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Private equity investors have $3 trillion to invest in smart manufacturing and distribution companies

Lighting the fire under $3 trillion of dry powder

Moore Global

There will be no shortage of funds available to the smartest manufacturers and distributors to invest in technology that boosts efficiency and profitability.

As bank lending criteria have tightened, private equity providers have become a key source of growth capital. And, according to calculations by Bain & Co, they have $2.9 trillion ready to invest in the right opportunities.

Of course, not all of that dry powder will go to manufacturing but deal experts have observed renewed interest in manufacturing opportunities.

Covid caused a slowdown in deal making in 2021 but due diligence activity was strong and they expect a strong rebound this year. The focus will be on those sectors and businesses least affected by the pandemic.

Private equity (PE) money offers a range of benefits to expansion-minded companies: a pay day for the owners, money to finance new product development and capital expenditure to upgrade machinery to move up the value chain.

Seven years ago, enterprise values ascribed to manufacturing and distribution businesses were around four times EBITDA – now multiples of between 10 and 12 are commonplace, with no signs of tailing off.

However, to achieve those heady valuations, business owners may have to fundamentally change some of the ways in which they operate.

Getting in shape

With decades of experience behind them in all market conditions, Moore’s manufacturing and distribution experts have a checklist of what is needed to attract a high valuation.

Here is what investors look for:

•   Management teams that communicate their strategy clearly and concisely.

•   Businesses that are well managed and operate with a team approach.

•   Companies that show sustainable levels of profitability and can confidently explain the ebbs and flows of financial data.

PE investors demand far more rigour in financial reporting than most privately-owned companies are used to: they want complete transparency from systems capable of producing actionable real-time management data.

That is where regression analysis and cost management analysis is important. Owners not only have to understand their own businesses at the granular level – what everything costs and the profitability of every item sold on a daily basis – but also the same dynamics throughout the entire supply chain.

Crucial judgement calls also need to be made on what free cashflow might look like in 18-36 months given various Covid scenarios. That requires technology and data which, applied correctly, will also help to map out what the business needs to look like in five years.

And, finally, there is combating the Amazon effect: how to build a compelling proposition to stand out and compete effectively online rather than simply be swamped by the world’s largest retailer.

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