Industrial Technology
2022 ANNUAL REPORT
INDUSTRIAL TECH SUMMARY & OUTLOOK
M&A
TRENDS
Harbor View Advisors conducted a survey with active lower-middle market private equity funds (see page 2) to gain a general sentiment about expectations for market activity in 2023. With responses from over fifty investors across the US, we have accumulated a range of perspectives on changes in strategy, foreseeable deal making challenges, fundraising headwinds, deal structure transformations, and valuation expectations for 2023.
In 2021, the M&A market experienced unprecedented valuations and deal activity which have since returned to more normalized levels due to the tightening of credit markets and increased volatility of the macroeconomic landscape. Despite potential challenges presented by these market conditions, private equity buyers continue to possess ample capital, eager to deploy it in the right investment opportunities. Even so, the scarcity of assets in the market presents a challenge, as buyers compete for attractive opportunities to put their capital to work.
The impact of change in the credit markets has shown through most significantly in larger deals, but the appetite for lower middle market deals remains solid. Private equity buyers are becoming increasingly cautious as it relates to investments in cyclical industries and are instead focusing on add -on opportunities for portfolio companies to continue to build out existing strategies. Buyers are prioritizing high-quality targets in attractive industries, while profitability is becoming the new benchmark for growth. The shift in focus towards profitability, rather than growth, reflects the current market conditions’ need for stability and sustainable returns in the private equity industry.
INDUSTRY COMMENTARY
“Uncertainty from global economic and market influences impacted industrial manufacturing deal volume in 2022. These influences — which include rising cost of capital, inflation, volatile raw material prices and availability, and increased freight costs will likely continue to challenge M&A in the near term. Given these pressures, M&A activity for industrial manufacturing companies will likely be driven by mid-market corporations and private equity portfolio companies seeking strategic expansion of platforms and programs. Additionally, the portfolio review and related divestitures of non-core assets is likely to fuel stable deal activity as we head into 2023..”
– Michelle Ritchie, PWC Global Deals; Industrial Co-Leader
“[Buyers] are looking for emerging growth companies that are operating highly efficiently during this time and have incredible potential when we come out of this downturn. That day is coming, and smart founders will be preparing and planning now to be well positioned to take advantage of the M&A boom many are predicting to come in 2023.”
– Louis Lehot, Foley & Lardner; Partner
HARBOR VIEW’S INDUSTRIAL TECH ANNUAL REPORT
PE SURVEY RESULTS
HARBOR VIEW’S INDUSTRIAL TECH ANNUAL REPORT
How do you expect your strategy might change in 2023?
Dynamic market conditions have prompted investors to reevaluate their capital deployment strategy. This includes shifting investments to more resilient industries and/or slowing down deployment altogether. We expect that lower valuations and harder-to-access debt will result in more add-on acquisitions to lower the average multiple across a platform.
“I think we will have a down year, but it won’t be disastrous. Non/counter cyclical sectors will still garner interest.”
Shift in industry focus
Greater focus on add-ons vs. platforms
Shift in transaction size
Slower deployment of capital
How would you describe the current capital raising environment relative to recent years?
Fueled by uncertainty surrounding macroeconomic conditions, private equity firms may delay raising new funds or take longer to gain LP commitment. In addition, firms may hold existing assets for a longer period of time.
“While we conservatively leverage companies and don't see an issue continuing to do that, debt markets may cause us to hold some assets longer”
What do you foresee being the largest challenge to closing deals in 2023?
Buyers are taking a more conservative approach to evaluating investment opportunities. While lower-middle market deal appetite remains solid, quantity of high-quality assets is expected to decrease. Investors will also grapple with tempering seller valuation expectations coming off historical highs.
“We are expecting some randomness in processes, going to have to see a lot to find the right balance between valuation with lower leverage and continued excess capital”
In 2023, what is your expectation for valuation compared to 2022?
Unsustainable 2021 valuations have returned to more normalized levels amidst credit market tightening and macroeconomic concerns. Buyers still have ample capital to deploy, however, there is lower deal flow activity creating scarcity value for high quality deals in the current market.
“High quality assets will still command high multiples, although somewhat lower than 1H22 and certainly '21.”
KEY ECONOMIC INDICATORS
VIEW’S INDUSTRIAL TECH ANNUAL REPORT
Source: Board of Governors of the Federal Reserve System
Source: U.S. Bureau of
Statistics
Source: U.S. Bureau of Labor Statistics
Source: Board of Governors of the Federal Reserve System
HARBOR
INDUSTRIAL TECH PUBLIC MARKETS
HARBOR VIEW’S INDUSTRIAL TECH ANNUAL REPORT
COMPARATIVE MEDIAN EBITDA MULTIPLES
Source: PitchBook, Data as of 12/31/22
Source: PitchBook, Data as of 12/31/22 Indices
ONE-YEAR HISTORICAL INDEX PERFORMANCE
INDUSTRIAL TECH PUBLIC TRADING STATISTICS
HARBOR VIEW’S INDUSTRIAL TECH ANNUAL REPORT
HARBOR VIEW’S INDUSTRIAL TECH SUB-SECTORS
AUTOMATED SOLUTIONS
• Robotics
• Specialty Equipment & Devices
• Sensors & Data Capture
• IIoT / Related Technologies
INDUSTRIAL & RELATED SERVICES
• D&E / T&M
• Logistics Services
• Facility & Site Services
• Staffing & Workplace Safety
AUTOMATED SOLUTIONS
TRADITIONAL INDUSTRIAL
• Manufacturing
• Value-Added Distribution
• Coating / Material Processing
• Installation & Construction
INDUSTRIAL & RELATED SERVICES
Note: Privately held companies typically trade at a discount to public companies Source: PitchBook
INDUSTRIAL TECH PUBLIC TRADING STATISTICS
TRADITIONAL INDUSTRIAL
Note:
INDUSTRIAL CONGLOMERATES
INDUSTRIAL TECH M&A SUMMARY
INDUSTRIAL TECH SELECT M&A TRANSACTIONS
HARBOR VIEW’S INDUSTRIAL TECH ANNUAL REPORT
AUTOMATED SOLUTIONS
INDUSTRIAL & RELATED SERVICES
TRADITIONAL INDUSTRIAL SELECT M&A TRANSACTIONS
HARBOR VIEW’S INDUSTRIAL TECH ANNUAL REPORT
TRADITIONAL INDUSTRIALS
INDUSTRIAL TECH SELECT VENTURE CAPITAL ACTIVITY
HARBOR VIEW’S INDUSTRIAL TECH ANNUAL REPORT
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Building on his nearly 25 years of Investment Banking and Private Equity experience, Nate leads Harbor View’s Industrial Tech practice. In his role, Nate advises clients in the Automated Solutions, Industrial & Related Services, and Traditional Industrial sectors helping business owners navigate the company sale, acquisition, and capital raise process. Suzi Airheart Associate Shaan Patel Analyst
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