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| 2 minutes read

WEBCAST: The resilience of the auto sector provides great opportunities for returns in private equity

Additional authors: Sean O'Flynn and Mark Veldon

Despite the challenges facing the industry, it has consistently demonstrated its resilience as a sector.

While the impact of Covid will pass it will take time. The loss of global volume in 2020 is the equivalent of switching off Europe for a whole year. We believe that light vehicle sales will not recover to peak levels until we’re halfway into the next decade.

However, our analysis of more than 2,000 Private Equity automotive deals over the last 15 years has identified some interesting trends. The right assets with the right backers, deploying the right strategies can create value.

Here are some of the highlights:

  • Investment strategies have become increasingly diverse. The industry has scrambled to commit investment dollars to a range of new (and in some cases distant) powertrain and driving trends: Connected, Autonomous, Shared and Electrification (CASE). This has caused many players to re-evaluate how and where they deploy their capital – and the implications of this on what they see as core and non-core in their portfolio. Nearly 50% of all deals over the past three years being related to one or many CASE technologies with a combination of both sponsor and corporate interest.
  • The majority of the capital deployed was with suppliers. And, in many cases, assets have changed hands quickly with 47 of the 164 large assets changing ownership more than once.
  • Over the past 15 years the average holding period of the larger assets has trended up.  It’s now standing at 7.9 years. This reflects the longer cycle platform-based nature and complexity of the automotive market, as well as focus on early stage technology investments in some areas. It is also a reflection of the challenges the market has seen in driving improvement in an environment with such high capital spending. Across the sector, 23% of all assets have reached a decade under the existing ownership.
  • Retail, aftermarket and auto services have become more attractive.  Typically, with lower capex needs and with a more direct link to both consumers and the wider car-parc, they’ve attracted multiples much closer to other B2C assets.
  • Buy and build seems to be the predominant strategy for the retail, service and aftermarket sector. However, the costs of getting the EBITDA improvement is high as it involves significant consolidation across location – an exercise that is now increasingly reliant on a strong digital strategy and execution capability to leverage the power of data analytics.
  • International expansion for the retail and service sector still appears challenging. This may change as more accessible digital platforms begin to drive economies of scale for the backbone of operations.
  • Bringing in new management seems to be a consistent feature in value creation. Those that brought in new leadership (and typically advisors) seemed to fare better than those that didn’t. They have succeeded in refocusing companies towards execution and speed, in a sector where many organisations remain large, slow and complex with many competing interests.

The new car market is set for a tough period but there are opportunities. These include:

  • Fundamentally sound and profitable businesses that must rescale and recapitalise to a new market size;
  • Niche growth opportunities with limited access to capital;
  • Scalable asset structures that will benefit from consolidation to drive efficiency;
  • Segments more negatively affected by macro trends which may present shorter to medium term opportunities to run as cash generative businesses.

While automotive is a sector facing huge disruption there is opportunity – and if the sector has shown itself to be one thing in its 100+ year history it is resilient.

Our analysis of more than 2,000 Private Equity automotive deals over the last 15 years has identified some interesting trends. The right assets with the right backers, deploying the right strategies can create value.

Tags

auto, private equity, webcast