Manufacturing-Focused Private Equity Firms Eye NAFTA Reforms and Digitization

January 2018

Among private equity firms with a majority of their investments in the manufacturing & distribution industry—comprising 37 percent of participants in BDO’s Ninth Annual Private Equity PErspective Survey—the North American Trade Agreement (NAFTA) reform and digitization arise as the key issues.

Nearly one-quarter (24 percent) identify trade issues, including ongoing NAFTA renegotiations, as the most concerning global political issue. With the potential for more protectionist language to enter the agreement, fund managers with a stake in the manufacturing industry are acutely aware that their portfolio companies could incur a sharp increase in the cost of doing business.

Given the uncertainty surrounding NAFTA, it is no surprise these fund managers don’t plan to venture outside of the U.S. much for acquisition targets. The clear majority (81 percent) plan to dedicate less than 10 percent of their fund to deals outside of the U.S. and about threequarters (73 percent) will not pursue cross-border deals in 2018.

To continue growing despite the headwinds, the manufacturing & distribution industry is in the early stages of the fourth industrial revolution, or Industry 4.0, in which plants, processes, products and people come together in an entirely new way, blurring the line between the digital and physical. Borne out of a confluence of technology disruptions—from Big Data and analytics to the Internet of Things to artificial intelligence—Industry 4.0 ultimately hinges on the ability to integrate data with physical processes.

Private equity firms recognize the opportunity to scale up their portfolio companies’ technology. Nearly nine in 10 (87 percent) plan to implement digital transformation initiatives at the portfolio company level in the next 12 months.

As manufacturing companies increasingly seek to become digital, cybersecurity is becoming a top priority, with eighty percent of fund managers surveyed planning to evaluate their current portfolio companies’ cybersecurity risks.

Still, not all fund managers are considering acquisition targets’ cybersecurity vulnerabilities prior to closing a deal. Fifteen percent report that cybersecurity due diligence is not at all important, nearly double the fund managers that say the same across all industries.