Middle-market private equity firms are finding opportunities in the transformation of manufacturers with Industry 4.0—a collection of technologies including the Internet of Things, artificial intelligence, machine learning, robotics, advanced analytics and cloud computing.
For some PE firms, the opportunity lies beyond the manufacturers themselves. Huron Capital, a lower-middle-market PE firm in Detroit, is focused on potential investments in service providers of manufacturers that are adopting Industry 4.0 technologies. Manufacturers are being driven to automation by several current trends, says Tony Pulice, a partner at Huron. These include:
• labor shortages
• wage inflation
• the reshoring of manufacturing operations to the U.S. because of supply chain complexities
• the declining costs of automation software and robotics
• the improving abilities of robots to perform work that previously had to be done by hand.
Increased connectivity, such as 5G bandwidth, and improved reliability of wireless networks are also opening more types of manufacturing to Industry 4.0 technology. With Internet of Things technology, manufacturers can monitor and manage operations around the world from a single control center that has real-time visibility into operations. In addition, AI tools offer the ability to predict potential breakdowns and to perform preventative maintenance on manufacturing equipment.
Huron sees investment opportunities in system integrators. This includes providers of electrical, mechanical and structural engineering and consulting services that help manufacturers and other companies with retrofits to set up Industry 4.0 hardware and software, Pulice says. Another area of opportunity for Huron is with the providers of maintenance and repair work, and parts for Industry 4.0 technology — such as for robots, laser sensors, conveyors, temperature sensors, cameras and the software that runs the hardware.
Buy and Build
Huron also sees opportunities in Industry 4.0 service providers for buy-and-build strategies to create larger, more compelling businesses that are attractive acquisitions at the next level, Pulice says.
“In this space in particular, the buy-and-build strategy almost has to be core for us because there’s a lot of smaller regional players that provide these services, but there are very few at scale,” he says. “There’s a bit of a scarcity value to assets that are providing services at that scale. There are very few assets that are $15 million Ebitda and above.” So Huron has to seek companies at $7 million Ebitda or smaller to build into a company with $30 million to $40 million Ebitda.
A lot of the Industry 4.0 technologies will be built on the automation that’s grown in general manufacturing over the past few years, says Greg Greenberg of Wilton, CT.-based Altus Capital Partners, a lower-middle-market PE firm focused on the manufacturing sector. For example, automated machines could supply data for advanced analytics.
Overall, the application of advanced data collection and analytics to drive efficiency in manufacturing operations is still in its infancy, Greenberg says. Altus focuses on applying data analytics to the operations of its existing portfolio companies, and also on potential growth from applying analytics to potential acquisitions.
In the lower middle-market—companies with annual revenue of $50 million to $100 million–most manufacturers aren’t ready for Industry 4.0 technologies like machine learning and AI tools, although some level of robotics can be found at nearly every manufacturing operation, says John Caple, managing partner at Hidden Harbor Capital Partners, a Boca Raton, Florida-based PE firm.
“Most of these businesses have severely underinvested in technology,” Caple says. Some businesses are almost back in the green-screen computer era with 20-year-old software. “You’d be shocked at how many of those guys still have a server in a closet somewhere. We see it all the time.”
Hidden Harbor creates a lot of value in its manufacturing acquisitions simply by implementing the basics, such as moving software from onsite servers to the cloud and adopting customer relationship management software. After an acquisition, “the first question we ask is: do you have a server anywhere, and how do we get that out of here?” Caple says.
Caple does see applications of AI and machine learning at middle-market logistics and transportation companies that have tasks such as optimizing trucking routes.
Pulice at Huron foresees manufacturers adopting more Industry 4.0 technologies as their levels of automation increase.
“The historical legacy approach is becoming more costly and more difficult, while the automation solutions are becoming more cost effective and the use cases which they can enter are increasing precipitously,” he says.