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‘Proactivity is critical’ when buying in the competitive industrials sector

'Buyers don't have the time or resources to compete in a drawn-out auction process, instead finding themselves willing to pay a steeper multiple to ensure they will win the asset and take it off the table extremely quickly,' explains Robert Reifman, managing director, Lincoln International.

PE Hub’s Q&A series with high-profile private equity professionals continues today with insights from Robert Reifman, managing director, Lincoln International. Reifman advises clients on the best approach to maximizing their investment returns on businesses they hold in the industrial space. He has M&A advisory experience, working on numerous transactions for private equity firms, public companies and private and family-owned businesses. His experience includes buy- and sell-side transactions, cross-border advisory, debt advisory and valuations.

What’s your outlook for private equity-backed deals in the industrials sector in 2022?

The broader industrials sector took a disproportionate hit during the height of covid – especially manufacturing businesses that shut their doors in early 2020. In the back half of the year and accelerating into 2021, the market saw a rapid reemergence in demand for industrial businesses with strong performance across the entire industrial landscape. A large portion of this surge is not just a “covid pop,” but rather acceleration of sustainable demand. Whether it be automation addressing labor shortages or filtration solving heightened concern for the air we breathe, the businesses that serve accelerated demand will be the most sought after. As demand continues to outpace supply, driving future growth, there is still time for PE firms to catch this wave. I expect continued increased competition for industrials businesses to drive valuations and speed up in deal processes in 2022.

What role is technology playing in the industrials sector?

For industrials, technology integration is creating “smart” processes and utilizing data collection to create efficiencies in production. Measurement, monitoring and the overall information side of industrials are key focuses for both businesses and investors. For example, sensors for tracking of industrials products allow plants to collect data and monitor operations. Other technology can communicate back to the user of any given product – like air monitoring that gives users information on indoor air quality. Industrials companies and their PE owners have technology companies high on their acquisition target list, though these assets are going quickly and often at premium valuations.

How are supply chain disruptions, labor shortages and other challenges affecting dealmaking in the industrials sector?

For industrials businesses there is no shortage of orders coming in, but they are struggling to keep pace with the demand, with some already declining new orders for 2022. When it comes to dealmaking, buyers have the added benefit of visibility into financials for 2022 early on, but at the same time, extended lead times put the customer base at risk as some search for alternative solutions. Industrial businesses are also not immune to the Great Resignation, but many are turning to increasing automation as one way to circumvent labor shortages and rising labor costs.

That said, industrials businesses are uniquely experienced in coping with these challenges, drawing on their experience navigating trade tariffs in the last few years. These companies have learned to pivot, overbuying raw materials in anticipation of shortages or being proactive with supply partners. When broaching this in a deal process, it is important that industrials companies explain their strategic moves and demonstrate the longevity of the demand spike – something that buyers are considering closely during due diligence.

How has M&A evolved over the last two years in the industrials sector? What are valuations and returns like in the sector now?

Valuations for industrials businesses continue to tick up, driven by the current dynamics in the M&A market. As deal flow progresses at a robust pace, deal parties are looking to strike a balance between competition for assets and resource allocation. Buyers don’t have the time or resources to compete in a drawn-out auction process, instead finding themselves willing to pay a steeper multiple to ensure they will win the asset and take it off the table extremely quickly. As this approach takes hold among more buyers and traditional dealmaking processes become increasingly obsolete, buyers are looking for opportunities to get to know businesses early. For sellers, they may find themselves receiving fewer bids on average, but from groups with much more invested interest.

What’s your bottom-line advice to private equity firms buying and selling in the industrials sector in 2022?

First, proactivity is critical. If you have conviction for a business, pursue that asset early and build a relationship long before it goes to market. Today, relationships and trust are bigger factors than ever before in a market where multiple deals are closing daily. Trusted bankers and advisers are also increasingly valuable, giving buyers and sellers confidence across the decision-making continuum.

Second, buyers and sellers need to distinguish between covid spikes and sustainable growth accelerated by the pandemic. In many cases, the demand spikes will last for years to come. Understanding businesses where this dynamic is applicable can be the difference in picking a true winner.