Aftermarket attractive to private equity firms
LAS VEGAS — More than 100 aftermarket companies are owned by private equity — and the number is only expected to go up.
Tony Cristello, senior vice president with BB&T, served as moderator of a private equity in the aftermarket discussion during the Automotive Aftermarket Supplier Association's (AASA) annual breakfast meeting at the Automotive Aftermarket Product Expo (AAPEX), Nov,. 1-3 in Las Vegas.
Most private equity firms are generalists who seek out any sector that looks like an attractive investment. Because of the stability and predictability of the aftermarket, it is easier for private equity firms to raise capital and predict how the market is going to grow, says John Tudor with Freidman, Fleisher and Lowe, the owner of Transtar Industries.
"Banks love certainty and predictability, and banks are quite willing to lend" when this exists, as it does in the aftermarket, Tudor says.
"Everyone is looking for a value proposition. It is much more of a short cycle so the cash structure is relatively short and predictable.
"What's made private equity so interested in the aftermarket is how we perform. The OE side can be very uncertain in terms of revenue. And it is the aftermarket side that supports cash flows," says David Overbeeke with Affinia, a company owned by private equity firm Cypress Group.
The industry is able to give private equity firms returns without leaving them at risk during times of volatility, Tudor says.
The economy is impacting private equity lending. It is much harder to for companies to get funding during challenging economic times, so bringing in a private equity partner can be a better way for some aftermarket businesses to go, says John Hatherly, owner of Wynnchurch Capital, a private equity company that owns seven companies in the automotive sector, two in the aftermarket.
While the predictability of the aftermarket makes is attractive to private equity investors, the industry also poses some downsides. it is difficult to build a compelling growth story in the aftermarket, which has very marginal growth percentages year over year, says Paul McCarthy, vice president of industry analysis with AASA. Margins are difficult to improve on the supply side, especially when dealing with clients that have such significant leverage. Finally, customer concentration makes it difficult for suppliers to say no to certain customers, which can affect sales.
To be successful when working with a private equity firm, a common set of goals and a framework for working together must be established between the company's management team and the private equity firm. "We never enter into a agreement thinking we know more about the company or the industry than the management team. Let the management team do what they do best — run the business. But we want to be 100 percent aligned with the management team," Tudor says.
Clear and concise expectations and open communication are vital to a successful partnership, especially when most partnerships last 5-7 years, Hatherly says. "We are looking for companies with good management and we want them to be our partner. We are looking for well-managed companies that have a successful relationship with their customer base, so much so that if they went away, their customers would feel pain."
Private equity interest is shifting from the manufacturing sector to distribution. "Traditionally investment has been more focused on the manufacturers' side, and I think that interest will continue. But there is a lot of activity in distribution. The interest is there, but the question is the availability," McCarthy says.