Industrials Private Equity: The Best Place for Old-School Deals at Reasonable Multiples?

If you ever tire of the hype around tech, industrials private equity might be an ideal hiding spot.

Industrials PE has been around for a long time and has always been seen as “stable but boring.”

Some would even argue that the first “leveraged buyout” of all time – J.P. Morgan’s acquisition of Carnegie Steel in 1901 – was an industrials private equity deal.

Andrew Carnegie’s partner, Henry Phipps, used his deal proceeds to launch the Bessemer Trust, one of the first modern family offices and a “proto” private equity fund.

But the real question is this: If you accept an industrials private equity job, will you end up more like Andrew Carnegie or Henry Phipps, or will your career trajectory resemble a distressed tire manufacturing company that later declared bankruptcy?

Industrials Private Equity Defined

Industrials Private Equity Definition: An industrials private equity firm raises capital from outside investors (Limited Partners), acquires companies in the capital goods, transportation, and commercial services industries, and grows and sells these companies within 3 – 7 years to realize a return on their investment.

We covered these three main segments in the industrials investment banking article, and they also apply here.

The “industrials” sector is so broad that it’s tricky to pinpoint what firms do.

For example, the following deals could all fall within this sector:

• A distressed buyout and turnaround for an automotive tool manufacturing company struggling with higher raw material and labor costs.
• A traditional buyout and roll-up for a print and packaging company that makes paper boxes and glass containers.
• A growth equity deal for an environmental services company offering legacy manufacturers low-carbon waste disposal and recycling services.

The commonalities are that industrial companies serve enterprise customers and governments rather than consumers (with some exceptions, such as airlines) and are very sensitive to broad macro factors and economic conditions.

Beyond that, we can say a few things about industrials vs. other verticals within PE.

First, in an average year, there are $50 – $100 billion worth of PE and VC deals in the sector (source: S&P Global):

That sounds like a lot, but it’s 4-5x less than healthcare or technology (source: PitchBook and Cherry Bekaert):

As you might expect, the vast majority of deal volume consists of traditional buyouts rather than growth equity or venture capital deals (source: Real Deals Data Hub):

What Has Drawn Private Equity Firms to Industrials Companies?

In the early days of institutional private equity, many industrial companies were perceived to be stable, cash-flow-generation machines with significant hard assets that could be used as collateral for debt.

Many of these companies had low growth potential, but that didn’t matter if they could reliably generate cash flow and, in the worst-case scenario, be worth something in a liquidation.

“Growth” was less of a goal than financial engineering and multiple expansion via cost cuts to improve metrics like Return on Invested Capital (ROIC).

But this shifted over time as EBITDA growth became more appealing in sectors such as TMT, and its importance also spilled over into industrials.

Today, you could put most private equity activity in industrials into a few main categories:

1. Consolidation / Roll-Up Plays – The idea is to acquire smaller companies to consolidate the parent company’s market position and become more appealing in an eventual IPO or M&A deal. Many markets are still highly fragmented, so this can work quite well.
2. Modernization / Automation Plays – Some old-school industrial companies are still run like it’s 1980, and so they need help with automating more of their business processes, preparing for the energy transition, and catching up with modern trends.
3. Stressed and Distressed Companies – Since the companies are so sensitive to macro indicators, issues like commodity price spikes can skew their costs and turn them unprofitable. This creates an opportunity for distressed PE firms to acquire, restructure, and turn around companies.

There are some growth opportunities, but as shown in the charts above, traditional buyouts represent far more deal volume than growth equity or venture capital.

Finally, note that PE firms tend to avoid some areas within industrials, such as airlines.

Airlines have high operating leverage because their costs are mostly fixed, which might seem positive on the surface.

Operating leverage is positive for high-margin software companies, but it’s negative for airlines because they have much lower margins, meaning that small swings in demand can tank their cash flows.

Also, unlike the other verticals, airlines are primarily consumer-facing.

So, if there’s a recession, a pandemic, a regional war, or another round of “transitory inflation,” many airlines will be in trouble.

The Top Industrials Private Equity Firms

Since “industrials” is such a broad sector, virtually every generalist private equity firm has a presence, from the mega-funds to middle-market funds and lower.

There are thousands of firms worldwide that do industrial deals, so I can’t possibly mention all of them, but here’s a quick overview of the main categories:

Mega-Funds and “Large” Private Equity Firms

Most of the mega-funds and “large” funds on our list do deals in industrials, but their strategies vary.

For example, Advent, Apollo, Brookfield, Carlyle, CD&R (Clayton, Dubilier & Rice), Cinven, CVC, Oaktree, and Onex all do industrial deals, but some of them, such as Apollo, may focus more on special situations and turnaround opportunities.

Other names include PAI Partners in France and Astorg (pan-European).

Platinum Equity, with more of an operational focus, could also be on this list, but some would label it “upper-middle-market.”

Note that not all “large” funds do industrial deals.

For example, Thoma Bravo and Vista are technology specialists, and while firms such as Leonard Green have industrials-related portfolio companies, they’re better known for their consumer retail deals.

Upper-Middle-Market (UMM) and Middle-Market (MM) Firms

Every middle-market private equity firm seems to do industrial deals.

A short list might include AEA Investors, American Industrial Partners (AIP), American Securities, Audax, Berkshire, Charlesbank, Greenbriar, GTCR, KPS, Lindsay Goldberg, Lone Star, Madison Dearborn, Morgan Stanely Capital Partners (MSCP), Nautic, TJC, and SK Capital.

Special Situations, Stressed, and Distressed Firms

As mentioned above, Apollo is probably the mega-fund most famous for special situations, turnaround, and restructuring-oriented deals.

But you could also add the Blackstone “Tactical Opportunities” fund, Centerbridge, and SVP to this list.

Newer / Smaller PE Firms with Some Industrials Focus

There are probably hundreds of firms in this category, but a few names include Arsenal, Black Diamond, Core Industrial Partners, Gamut, Harvest, Industrial Growth Partners, Kohlberg, LFM, Littlejohn, Middleground, Monomoy, One Rock, Pacific Avenue, Ridgemont, Staple Street, Stellex, Tinicum, Trive, and Warren Equity Partners.

In this size range, firms tend to specialize in one niche or strategy.

For example, Industrial Growth Partners (IGP) focuses on “engineered products businesses” and “niche industrial services companies.”

Meanwhile, Warren Equity does many services deals in markets like infrastructure maintenance and waste management.

How Do Industrials Private Equity Deals Work?

To illustrate a simple deal, let’s use CD&R’s ~$2.6 billion acquisition of Veritiv, a B2B provider of packaging products and services and print-based products:

The deal was done at a 4.7x trailing EBITDA multiple and a 5.2x forward multiple (the forward multiple was higher due to a projected decline in sales and EBITDA).

These multiples might seem ridiculously low if you’re used to tech or healthcare deals.

Who buys companies for 5x EBITDA when they could pay 15, 20, or 30x EBITDA?

But there’s a good reason for this: The company operated in a mature market with low single-digit growth rates.

Here are the financials before the deal close:

This $2.6 billion deal was financed by a mix of Senior Secured Notes, a Term Loan B, and an asset-based loan for a total of $2.125 billion, or just over 5x EBITDA.

The company’s CapEx requirements were low, so its FCF Conversion was high (Free Cash Flow was roughly ~86% of EBITDA in the LTM period).

Therefore, the plan here likely consists of:

1. Grow EBITDA via Bolt-On Acquisitions – Organic growth seems challenging, but the company will have plenty of room for more Debt to fund these deals.
2. Repay Debt Where Possible – The company won’t be able to repay nearly as much going forward due to its much higher Debt in the deal, but it can still make some progress.
3. Expand the Multiple – Veritiv traded at EBITDA multiples closer to 10x+ in previous years, so at least some multiple expansion is plausible.

Let’s do some “quick IRR math” to illustrate.

Assume a Purchase Enterprise Value of $2.6 billion with Debt of $2.1 billion.

We’ll say there’s no organic EBITDA growth, but the company converts ~50% of its ~$400 million of EBITDA into $200 million of Free Cash Flow per year (it’s much lower due to the post-deal interest expense).

It uses this $200 million in annual FCF to acquire other companies for 5x EBITDA over a 5-year holding period.

By the end, its EBITDA will increase to $400 million + $200 million * 5 / 5x = $600 million.

CD&R might get some multiple expansion if the cycle is more favorable by then, so let’s say the exit multiple is 6x, which makes the Exit Enterprise Value $3.6 billion.

No Debt has been repaid, so the Exit Equity Proceeds are $3.6 billion – $2.1 billion = $1.5 billion.

CD&R invested only $500 million upfront, so this is a 3x multiple over 5 years or a ~25% IRR.

Even though the growth rates are very low, the deal “works” because the company’s CapEx requirements are also low, meaning it can use significant cash flow to make add-on acquisitions or repay Debt.

On the Job in Industrials Private Equity

Since the deal types differ widely, it’s hard to “summarize” the on-the-job experience.

It has much more to do with the size of your firm and its specific strategy rather than the fact that you’re working with industrials companies instead of tech or healthcare companies.

That said, one consistent difference is that since most industrial companies have enterprise and government customers, the due diligence process focuses on:

• Contract types and special terms around price changes, advance orders, and cancellations.
• Customer concentration, especially for firms with an industry focus (e.g., a chemicals producer or auto tool distributor).
• Pricing and value chain, such as which companies own the profits and losses and which can more easily pass on price increases to customers.

If something in the macro environment goes wrong and the firm has a high industry concentration with unfavorable contracts, it could be bad news.

Recruiting for Industrials Private Equity Roles

Not much is different here: Expect the usual on-cycle or off-cycle recruiting depending on when you start, the firms you target, and your region.

You should expect a traditional private equity interview process, with questions about your deal experience, LBO models, LBO math, and portfolio companies and industries you find interesting.

You have the best chance of winning an industrials PE role from an industrials investment banking team, but it’s not the only option.

The modeling and valuation are not very specialized, so you could potentially compete for these roles if you’ve worked in industrial-adjacent areas (e.g., energy, consumer, infrastructure, IT services, chemicals, aerospace, etc.).

Even a tech or TMT background could work if you can spin it into sounding related.

You don’t have a great shot coming from non-IB roles, but corporate development at an industrials company could potentially work.

Should You Enter the Assembly Line for an Industrials Private Equity Role?

I’d sum this up by saying that if you’re unsure which private equity group you’re most interested in, you can’t go wrong with industrials.

It’s not a new or shiny area like sports PE, and it doesn’t have the same hype or risk as tech PE.

You may not work on the most exciting transactions, but deal activity is stable and consistent, and you can move around to many different industries within this broad sector.

You could even use the experience to move to a different sector, which would be much harder in specialized groups like FIG or real estate.

The main risk is that since the sector is quite cyclical, you could enter at a bad time for deal activity and end up without great experience.

This will make it harder to become the next Andrew Carnegie, but it will be much better than becoming the last employee hired at a failed tech startup.

Industrials Private Equity: Further Reading

If you want to learn even more about the sector, I recommend:

• Bain – M&A in Diversified Industrials
• Shifting Gears: Private Equity Looks to Spark Industrial Growth
• Deloitte – Industrials M&A Reports
• Capstone Partners – Industrials Trends & Insights
• L. Hulett – Quarterly M&A Updates for Various Industrials Verticals