3 lessons from high-performing, “oddball” rollups

In the year-and-a-half of running RollUpEurope, we have researched all kinds of programmatic serial acquirers. 

Their playbooks appear to be surprisingly similar. 

High, and stable gross margins. Asset light business models. Predictable revenue streams coming from diversified customer bases.  

If you follow this playbook, you are going to make money. If you don't… you can still succeed. In this article, we profile 3 “oddball rollups”, that have generated (or are on track to generate) outsized returns for their investors precisely by eschewing conventional wisdom.  

Why “oddball”? Because these businesses defy the above characteristics so much they almost seem like anti-rollups. 

Next, we distilled these case studies into 3 actionable insights on driving shareholder value:

1. Boost margins through vertical integration

2. Corner supply

3. In people-centric businesses especially, don’t be greedy

Insight #1: Boost margins through vertical integration

The attractions of private label products in retail are well understood. What about adult retail?

Enter Lovehoney Group - the self-styled “world’s leading sexual-wellbeing company”. Lovehoney is, in fact, a rollup of rollups. Its majority shareholder is Telemos - an investment vehicle controlled by Philippe Jacobs of none other than the illustrious Jacobs family from Switzerland. 

Covid or not, adult retail is a great business to be in. In the 10 years to December 2022, Lovehoney UK had delivered CAGRs of:

• 20% revenue

• 27% gross profit

• 34% EBITDA

Even more astonishing is Lovehoney’s asset-light model. In 2022, it churned out a Profit to Net Working Capital capital ratio of 100%! 

Telemos acquired Lovehoney in 2018. 3 years later, it merged Lovehoney with WOW Tech - a German peer that owned the Womanizer and We-Vibe brands. Combining British marketing nous with German R&D prowess was a genius move. 

And even though consumer sentiment has not been immune to the post Covid slowdown, Lovehoney UK’s gross margins haven't slipped much before 40% - nearly double their 2018 levels. 

Read the full story: I Love You, Honey! What Did a German Count and a Swiss Coffee Heir Get Up To?

Insight #2: Corner supply

The description of Graanul Invest, an Estonian producer of wood pellets (a form of biofuel), sounds like an anti-rollup. Asset heavy. Dependent on a single customer dogged by political controversy. Not to mention the fact that its business model is literally cutting down trees!

OK, let’s take a step back. Graanul was acquired by Apollo for $1B+ enterprise value 3 years ago. The sale was a fitting finale to more than a decade of gradual but unrelenting buildup in capacity. 

Graanul’s genius was to negotiate relatively short (4-5 years) take-or–pay contracts with major utilities such as RWE, Orsted and Drax (its largest customer). At a time of supply crunch, this allowed for more frequent pricing negotiations.        

Read the full story: The Unicorn Rollup: How Graanul Invest hit $500M+ in sales and exited to Apollo

Formerly the UK’s largest coal-fired power plant, Drax has benefited from mammoth subsidies to convert fully to biomass. It was Drax’s seemingly insatiable appetite for pellets that has propelled Graanul’s revenues from a paltry €64M in 2011 to €454M in 2021.  

This spectacular growth was made possible by a concurrent expansion in production capacity. An estimated 40% of Graanul’s 2.7 million tonne capacity is the result of M&A. Pelleting facilities acquired in Estonia, Latvia and the US.  

It is not just upstream assets that Graanul has been gobbling up:

• Building combined heat power (CHP) plants next to production facilities to reduce energy costs

• Securing feedstock supply i.e. forests

• Securing distribution i.e. ports and cargo ships

Insight #3: In people-centric businesses especially, don’t be greedy

Recruitment is not an industry that naturally lends itself to a rollup strategy. On the one hand, executive search is a high-margin industry: a natural hedge against inflation since recruitment fees are charged as a percentage of salaries. On the other hand, recruiters are a fickle bunch who can walk out any time. Worse, some of the most profitable industries, like finance, are notoriously cyclical.  

The UK private equity firm Literacy Capital either didn’t know about these issues, or didn’t care. Either way, in 2018 it went all-in on the investment banking specialist Dartmouth Partners (since rebranded to Kernel Partners) - and was eventually rewarded with a 10x MOIC.

Read the full story: Are recruitment rollups even a thing?!

The highlights of Kernel’s 6-year journey with Literacy include a chunky bolt-on (Pure Search); a strengthening of the management team; and a rebrand. And above all, a 7-fold growth in revenue that drove the estimated 10-bagger on Literacy’s partial exit to Three Hills Capital earlier this year.   

There are multiple reasons why Kernel had performed so well (and to be fair, its revenue has subsequently declined). We will single out just one: sharing the spoils. At entry, Literacy took a 36% stake in the business. The founder and CEO Logan Naidu rolled over 44% stake. The employee benefit trust accounted for another 14%.

Key people were locked in and incentivised in a very tangible way.