Excerpt: Sponsors Eye Cyclical Plays

Buyout firms are expressing more interest in cyclical sectors such as industrial and retail with an eye on bargain deals at the outset of an economic recovery, bankers and buyout pros told Buyouts.

“The perspective is there’s been a pretty strong rebound in those areas, but we’re in [the] early stages of economic expansion so companies are still selling off a lower earnings basis,” Mike Hogan, a managing director for the mid-market investment bank Harris Williams & Co. told Buyouts.

The interest in the industrial sector is also heightened by a weak dollar, which makes it more expensive to buy imported goods and puts U.S. manufacturers in a more competitive position, Hogan said.

Berkshire Partners, OMERS Private Equity Inc. and The Blackstone Group recently made investments in the industrial sector. And several firms that have traditionally targeted the area have ramped up their activity. Sentinel Capital Partners in April bought Chromalox Inc., a Pittsburgh, Pa.-based manufacturer of commercial and industrial electric heating products and solutions. And in January the firm bought Chase Industries Inc., a Cincinnati, Ohio-based maker of heavy duty doors for uses in industrial and retail settings.

“Historically it’s the consumer that has been [in] the vanguard of driving recoveries in the U.S.,” Sentinel Capital Founder David Lobel told Buyouts. “But in current market, with so much unemployment, the consumer has not been leading the recovery.” Instead, Lobel said, many industrial companies that saw a 30 percent, 40 percent or even 50 percent drop in sales during the downturn have seen a rebound of about 20 percent in the last year.

As of May 11, U.S. buyout firms had completed or agreed to 32 control-stake deals globally with $1.7 billion in disclosed deal value in the industrial sector, according to Thomson Reuters, publisher of Buyouts. That amount of disclosed deal value is already close to levels seen in the fourth quarter of 2010—the most active quarter for sponsors across all sectors in recent years—when there were 64 deals with a disclosed deal value of $2 billion.

Strategic buyers, sitting on trillions in cash for deals, however, are posing stiff competition. Read the rest of the story here.