Private equity capital is now competing with offshore sources looking to set up shop.
CHICAGO — The aftermarket continues to be a haven for growth and investment, say speakers at this year's Aftermarket Financial Symposium. And its strong backbone is partially due to the general dynamics of consumer behavior.
Not only are more cars purchased every year, but people are owning them longer, notes Gary Meteer, account director, Commercial Vehicle & Aftermarket Group for R. L. Polk & Co. Simply put, that means more parts and more service opportunities, he says.
Dan Smith, president of Capstone Financial Group, adds that over the next three years, 50 million cars and light trucks sold between 1999 and 2001 will come off warranty. These cars will fuel growth in the aftermarket. Complementing the underlying fundamentals, Smith suggests that demographics — 78 million baby boomers and 70 million Gen Y'ers — will continue to make the aftermarket a sweet spot within American industry.
In addition, more than $200 billion in private investment funds is sitting on the sidelines looking for opportunities to buy-in, says Smith and other representatives of private equity groups. That private equity is now competing with offshore money from Asian sources.
"Chinese firms need a presence in the form of U.S.-based brand names," says Smith. "With the Chinese yuan to U.S. dollar currency relationship giving Chinese firms windfall profits (like Japanese automakers), they have cash to burn."
In particular, Smith believes business in the distribution, service and high-performance segments have the most promise.
Picking a partner
For those in the aftermarket looking for capital, speakers warn them to exercise due diligence when seeking a partner. In a panel discussion, Smith emphasizes that much of today's growth is being done via private, rather than public, financing.
Andy Foskey, a vice president with Hunt Private Equity Group, says the abundant domestic private equity available, let alone incoming Asian money, concerns him. With so much money earning little interest on the sidelines, the cash bubble is fueling a rush to aftermarket firms. If deals are not structured soundly, difficult times lay ahead.
Steven Grove, an associate with Prairie Capital, a mezzanine lender and private equity group, explains that unlike banks, regulators do not oversee private equity groups. Both Grove and Foskey agree that picking a reputable firm is crucial. A track record of success, a history of being patient and disciplined in riding out cycles, an understanding of the aftermarket and other factors need to be considered carefully.
Whether distributorships decide to find additional capital or remain independent, staying financially successful also means addressing internal issues and rising expenses. Lee McManus, an associate director with Acordia Inc., asserts that rising employee benefits, such as health care, is something every business needs to address. "Today, health care is usually the third to fifth line item. Costs will more than double over the next five years," he says.
Aftermarketers should seek out companies that offer employee benefit plans and employee education and encourage behavioral change toward more self-managed care by employees, suggests McManus.