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 last month 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.
“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
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 Buyouts in an interview. “I have a conviction we’re going to have a mini-resurgence in manufacturing.”