Excluding the COVID-induced collapse in 2020 and the record-setting surge in 2021, middle-market deal activity in the industrial sector has been relatively flat over the last decade, as comparted to other segments such as technology and healthcare. While persistent supply chain interruptions and labor shortages have dampened deal activity in recent months, an array of pandemic-related stimulus programs and other favorable economic developments may well revive the sector. Private equity investors must now shift gear to respond to the changing macroeconomic landscape to acquire the best possible targets, optimize their current portfolio, and improve overall performance in a rapidly evolving marketplace.
Highlights From the Report
Macroeconomic Pressures
The U.S. industrial segment has experienced significant disruptions due to the pandemic, including complete shutdowns of manufacturing plants and a diminished labor force. In 2021, the sector experienced resurging activity due in part to pent up demand globally. However, record high inflation and a rising interest rate environment present a new set of issues, the likes of which the industry has not experience since the 1980s.
Commodity Pricing and Inventory
As inputs such as energy, materials and labor become more expensive there is often a delayed reaction in the ability to pass these higher costs on to customers. Surging commodity prices over the last 24 months, combined with supply chain and logistical challenges have resulted in companies stockpiling inventory levels resulting in bloated balance sheet inventory levels, even as recession-related declines in consumer demand persists. Many organizations will require proactive strategy and planning to optimize the value of their inventory.
Automation and Smart Manufacturing
Structural changes within the industrial manufacturing, including automation and digitalization has the potential to offer significant investment opportunities for private equity funds, particularly by sustaining valuations and increasing multiples even in the face of an economic downturn. Industry 4.0, which refers to the fourth industrial revolution in manufacturing, is revolutionizing the way companies manufacture, improve and distribute their products. Over the long haul, efficiencies realized through automation and digital transformation produce competitive advantages in the marketplace.
Looking Ahead
Although dealmaking and lending activity in the industrial sector is pulling back from the pace we saw earlier this year, there is strong optimism that the COVID-induced stagnation in the industry may well be behind us. The private equity market still has plenty of uncalled capital to work with and management has a number of tools in the toolkit to promote growth and attractiveness. As of September 30, more than $800 billion was committed to buyouts, and private equity funds have an unrivaled $2.5 trillion in unspent capital. Consequently, private equity investors are well-positioned to not only withstand the effects on an uncertain marketplace but to take advantage of it and grow beyond what we have seen in over the past decade.
