Deal making is likely to surge as companies seek funding and private equity firms scour the market for buyout opportunities.
Italy is poised to help steer automotive deal activity in the final weeks of what has been another bumper year for the industry. According to PwC, global automotive deals reached US$59.3 billion in the first three quarters of 2018 — marking the highest year-to-date value in a decade. As the end of 2018 approaches, automotive deal value is on course to race past previous years at a promising time for sector consolidation and innovation. In particular, private equity firms are on track to play a crucial role in driving deals in the country as Italian businesses seek external investment.
A combination of factors is causing Italy’s automotive companies to increasingly turn to PE funding. For starters, Italy’s autonomous driving development is moving at the wrong speed. According to Roland Berger in Automotive Disruption Radar #4 (2018), Italy ranks 13th among European countries for electric vehicle public charging infrastructure.
In addition, Italy’s automotive industry is highly fragmented and mostly family-owned, which will likely lead to increased demand for investment from financial sponsors. The Italian auto market is currently dominated by small and medium-sized enterprises (SMEs), many of which will require significant additional capital to develop next-generation products. An increase in deal making is probable as companies seek funding and PE firms scour the market for buyout opportunities.
Current funding structures are simply insufficient for many SMEs, which have exhausted their ability to access credit from banks. Furthermore, family-owned businesses across Italy will need to consider succession planning and their future ownership structure, factors likely to increase PE investment. Italian PE firms are apt to provide significant capital for small businesses, while large international buyout firms are well placed to consolidate the market and drive bigger transactions.
Due to the complexity of the automotive sector, PE firms will need to take a longer-term investment horizon. The emergence of long-term PE fund strategies in recent years will suit the automotive industry’s investment needs. Traditional PE firms have also demonstrated an appetite for Italian automotive deals. For example, Bain Capital’s acquisition of Fintyre, leading distributor of replacement tires in Europe, underlined interest in the sector. Like Bain Capital, firms are likely to use portfolio investments as a platform for consolidation. At the level of main supplier, various PE firms and funds have been investing in the automotive sector, including Bain Capital, BlueGem Capital Partners, Charme Capital Partners, IDeA Alternative Investments, KKR, Mandarin Capital Partners, Quadrivio, and TowerBrook Capital Partners.
Developing the next generation of automotive vehicles will also require greater investment, presenting a chance for PE firms to provide capital. Electrification, autonomous driving, and digitalization of cars should be of interest to PE. Electrification is a particular focus for original equipment manufacturers (OEMs) at the moment. The development of these products depends on enhanced infrastructure, and PE firms are in a strong position to fund growth.
With increasing technological complexity, the next generation of automotive design will transform cars into digital platforms, and automotive companies will require suppliers beyond traditional manufacturers. Companies involved in artificial intelligence or digital media are likely to see their technology used in next-generation vehicles, presenting an opportunity for investment and innovation across the sector. Once again, this presents opportunities for PE to fuel growth, drive consolidation, and power the Italian automotive market into the future.