Private Equity Helping Mid-Size Manufacturers Thrive in Increasingly Competitive, Global Marketplace

Oct. 1, 2008
Five benefits of PE investment

Many mid-sized manufacturers are finding themselves in an increasingly difficult position. While the U.S. economy has cooled, shrinking revenues and tying up credit, global competition continues to heat up. Large manufacturers fortunate enough to be flush with capital resources are investing in more efficient equipment, implementing Lean principals and streamlining operations to successfully compete with overseas rivals. But the sagging economy and credit crunch has left many mid-sized manufacturers cash-strapped and unable to keep pace in what's become an intensely dynamic marketplace.

That's one reason more manufacturers are exploring private equity (PE) as a means to remain competitive and grow their businesses. With access to capital from private equity investment, manufacturers are empowered to purchase new equipment, expand product lines, enter new markets, enhance research and development, and aggressively pursue growth initiatives. While business owners and management teams may be considering many of these moves, a lack of capital coupled with trepidation over a volatile economy has stymied growth as even the best run businesses are hedging their bets lately.

With help from the right PE firm, mid-sized manufacturers can bring more efficient and productive systems into the organization that are designed to facilitate operational improvements such as reducing waste and improving throughput. Additionally, investments in technology and automation are common actions a PE firm takes to upgrade and streamline processes, saving time and money on daily operations.

New Ernst & Young Study Praises PE

A recent study by Ernst & Young provides further support behind the value of partnering with a PE firm. The study looked at metrics for the 100 largest private-equity exits worldwide in 2007 and compared them to the performance of comparable publicly traded companies over the same period.

The study found that companies sold by private equity firms increased in enterprise value at an annual compounded rate of 24% during the time they were in a PE firm's portfolio -- double the rate of the comparable publicly traded companies. Buyout firms also increased the earnings before interest, taxes, depreciation and amortization (EBITDA) of these portfolio companies 33% faster than their publicly traded counterparts did. Finally, these companies had productivity levels 33% higher than publicly traded company benchmarks.

The outperformance stems from the PE business model, which produces measurable growth, productivity improvements and profit increases at a greater rate. In turn, those gains serve to increase enterprise value, or the value of a company's equity plus debt.

Five Benefits of Private Equity Investment

Many business owners may not fully understand the advantages they can gain by leveraging a PE investment. Below are five of the most important benefits owners of mid-market manufacturing businesses can expect from the right PE firm.

  1. Spark business growth.
    A good PE firm brings efficient systems into a company, narrows the focus, identifies new markets and integrates value-added processes. Whether it's in the form of a capital infusion to bolster IT systems or a fresh perspective on the marketplace, a PE's involvement can breathe new life into a mature company.
  2. Gain a strategic planning partner.
    For many mid-market PE firms, involvement comes in the form of strategic planning and providing additional resources to help improve and build the business. In addition to capital, a PE firm may have a network of other resources -- such as a board of directors with experience in the manufacturing industry -- to assist management teams in achieving strategic objectives.
  3. Plan for long-term growth.
    PE is a viable alternative to the cash infusion a public offering brings and it allows for steadier, longer-term growth. Under the public microscope, companies are held to short-term growth goals measured quarter by quarter. PE allows more flexibility to make strategic decisions that can pay off in the long run, but wouldn't be as attractive to stock-market investors.
  4. Compete globally.
    Globalization is now a major factor in the manufacturing industry. Some mid-market businesses may not be equipped to compete globally. But the resources and know-how of a PE firm can help them enter new markets and serve new customers worldwide.
  5. Create liquidity.
    PE provides liquidity as a way of cashing out or diversifying assets. Owners can achieve partial or full liquidity on their equity ownership, diversifying net worth for estate planning purposes.

Increasing Revenues

Oliver Products Co., manufacturer of food and medical packaging products, partnered with Milwaukee-based private equity firm Mason Wells in May of 2007. After just one year, the company has been able to increase their revenue nearly 10%. Why? The partnership gave the management team the confidence and sense of empowerment it needed to move forward with strategic growth plans that had been on hold due to the economic outlook and the company's understandably cautious approach.

The influx of cash enabled Oliver Products to purchase new equipment and open an office in China. In addition, the company relocated its operations in the Netherlands to a larger facility, and R&D efforts have significantly ramped up to develop new products. Lean manufacturing principals were implemented throughout the organization, leading to improved production efficiency in the manufacturing processes.

As is typical in PE investments such as this, Mason Wells obtained a majority ownership position, with the balance of equity held by management. While the PE firm's leaders serve as advisors on the strategic direction of the business and serve as board members, the company was able to remain independent and the management team steers decision making and oversees day-to-day operations.

Greg Myers is a managing director Mason Wells Buyout Funds, a Midwest-based private equity firm. He has 20 years of experience in private equity transactions and has sat on the board of directors for many mid-market manufacturers in the firm's former and current portfolio. Greg can be reached at [email protected].

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