Private equity investment in the global industrials sector appears set for a steep plunge for 2023, as the high cost of financing and concerns about the direction of the largest economies put downward pressure on deal activity.
Investment in the sector amounted to only $66.41 billion across 2,156 deals in the year to Nov. 16, compared to $153.16 billion across 3,162 transactions in the full year 2022, according to S&P Global Market Intelligence data.
Deal activity in the industrial sector is reverting to normal after a post-pandemic spike and subsequent inflationary pressures, but recovery is tempered by soft volumes, Joe Robbins, a partner at Bain Capital, told S&P Global Market Intelligence.
"Perhaps there will be some positive discontinuity if the Fed pulls back on [interest] rates, but my base case would be continued slow improvement as opposed to a sudden inflection," Robbins noted.
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The sector pulled in $18.67 billion in the third quarter, a 19.1% sequential increase from the second quarter, but down 19.2% from the same period in 2022, when it recorded $23.11 billion.
The number of deals also fell to 602 compared to 746 in the same period in 2022.
The US and Canada have seen the most transactions so far this year, with 689 deals totaling $31.62 billion in value. They were followed by Europe with 745 transactions totaling $20.82 billion.
Top transactions
US companies dominated the list of largest private equity transactions, accounting for five of the top 10 investments during the year to Nov. 16.
In the largest private equity investment in the sector year to date, Apollo Global Management Inc. and Abu Dhabi Investment Authority acquired Univar Solutions Inc., which distributes commodity and specialty chemical products, for $8.16 billion.
In November, Bain Capital LP agreed to acquire business advisory services company Guidehouse Inc. from middle market investor Veritas Capital Fund Management LLC. With $5.30 billion transaction value, it is the second-largest deal thus far in 2023.
Guidehouse operates in research and consulting services, a sector that has demonstrated resilient growth across various economic and political landscapes, Robbins noted.
Subsector analysis
Breaking down industrials into subsectors, research and consulting services attracted $15.50 billion across 220 transactions in the year to Nov. 16, surpassing trading companies and distributors, which secured $12.46 billion across 98 deals.
Despite the challenging environment, stability persists in types of distribution and consulting that are driven by essential maintenance needs or operate in stable end markets like healthcare and finance, Robbins said.
Private equity can support the scaling of business models in distribution and consulting. "This equation still holds, if perhaps in fewer places than it did 18 months ago," Robbins added.
Government renewable energy policies
Further deal activity in the industrials sector could be supported by the August 2022 Inflation Reduction Act, which targets $369 billion for investing in clean energy and climate-related technologies and includes an extension of tax credits that aim to promote long-term investments.
Robbins said so far only a small portion of the amount the government allocated for solar energy, for example, has actually been spent. Government policies promoting investment in renewables can accelerate private equity activity in the sector, but it isn't essential.
"Our view is that the transition to clean energy and to electric vehicles has fundamental momentum predicated on the fact that the technology is better, and keeps getting better," he said.