MiddleGround leverages Industry 4.0 to position Megatech as diversified parts supplier

'There are a lot of these single-facility players that focus on low-volume, complex parts, but it's hard for them to get to real scale just organically,' MiddleGround's Marty Sjoquist said.

Rising demand for specialized engineered parts in North America attracted MiddleGround Capital, a Lexington, Kentucky-based mid-market private equity firm, to acquire Megatech, a Québec-based manufacturer, in a deal announced in January. To find out more, PE Hub spoke with Marty Sjoquist, a director on MiddleGround’s investment team.

Founded in 1992, Megatech focuses on computerized numerical control (CNC) for the machining industry. The company leverages simulation, 3D visualization, analytics and collaboration tools to produce a wide variety of highly-complex, highly-precise, low-volume engineered parts for a range of applications, including optics and photonics, robotics and medical.

Megatech fits in well with MiddleGround’s investment thesis on Industry 4.0 manufacturing (which involves new technology, including artificial intelligence and machine learning), Sjoquist said.

Marty Sjoquist, MiddleGround Capital

“Megatech is serving customers in growing end-markets, and as technology advancements continue to occur, these customers will continue to need more complex parts with new geometries that require the types of machining expertise that Megatech can offer,” Sjoquist said. “We think there is an attractive organic growth story in addition to the M&A strategy that we are planning to execute on.”

The firm will leverage its resources and expertise to build a larger platform organically and inorganically around Megatech, with Sjoquist citing strong revenue tailwinds driven by Industry 4.0 trends.

The M&A strategy will also focus on increasing the geographic footprint for Megatech and adding services, such as plastic injection modeling.

There are a lot of niche players in the industrial manufacturing space for low-volume engineered parts, but most of them just focus on one technology, according to Sjoquist. The strategy with Megatech will be to build a diversified platform with a set of manufacturing technologies that can provide a suite of services for many customers.

The industry is also fragmented, which presents an opportunity for consolidation. “When you look at the level of fragmentation and the structure of the market, there are a lot of these single-facility players that focus on low-volume, complex parts, but it’s hard for them to get to real scale just organically.”

Ever since the pandemic induced supply chain woes that delayed the movement of goods, many companies have diversified their sourcing options, mainly by looking at regional providers whose turnaround times are significantly shorter as compared with offshore sources. MiddleGround is benefiting from this trend, Sjoquist explained.

“We definitely see reshoring as a major trend especially for these type of complex, low- volume parts,” he said, adding that reshoring trends are benefitting local companies immensely. “Reshoring is a real thing that we see happening and benefiting domestic companies that are in advanced manufacturing.”

When asked about other challenges, such as raw materials for parts, he asserted: “End-markets tend to be more resilient through the broader economic cycle, especially the higher tech markets, such as medical, which are not necessarily sensitive to the broader economic environment.”