Fairly new to PE and I'm trying to think about all the potential target industries. I'm curious about the play book for industrial PE. The businesses, for both manufacturers and distributors, all seem capital intensive and would be hard to scale without pretty substantial capex.
I wonder if the playbook is focusing on a stable cash flow business, growth EBITDA via M&A and lever up.
Or it's becoming a more distressed situation, where PE comes in and discover turnaround opportunities, buy low, improve operations and hopefully sell high. This is a wild generalization but curious about any interesting cases you guys came across!
It comes down to pulling a few elements together, in my (humble, as a banker) view. Industrials is absolutely vast (most sectors are), so there no one-size-fits-all. But here's how I think about it.
First is the market. You're in some sense facing an end market that needs a reason to exist. Maybe that manufacturing glass bottles that are sold to beverage companies - can you get comfortable that the end market here (premium or alcoholic beverages) has a reason to exist and will continue to grow at a reasonable clip?
Once comfortable with the market, think about the (1) product portfolio (is it diversified? Is it more commoditised or highly specialised? Is it outdated or is it well-aligned with the key drivers of the end market?), (2) manufacturing footprint (is it old and falling apart, or modern with recent capex? what is the capacity utilisation? Is it globally distributed?), (3) distribution and customers (is there customer concentration? who are the customers (government? mom and pops? blue chips?), how are we reaching customers (own salesforce? distributors?))
There's more (management, procurement, etc.) but you get the idea.
Now, an outstanding company will tick all the boxes. But you should also be thinking about ways to improve the company that the existing owners haven't done. Improving the existing business (e.g. using existing expertise to develop more premium glass bottles which can be sold to spirits manufacturers and craft breweries improving margins and accessing a new customer base).
Management will have their own organic growth initiatives (usually moving into new geographies, new products, new technology) which you should assess.
Layer onto this inorganic growth (which is an animal which can take shape in a lot of different ways).
I realise this essay doesn't really answer your question at all - I find it difficult to provide a "blueprint". But yes, most (not all) industrials companies are capex-intensive and usually trade at lower multiples (at least relative to SAAS, whatever that is), and can be more difficult to finance. But there's a price for everything, and if you can get comfortable on the risk factors, and find some tangible growth opportunities, there are good trades.
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