Manufacturing has recovered strongly since the Great Recession and is likely to retain a key position in the U.S. economy, according to participants at the Association for Corporate Growth’s InterGrowth conference this week in San Diego.
This perspective should be reassuring for financial sponsors, who historically have favored sectors such as manufacturing, with its hard assets and generally reliable, if often unglamorous, financial performance.
While the sector should continue to be a mainstay of the economy, its prospects are likely to be driven more by technological investments and automation, even as its role as a job creator continues to decline.
Altus Capital Partners, a boutique buyout shop in Westport, Conn., looks for target companies that have a proprietary technology or process that can drive their growth, said Elizabeth Burgess, a senior partner at the firm, during a panel discussion on manufacturing. But the firm also must analyze the cost of maintaining the competitive edge of its portfolio companies, she said.
“Sometimes left out of the equation is the capital required to get there,” Burgess said. It may take $1.50 of capital expenditures to drive $1 in EBITDA, calling for a careful calculation by the sponsor. “You need to look at EBITDA less capex to get the true value of the business.”
Altus Capital focuses on domestic niche manufacturing, targeting lower mid-market companies with an enterprise value of $25 million to $100 million and EBITDA of at least $ 3 million. The firm struck a deal in March to sell portfolio company The D.S. Brown Co., a provider of transportation infrastructure products, to Gibraltar Industries of Buffalo, N.Y., a publicly traded manufacturer and distributor of products for the construction and industrial markets.
Last August, Altus Capital portfolio company Aqua-Chem, a Knoxville, Tenn.-based maker of osmosis technology and water pretreatment equipment, acquired Specific Equipment Co., a Houston-based provider of fluid-handling systems for the petroleum industry. No financial terms were disclosed for either transaction.
U.S. manufacturing is likely to get a boost from global macro-economic trends, said Ron Ritter, a partner at the consulting firm McKinsey and Co. Nations such as China, long a haven for low-cost production, are experiencing inflation at a higher rate than the United States, diminishing their competitive advantage, while disasters such as the earthquake and tsunami in Japan demonstrate the vulnerability of international economic networks, Ritter said. “The turbulence is very strong against these global supply chains.”
U.S. manufacturing is likely in the future to look like the agricultural industry, Ritter argued. Agriculture once employed half of the American workforce, he said. Today, although it employs less than 5 percent of America’s workers, agriculture continues to be a major contributor to the economy and the U.S. export market, he said.
Buyout shops are showing signs of interest in beaten-down industries such as auto parts and construction, according to Thomas Bonney, the founder and managing director of the Philadelphia consulting firm CMF Associates. But the sponsors are looking for specific kinds of competitive advantage from the deals they do.
“Private equity firms must have some conviction in their investment theses,” Bonney told sister magazine Buyouts. “I have a conviction we’re going to have a mini-resurgence in manufacturing.”
Steve Bills is a senior editor at Buyouts magazine and a contributor to peHUB. Any opinions expressed here are his own. Follow him @Steve_Bills. Follow Buyouts @Buyouts.