Maximizing the Potential of Industrial Tech

Judging by my recent conversations with clients, industrial tech continues to be an area of significant interest for private equity investors.

The appeal of the sector is clear: a combination of rapid growth, high customer willingness to pay for the best solutions and the potential for recurring, highly sticky revenue creates a compelling financial profile for many assets.

Industrial tech businesses have had great success driving adoption of technologies within their customer base and, more often than not, they have ample remaining white space to go after.

At the same time, the emergence of new technology is creating significant benefits for customers who adopt the best solutions. From field engineers to facilities managers, firms that can deploy technology effectively stand to improve customer satisfaction, enhance compliance with standards and regulations, and drive cost reductions.

For PE firms, a key diligence question is emerging:

If the technology has the potential to create radical customer value, am I certain the business I’m buying is set up to fully realize the rewards?

Take the construction sector as one example.

It’s well known that productivity in construction has stagnated over the past two decades – growing at less than 1% per annum. Increasing regulation, the uniqueness of each job site, the complexity of managing major projects, and an ageing workforce have all caused problems.

Now, new technologies appear to have the potential to drive major gains. From AR design tools and new surveying technologies to automated, hybrid equipment – the list of technologies is long. In that context, the potential for changes to the industry cost structure – and hence radically improved performance for the winning firms – is significant.

Of course, construction is just one example. A range of other “old economy” sectors could equally be upended by companies which fully grasp tech-enabled change.

When a sector is subject to disruption, not all the participants will benefit equally. The key is to identify the niches or the specific targets that – with the stimulus of a skilled investor – can creatively and aggressively deploy new technologies to transform their economics and value proposition.

Developing a sound investment thesis requires early investigation to assess the likelihood of change, the magnitude of impact and to identify the specific companies that can best capture the new value.

Here are some of the questions that we’ve seen people address early on, as they begin to craft and refine their thesis:

  1. Which activities in the value chain will most be affected by new technology?
  2. How much capital will be required to acquire and deploy new technology, and what does that imply about the overall funding requirement for the business?
  3. Does cyclicality amplify or restrict the ability to take advantage of new technology? Where in the cycle are we?
  4. What factors best position a company to deploy the technology?
  5. What might the sector’s structure look like after the disruption? Will it be more consolidated or more fragmented?
  6. Does the disruption present an opportunity to establish strong pricing and margins in the sector?
  7. What are the “early warning signals” that industry change is gathering pace – so that we can best time our investment?

Winning with this kind of investment requires much more than a sound thesis. Even having found a great target, success often requires skills and appetite to drive a new management agenda and to reinvent the value-gen plan.

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