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Business Insights From Conway MacKenzie
March 2, 2017

Automotive Middle Market – What’s the Play?

The following post was written by Managing Director John Pencak.

Currently, we are in the seventh year of the latest automotive cycle that appears to be long in the tooth. Middle market automotive suppliers have performed well in recent years and have reaped the benefits of record North American production volumes. Now, for the first time since the Great Recession, it appears the automotive market is softening. What might that mean for prospective mergers, acquisitions and takeover activity in the automotive supplier space?

Dry powder—the amount of investible cash with private equity (PE) and venture capital (VC) funds—stands close to a six-year high of over $875 billion, data from industry sources shows. Financial buyers are attracted to the automotive sector because of its long-term contracts and predictable cash flows but they prefer to put money to work in the early stages of automotive growth cycles. Their current reticence to act would seem to speak volumes as they, of course, never want to be the guys that buy at a peak.

Furthermore, we appear to be at a tipping point, with some PE firms already invested in the auto supplier space seeking a quick exit –– before the next downturn and while valuations are still attractive. More sellers and fewer potential buyers translate into lower values for middle market automotive suppliers.

Much of the activity we expect to see will come from strategic buyers who have a long term investment strategy and think beyond the shorter term investment returns that financial buys are measured on. Middle market automotive suppliers looking to attract investors and capital must offer something special or unique. Strategic buyers are particularly keen on specialty suppliers who provide analogous parts to widen their product portfolio and geographic expansion to unserved markets and technology plays. While mergers and acquisitions activity in the middle market automotive sector may slow in 2017, the long term prospects of the industry are still strong.

The status quo is not a recipe for success for automotive suppliers given the rapid pace of change in the industry. ABLs are typically a conservative and effective way of financing the operations of automotive suppliers. Today, now more than ever, ABLs can be valuable partners in helping automotive suppliers achieve their strategic goals by providing additional financial flexibility under more favorable terms than one might attain from non-traditional lenders or other junior capital providers that are actively lending in the automotive sector. With that said, executing on game changing strategies brings additional risks and ABLs should have a network of trusted advisors with deep industry experience to assess the competitive positioning and the long term sustainability of the business models of the automotive suppliers in their portfolio.