Issue: Sep 2011


BBK Study Challenges Preconceptions About Private Equity Investors



by Steve Barclay

A new study by international business advisory firm BBK is shaking preconceptions about private equity (PE) investors in the auto industry, painting a picture of PE firms that is far more positive and varied than the one depicted by many news stories. As a result, wary auto suppliers and original equipment manufacturers (OEMs) may be missing value creation opportunities.

According to David Knill, lead managing director of BBK's Private Equity Practice, it's a good time for many companies to consider the substantial investment and savvy management resources PE firms can provide. "If a private equity firm comes knocking at their doors, suppliers and OEMs should carefully analyze the potential benefits," said Knill. "The key to a successful relationship is to have a clear, unbiased understanding of both one's company and that of the PE firm. Only then can the stakeholder determine if the PE firm has the capital and services that will help it maximize potential."

BBK has determined that many PE investment firms are stable, long-term owners that quietly introduce efficiencies to improve a company's performance and help it expand. "The notion that PE firms only acquire companies just to sell off their parts no longer applies in today's business world, which has changed significantly in the past few years," said Knill.

Indeed, the involvement of some PE firms may be so low-key that OEMs may not even be aware that an equity investor owns a particular supplier. By definition, privately held companies are not buffeted by the ups and downs of stock markets and are free to pursue a longer view without fearing the impact of quarter-to-quarter financials on share prices.

In its analysis of more than 100 PE firms serving the auto industry, BBK found that they maintained their ownership of parts suppliers anywhere from 1 to 11 years and the average holding period was almost five years. BBK discovered that many PE investors either have or had multiple holdings in the automotive supply space; and, at the time of the acquisition, the vast majority did not remove existing management
-- although they often added key managers to the supplier's team.

In addition, contrary to popular belief, many PE purchases are not highly leveraged: some approaching all-equity capital structures. According to the BBK research, the average PE firm paid a little over 40 percent of the purchase price in cash.

With an in-depth knowledge of the sector and of the best PE investors, OEMs can point troubled or growth-oriented suppliers in the right direction -- without any direct involvement in the deals. Both OEMs and suppliers benefit from the improved stability and reliability that these deals often produce.

While not yet in perfect shape, the PE sector is showing signs of recovery from its doldrums in 2008 and 2009. The gap between the expectations of buyers and sellers on price remains a stumbling block for some deals; but, according to Knill, this will change as the auto industry continues its recovery.

"Multiples in general have been improving and this fact will likely change the profile of PE firms that are interested in the auto industry," Knill predicted. "As automotive profits increase, we'll see fewer 'bargain hunters' and more PE firms that are focused on the longer-term."

While not at their highs before the financial crisis of 2008 and 2009, the amount of money available to PE firms is still in the hundreds of billions of dollars. There are also signs that investors are capitalizing on the improving environment and exiting other deals -- freeing up more capital for new investment in the automotive industry.

About BBK

BBK is an industry-leading business advisory and performance improvement firm that partners with clients to drive performance, spur growth and increase profitability. BBK's business solutions solve complex financial challenges and improve operations through a strategic approach that is client-centered, process-driven, fully integrated and focused on results. BBK's seasoned, executive teams bring years of knowledge and experience implementing industry best practices that have built BBK's reputation for a sense of urgency, excellence and outstanding results. Manufacturing clients consistently realize five to ten times ROI on the cost of BBK services.

BBK and its wholly owned subsidiary, Performance Improvement LLC, are headquartered in Southfield, Mich., and serve clients globally through offices in Los Angeles, Calif.; New York City, N.Y.; Nashville, Tenn.; Frankfurt, Germany; Landensberg, Germany and Shanghai, China. For more information on BBK or Performance Improvement LLC, please visit www.e-bbk.com

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