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Q1 2018 Business Products and Services Industry Spotlight

INSIGHT ARTICLE  | 

Spotlight

Challenges of the auto industry

While the initial public offering (IPO) market has slowed generally, 2017 saw a rebound in offerings specific to global automotive suppliers. Among other auto suppliers that went public last year were Gates Industrial, a Blackstone-backed manufacturer of power transmission belts and fluid power products, and CarGuru, an online network with more than 40,000 dealers. The industry is facing a number of challenges, including changing demands and sustaining profitability. Among other priorities, suppliers may need to secure sufficient financing to succeed in this market. The IPO market was a popular way to do so last year, and the $2.3 billion raised through IPOs was more than twice the amount raised in Q4 2017.

Big picture

Seller expectations have seldom been higher than they are today. Asking prices are somewhat inflated, with high synergistic expectations already baked in. Those optimistic assumptions are creating issues when synergies don’t pan out as hoped. Because of the disconnect between buyer and seller expectations, the market is seeing more broken deals in recent quarters. High valuations create significant uncertainty when even small earnings adjustments are discovered prior to closing. Private equity (PE) investors are cautious of overpaying in this market, which saw a decade-high $331 billion invested last year. Valuations aren’t expected to come down until investor interest subsides dramatically, which doesn’t appear to be the case this year.

Looking ahead

Some RSM clients are starting to plan for a “soft slowdown” in the economy, even if a downturn doesn’t fall to recessionary levels. Recent investments may be affected by any macroeconomic hiccups over the next three to five years. Recent changes to the federal tax code shouldn’t significantly affect PE, though the changes are worth understanding. From a structuring perspective, RSM is helping clients understand the changes from a post-close, cash flow perspective, which is the most relevant to PE firms.

 

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