Is Private Equity the Manufacturing Cure for the Credit Crisis?

I found a recent Industry Week article that discussed how private equity [is] helping mid-size manufacturers thrive in [an] increasingly competitive global marketplace quite interesting. The article, which noted that help from the right private equity firms can allow mid-sized manufacturers to bring more efficient and productive systems into the organization that are designed to facilitate operational improvements such as reducing waste and improving throughput, also noted that a recent Ernst & Young study found that companies sold by private equity firms increased in enterprise value at an annual compounded rate of 24% during the time they were in a PE firm’s portfolio — double the rate of comparably publicly traded companies. In addition, buyout firms also increased the earnings before interest, taxes, depreciation and amortization (EBITDA) of these portfolio companies 33% faster than their publicly traded counterparts did. Finally, these companies had productivity levels 33% higher than publicly traded company benchmarks.

The article then put forward five benefits of private equity investment that mid-market manufacturing businesses can expect from the right private equity firm.

  • Sparked Business Growth
    A good private equity firm brings efficient systems into a company, narrows the focus, identifies new markets and integrates value-added processes. This gives a company a solid foundation for growth.
  • Strategic Planning Partnership
    A good private equity firm will have a network of resources, including a board of directors with experience in the manufacturing industry, that they will use to assist management teams in setting and achieving strategic objectives.
  • Long-term Growth Plan
    Private equity, not subject to the whims of Wall Street, can allow for steadier, longer-term growth. It gives the company the flexibility to make decisions that will pay-off in the long run as the company doesn’t always have to worry about quarterly earnings statements.
  • Global Competitiveness
    A good private equity firm has the resources to help a manufacturer enter new markets and serve global customers.
  • Liquidity
    Private equity provides liquidity that allows owners to cash out or diversity assets.

So is it the answer to the credit-crisis? For some firms, I think the answer is yes, especially if they have solid people, solid products, and a history of satisfying solid customers and really need a cash infusion to stay competitive. With good foundations, the right PE firm will be able to take their operation from shaky to stable and take their performance from good to great.