Manufacturers Keep Their Eye On PE –

Although manufacturers moving into the New Economy by e-enabling their businesses and driving into international markets are increasingly looking at private equity sources to fuel that growth, investors are proving hesitant to jump.

Of the 300 chief financial officers at the helm of middle market manufacturers recently surveyed by Fleet Capital and Strategy One, more than 30% said they would seek private equity financing in 2001, versus 15% who said they would fund growth through lease financing. While more than half expected their companies to use bank financing or internal sources to fund their growth, private equity funding surpassed leasing as the third most prevalent type of financing for these manufacturers. Senior debt placed fifth among desired funding sources.

As the private equity markets have grown more robust in recent years, manufacturers have been eager to jump into the fold. Since 1999, the trend toward private equity has been rising. While only 19% of the chief financial officers surveyed in 1999 said they would seek private equity financing, that figure jumped to 27% the following year.

“The cost of capital has gone up in terms of interest rates and a tightened credit environment. Companies are seeing this and looking for other options,” said Myles Cohen, a senior vice president with Fleet Capital.

The private equity markets, however, may not offer deliverance. The venture capital pool has been shrinking just as manufacturers are asking for more. According to Venture Economics and the National Venture Capital Association, while the amount of private capital raised by manufacturers grew steadily through the mid-1990s, it has been declining since 1999.

Manufacturers have tapped private sources of funding in recent years to move their businesses online and create e-commerce initiatives, Cohen said. They also have used the capital to set up international distribution centers, particularly in Europe, and to build sales forces to match.

In 1995, 44 manufacturers raised $282 million in the private equity markets. Two years later as the market began to roar, that figure nearly quadrupled 78 companies raised $1.04 billion in the private equity markets. Venture investing in manufacturers reached a peak in 1999, with 99 manufacturers pocketing $5.14 billion in private investment. Last year, however, that number was sliced in half, with $3.36 billion raised by 97 companies.

“These CFOs are going to keep close tabs on what’s happening in the private equity market in 2001, if the market is available to them,” Cohen said. “The markets really dictated, not necessarily in terms they want.”

Manufacturers in the Fleet Capital/Strategy One survey included, among others, players in the agriculture, construction, transportation, apparel and electrical industries.