Smaller buyouts escalate in UK industrials sector

Though the UK certainly hosts its fair share of manufacturing conglomerates, it has been some time since it was renowned for its ecosystem of industrial SMEs. According to a report by the European Commission, the country accounted for just 9% of the EU's overall value of sold industrial production in 2017, compared with the 28% accounted for by Germany, 16% by Italy and 12% by France.

However, private-equity-backed buyout investments in both the industrial engineering and the construction and materials spaces have soared in the past year, particularly for companies with enterprise values of up to £50m. There were 11 such buyouts in the construction and materials segment between Q2 2018 and Q1 2019, according to Unquote Data, compared with six in each of the two previous years and three in 2015-2016. Similarly, in the industrial engineering sector there were 15 buyouts within the value range, comfortably surpassing the five seen in 2017-2018, seven in 2016-2017 and four in 2015-2016.

Andrew Steel, managing partner at Cairngorm Capital, says fund managers have often shied away from the construction and materials space due to perceptions surrounding its cyclical nature. Yet he says these can be less applicable to the market for repair, maintenance and improvement in UK residential housing, which he says also presents compelling long-term opportunities. Indeed, over the course of the past year, Cairngorm has made three bolt-ons for the National Timber Group and acquired both Sentry Doors and Parker Building Supplies.

"There are long-term trends in repair, maintenance and improvement: increased household formation, aged housing stock and modest new-builds compared with the existing housing stock," says Steel. Within the space, Steel considers distribution particularly appealing, as it is asset-light compared with other areas. "There remain many fragmented segments and therefore considerable consolidation opportunities," he says. "There are numerous, fundamentally well-run, profitable and often founder-led companies that provide great services and have strong reputations."

Ready to assemble
The potential for consolidation also plays a large part in Elaghmore Partners' approach to the wider industrial space. The GP has made two UK buyouts in the sector since April 2018: Priden Engineering and McPhee Mixers. "Tier-two suppliers in the industrial engineering and construction space are highly fragmented and are limited in their reach," says partner Andy Ducker. "It creates opportunities to buy businesses and build critical mass. This opportunity informed our decision to acquire SB Components, Priden Engineering and McPhee Mixers. These businesses are now working more closely together, sharing resources and premises, to create what is, in effect, a national player serving major organisations."

Another notable trait in the UK industrials space is that companies are often located in the so-called regions, as opposed to being concentrated in London and the south-east of England. Of the 11 sub-£50m buyout investments in the construction and materials segment since Q2 2018, just two were located in London and the south-east, while in the industrial engineering space the region accounted for three of 15 deals. That said, Elaghmore's Ducker argues that those being acquired have remained regionally focused due to a historical lack of external backers and are ultimately capable of reaching national scale.

While GPs are beginning to unearth enticing opportunities at the smaller end of the price scale, the fact that UK industrial companies are proving less attractive to larger-cap players may present exit-related concerns for some managers. Deals involving industrial companies accounted for 23% of sub-£50m buyouts between Q2 2018 and Q1 2019, while they accounted for just 13% of those valued at £50m and above.

However, Steel believes this could change in the coming years. "There is currently a small group of investment firms that is building quite large businesses in these spaces," he says. "These sectors, which are currently not priorities for large-cap private equity generalists, will gradually trickle up and end up on their radars in due course, as organisations such as ours consolidate bigger companies." 

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• UK / Ireland
• United Kingdom
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