide array of industries and generating combined turnover in excess of £650 million.

The company describes itself as being an expert in corporate acquisitions “and a long-term investor in successful companies, we have a proven operational management team and a track record of consistent profitability demonstrated over a number of years.”

It seeks to acquire and develop companies that strong management teams with the drive and determination for further growth and says it is “keen to venture into new industries that meet our acquisition criteria and grow within our existing sectors.”

The company has a strong, highly-experienced management team headed by founder and Chairman Simon Orange and Chief Executive Officer David Martin, along with Acquisitions Manager Stuart Kissen, whose role encompasses leading new business origination as well as structuring, negotiating and executing acquisitions.

The company has a number of corporate finance partners that help to provide the funding for its scaled-up acquisition strategy, with Goldman Sachs Asset Management and Nova Capital among the investors to have backed CorpAcq over recent years.

Between 2018 and 2022, the company reported a compound annual growth rate (CAGR) for revenue of 16 per cent and an adjusted EBITDA CAGR of 17 per cent. During that period, it also reported average organic revenue growth of 4 per cent and subsidiary-level profit growth of 7 per cent, indicating that its success is far from being driven by acquisitions alone.

Last year, this success was reflected by the announcement that CorpAcq would be acquired by American investment vehicle Churchill Capital Corp VII and would list on the New York Stock Exchange (NYSE), with the deal reportedly involving a new $592 million war chest to fund further acquisitions.

In August 2024, however, it was announced that the proposed deal had been called off, with the two companies announcing they had mutually agreed to terminate the merger “due to IPO market conditions”.

Despite this blow, Simon Orange said he remained "confident in the company's future growth opportunities”, with Churchill VII Chairman and CEO Michael Klein saying: “"While market conditions are not favorable today for the public listing of CorpAcq through our proposed merger, we continue to believe in the strong fundamentals and growth prospects of the Company.”

Challenges
For all the benefits of the compounder acquisition model and the caution and strategic rigour with which they operate, there are of course challenges associated with the strategy, as there are with any scaled-up acquisition model.

One of the primary challenges is consistently finding high-quality acquisition targets that fit the model's criteria. Searching for, and identifying, well-run private businesses in favoured sectors can be a full-time job. Conducting due diligence and negotiating deals under a target multiple will also demand time from a wider ‘deal team’. As the company grows and makes more acquisitions, maintaining this quality becomes increasingly difficult. Read this article to find out more about using the BSR Lens to identify off-market acquisition opportunities.

Integration risks also represent a prominent challenge. Despite the lengths compounders go to to ensure a strong strategic fit, there will remain some risk of operational disruption and the possibility of a strain on internal resources from having to integrate frequent acquisitions, all the while trying to share best practices across diverse businesses.

Cultural clashes with acquired companies can lead to friction and challenges with integration, which could potentially hamper the compounder’s ability to retain key talent – which may have been one of the key motivators behind a deal. Even with rigorous due diligence, there is also the risk that buyers can overestimate the potential synergies or cost-savings of a deal and that the expected returns may not materialise.

Delays in realising the expected synergies from acquisitions could lead to returns initially being lower than expected, which will have a knock-on effect on the compounder’s revenues, cash flow and ability to reinvest and allocate capital effectively. Balancing autonomy with group-wide synergies is a common challenge.

If they are operating in highly-competitive industries, compounders may also find themselves at risk of overpaying for acquisitions – particularly if they are coming up against rival bidders who may be willing to pay more.

There are also challenges associated with scalability. While incremental growth will reduce these risks, there is an unavoidable increase in complexity that comes with managing a larger, more diverse, geographically disparate portfolio.

While financial efficiency is of paramount importance to compounders, there are still risks that come with funding numerous acquisitions – especially if the compounder is reliant on significant debt to fund acquisitions which subsequently do not perform as expected.

This can be compounded by rising interest rates, and there have been many cases over recent years where this has resulted in a rapid unravelling of the compounder (i.e. in the case of e-commerce giant Thrasio).

As with roll-up acquisition strategies, compounders will also need to be wary of regulatory considerations. If they are operating in sensitive industries or consumer-facing sectors, buyers that make numerous acquisitions could face significant scrutiny from authorities, which could lead to deals being delayed or even blocked and adds another layer of complexity to the M&A process.

Finally, an over-reliance on acquisitions to fuel growth may mean that organic growth opportunities are missed. This will be less of a concern if deals are enabling the company to sustain consistent growth, but could prove damaging in future if consolidation leads to a scarcity of suitable targets or changing market conditions make deals overly expensive or complex.


Despite these risks, compounders that identify and proactively seek to avoid the challenges associated with their acquisition strategy should be able to effectively manage risk. Strong integration processes, a clearly defined strategy, flexibility, strong management and disciplined capital allocation and expenditure are at the core of the compounder model and successful firms will be well-equipped to anticipate and manage most of the risks associated with the strategy.

For owners, meanwhile, the prospect of securing a long-term backer that is focused on building on the company’s success, investing in its operations and future growth and supporting its existing management team and workforce, could provide an extremely attractive alternative to a potentially disruptive private equity sale.

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