Why Unsexy Industrial Businesses Are Ideal for Microcap Buyouts

During their recent episode, Taylor, Carlisle, and Claremon discussed Why Unsexy Industrial Businesses Are Ideal for Microcap Buyouts, here’s an excerpt from the episode:

Tobias: We’ve got about three minutes left, Ben. If you had to look into your crystal ball, what do you think will be the industry that you do your deal in?

Ben: Yeah. I think the odds are that it’s going to be an industrial or focus company, some kind of manufacturing business or somebody who provides a small component that goes into a larger piece of hardware or that an OEM assembles. Because I like businesses like that because they have often provide mission critical systems and structures that if the device fails without them, so they can often be specked in. These companies have pricing power, because if you’re a mission critical part of a larger system and you’re only like, whatever, less than 5% of the cost, there’s some price and elasticity there. So, I love businesses like that.

So, I think we need to be really clear about where we can best in class. I do not think we can best in class in software. If Constellation is willing to write a $20 million check, we’re not going to be competitive there. And that’s fine. We don’t need to compete with Constellation. Banks, we’re not going to do banks. I think there’s a long roll up for microcap banks. I just don’t think we’re going to best in class there. Biotech, there’s no PhD’s here. We’re not going to do biotech. So, part of this is just understanding where you’re not going to go.

I’ve been a generalist my whole career, but I think in the industrial space is where you can find a real business that has all of the characteristics that we want, but it’s just unsexy. Boring and unsexy. I think for private equity are the best businesses, because you pay a low to fair multiple for a business like that. You can layer on all kinds of improvements operationally and from capital allocation basis and you can own the business forever. So, I think I’d be surprised if it wasn’t industrial, but you could also say business services would be a close second.

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