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January is a slow month for many businesses, private equity and investment banking among them. But a question on a lot of dealmakers' minds is, "Was that a normal slow January? Or a slow January that's signifying a slow 2023?"
While we'll have to wait and see how the year shakes out, Private Equity Career News and SourceScrub invited the following dealmakers focused on the industrial and industrial tech sector to share their thoughts on what’s ahead and where to find deals:
We've collected the top tips and insights discussed during the webinar about hot niches in industrial and industrial tech, as well as tactics for finding the best deals and navigating the current market slowdown.
Efficiency always floats to the top of companies’ priority lists during times of economic uncertainty. This means two things for firms: investing in the robotics companies that provide those efficiencies, and adopting new technologies within these portfolio companies.
"We're seeing increasing private equity interest in [robotics], acting on the industry 4.0, scarcity of labor, and automation theses. Especially in the system integrators and services companies that install robots in manufacturing settings, there's a lot of interest from private equity," Jason disclosed.
This increased interest aligns with the challenges the companies themselves are trying to solve surrounding labor shortages and rising labor costs. "We've turned to automation to help solve the problems of these shortages," Jody detailed.
"Adoption of new business models is something that I’m seeing a lot more of, automation being one of those," Josh added. Dealmakers looking to make a splash this year should investigate how to best take advantage of automation and robotics, whether it's adding a robotics manufacturer to your portfolio or adding some robots to the floors of your portfolio companies.
Many of the deals that appear to be actionable in the coming year are focused on more niche sectors and specialized capabilities. “There’s a bunch of strategic interest in several of our companies given the niche they’ve carved out,” shared Jody. These include an on-shore semiconductor manufacturer, commercial roofing company, and portable sawmill business.
“We really like these ‘nichey’ companies that have a moat and they’re going to grow because they’re doing something different,” agreed Jessica. “I think this is a market where the smaller your focus area is, the better. We’re seeing many more deals that are founder-owned, family owned, first institutional capital opportunities...it’s more thesis-driven than our general manufacturing mandate.”
While it's always tempting to go after the big, A+ investment opportunities, smaller, more thesis-driven B and C opportunities are and should be the focus for many of those looking to invest in industrials and industrial tech this year. Adopting direct sourcing as part of your strategy and using a deal sourcing platform like SourceScrub to find, connect with, and build relationships with the right companies in your niche — especially those that are bootstrapped — is vital to success.
“We’ve built the tool in such a way that allows you to take what you know and apply it to the system to cast a wide net and then screen for a strategic fit,” said Josh. “Since we’re tracking very methodically things like headcount growth over time, you’re able to sort and filter by those [companies] that are experiencing more negative growth versus positive growth within seconds.”
Following the theme of focusing on smaller, more niche companies this year, the panelists also agreed that add-ons would likely constitute a significant part of this year’s deal flow. "Our add-on pipeline is bursting at the seams in a way that it never has before," Jessica disclosed. In a year where major platform deals are more unlikely, add-ons offer a way to use the trillions of dry powder still available and accept less risk with each deal.
Using add-on acquisitions to close the valuation gap in your portfolio could be a valuable method of using your firm's capital and setting yourself up for greater success next year. Add-ons are a way to "sweeten the pot" to help close platform deals, as well. Private credit is a burgeoning aspect of the private equity industry, especially as rates keep rising.
"If you have a good thesis and know what the add-ons could be [for future growth, sponsors] you might be willing to put in more equity in the beginning knowing you can meet your return thresholds," Jason revealed.
Much like with finding niche deals, firms looking to fill their add-on pipeline will need to be more proactive and use direct sourcing methods. A deal sourcing platform can help your firm in many ways: investment opportunity notifications, industry activity tracking, and potential conferences to attend and build the relationships that make deals happen.
Overall, the outlook for 2023 is positive among both our webinar panelists and attendees. Even in the face of economic uncertainty, most attendees expect the same or an increased number of deals this year, both platform deals (80% of attendees) and add-ons (92% of attendees). By focusing on the right tactics and using the right methods and tools, firms can make 2023 a strong year and set up 2024 to be even better.
To get even more insights — conference experiences, thoughts on AI, specific niches doing well, etc. — watch the whole on-demand webinar, Where to Find Great Deals in Industrials and Industrial Tech, for yourself.