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Private equity in remanufacturing

This article by John Daly originally appeared in Reman Industry Focus – Duxes – Shanghai, China on Jun 23, 2015. Click here to view the original article from RIF 

Will Burnett, Managing Director of Owner Resource Group, discussed the growing private equity interest in the remanufacturing industry with Reman Industry Focus (RIF)

Private equity interest in remanufacturing companies is becoming ever more prevalent. Recent major examples include Pamplona’s acquisition of BBB last year; prompting Tim Roth’s move from SRC Holdings to the Alabama based remanufacturer. Another significant instance was towards the end of 2014, as BU Drive sold a sizeable chunk of its business to Sercoo group.

Will Burnett
Will Burnett

Owner Resource Group (ORG) is an Austin Texas based private investment firm, investing in manufacturing, distribution and business service companies with revenues in excess of USD 20 million. The firm was founded in 2008, and is staffed by 10 people managing approximately USD 300 million worth of assets. To date the private equity company has invested in seven businesses. Will Burnett described ORG’s strategy “we look for solidly profitable, well managed businesses to partner with and then set about using our capital and resources to help the management team grow their business. Our investments enable business owners and management teams to pursue their objectives and accelerate the growth of their companies in a disciplined manner.”

Private equity entities such as ORG pay constant attention to all segments of the remanufacturing market, fostering relationships within it. Although the firm’s partners have invested in reman in past careers, ORG is biding its time, waiting for the optimum opportunity to invest in a remanufacturer. Private equity companies such as ORG are patient in their approach; a quality investment is the priority.

Remanufacturing attractive to private equity

Private equity investors find remanufacturing an attractive proposition for a number of reasons. Mr. Burnett elaborated “the general awareness of and growing sensitivity to environmental issues is a nice tailwind for remanufacturing. In most markets, remanufacturing gives the buyer an opportunity to save money over a factory new product – another compelling positive. Also remanufacturers often have very strong relationships with their customers.”

The inclusion of remanufacturing in G7’s agenda and the sheer size of the market in the U.S. are examples of the progress remanufacturing is making; more and more private equities are succumbing to the lure of this opportunity. According to Michael Hanley, Ernest & Young’s Global Automotive Leader: “The aftermarket and remanufacturing is an attractive industry for PE investors as it is a relatively untapped market and it holds many growth opportunities, especially in remanufacturing as the industry and consumers focus more on sustainability.”

As awareness increases and more people begin to understand remanufacturing, some may view the industry as merely a new environmental trend. Reman however dates back to the Second World War, fueled by the shortage of resources at the time, this “durability of the concept is also attractive” said Will, continuing “the markets that remanufacturing predominates such as aerospace and automotive have long been attractive markets for private equity. ” Remanufacturing often mirrors the manufacturing market in numerous aspects.

Attractive Reman companies for investment

Numerous private equity interests are enticed by remanufacturing businesses of all sizes in various sectors.

Private equities tend to look for certain key facets in a company prior to investment. “Every company, reman or otherwise, is worth more and has better prospects if it has a capable management team, good relationships with long-term customers (without being overly concentrated), differentiating qualities in the way they go to market, the products or services they provide, or their expertise and reputation” Will opined. A remanufacturer must tick a similar set of boxes to any prospective investment.

In terms of sectors apt for investment at present, Mr. Burnett commented “Automotive, including heavy duty and off-highway seem ahead of the pack, although I’m seeing more and more in aerospace, which I believe is the largest sector of remanufacturing. I’m seeing less activity in medical devices, but quite a bit in industrial machinery and equipment.”

Growing a remanufacturing company

A series of careful steps are taken to cultivate a newly procured remanufacturing company. The first approach is financial. Will elaborated on ORG’s strategy, “We first give the company a capital structure that allows it to grow. This may mean we provide the capital for acquisitions or capital expenditures. It may mean that we help the company get better terms from the bank on their line of credit. What we don’t do, but private equity sometimes has the reputation of doing, is hinder the company by using a lot of debt. We believe that the best use of the cash flows of the business is in growing the company rather than paying down onerous amounts of debt.”

Will continued: “A private equity partner will also help provide structure and strategy, and help implement processes that make managing the business more transparent and nimble. And the private equity team should be able to assist in making introductions to potential acquisitions, strategic partnerships and even customers.” Equities such as ORG can draw from their years of experience to truly develop an investment, maturing a company in all aspects.

Issues investing in remanufacturing

Some of the business challenges reman companies face may dissuade private equity companies from investing. Will outlined some possible deterrents: “remanufacturers have at least two sets of direct competitors: other remanufacturers as well as OEMs, they can also have feedstock sourcing issues.” Remanufacturers anywhere require an abundant supply of cores (used parts) to flourish.

Will also mentioned that remanufacturers have “often been very successful despite a lack of deliberate strategy, which is a challenge and an opportunity. It can be challenging to implement the reporting and operational processes we think help make a business more successful in companies that have being doing things the way they have been doing them for a long time. I understand that frustration, because it’s worked for them for so long – but when a company gets to a certain size, it really is important to have structure.”

On occasion, the issues remanufacturers experience may discourage investors, conversely the same goes for any company being assessed for investment. The recent movements of BBB and BU drive underpin the potential private equities see in remanufacturing. Commenting on his move to BBB, Tim Roth said “there’s lots of private equity interest” in remanufacturing.

Will expressed his thoughts on the future of private equity in remanufacturing: “I don’t see any reason why private equity won’t continue to be active in remanufacturing. For all the reasons previously described, the potential for very successful partnerships exists.”

The emerging Asian reman market will surely be one to watch in the future. The huge sums of money to be made in aerospace reman also make this a desirable sector for private equities. There are investment opportunities in remanufacturing waiting to be seized. The mention of remanufacturing at the G7 and the budding European Commission funded European Remanufacturing Network indicate the growth in the market; various world governments and companies are actively trying to stimulate the industry and the market is developing. What’s more, private equity (as an industry) has demonstrated consistently strong growth since the financial crisis; the increased private equity investment in remanufacturing reflects the growth of the private equity sector. The future of private equity investment in remanufacturing is bright as the futures of both private equity and remanufacturing are bright.

With special thanks to Will Burnett.

This article by John Daly originally appeared in Reman Industry Focus – Duxes – Shanghai, China on Jun 23, 2015. Click here to view the original article from RIF 

Lead image: Storm Crypt/Flickr CC by 2.0

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Joe Iles

Joe Iles

I'm Editor in Chief of Circulate and Digital Architect at the Ellen MacArthur Foundation.

When I'm not discussing the circular economy, I also love talking about digital media and online trends, memes, music, bad films and good beer.

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