Morning all, Craig McGlashan here with the Europe Wire from the London newsroom.
Just how much are private equity firms going to have to pivot their playbooks to the new world of AI? This morning, we hear from Lincoln International’s Chris Brooks on why GPs might have to dump the old buy-and-build model – at least in the world of tech.
Switching to another megatrend, Arlington Capital Partners has found a buyer for Forged Solutions Group, a UK provider of high specification forgings for the aerospace and defense sector. PE Hub reported that the company was going up for sale back in May.
That deal dovetails into our final item of the morning nicely as it involves a company that, like FSG, is based in Sheffield.
Waterland Private Equity has acquired a majority stake in Cooper Turner Beck Group, a provider of safety-critical fastener services based in the city.
Winners and losers
Private equity firms are changing their approach to the tech sector as artificial intelligence disrupts long-held playbooks, Chris Brooks, managing director and co-head of technology, Europe at Lincoln International, told PE Hub.
London-based Brooks, who spends most of his time on tech services (the team splits that roughly 50/50 with software) said that GPs are moving away from buy-and-build, financially engineered strategies in tech services. The old tactic of buying and combining different service products – doing a bit of Microsoft, some cloud services, some software development – then cross-selling is increasingly falling out of favor.
“Those days are over. There’s a lot more focus now – it’s all about operational excellence and differentiation/specialization. You can do some buy and build, but you’ve got to be very clear on how you’re operationally going to integrate those and make the whole go-to-market product strategy/service management side work effectively from an efficient an organizational perspective.
“That will then manifest itself in higher organic growth and better margins, and you should get a higher valuation.”
Integrating AI is another reason that the old buy-and-build models no longer carry weight. Brooks pointed out that in managed services, several PE-backed businesses are struggling because they have made a lot of acquisitions that they haven’t quite integrated.
“The organic growth is coming off. Those are going to continue to suffer. They haven’t got a coherent single set of systems and processes that they can apply the AI to, because you need the underlying infrastructure and the data to be able to train your agents and make it all work. If you’ve got a really complex organization, it’s going to be even harder to automate and add to these AI solutions.”
Software companies – and others – have been hammered in public markets as some of the latest AI releases raise questions about the viability of business models. That’s “probably” an overreaction, according to Brooks, who says that the trend has been to “tar everyone with the same brush, whereas the reality is, of course, there’s going to be winners and losers.”
He pointed to trading desks at banks. “Trillions of dollars are being traded. You’re not going to rely on big chunks of your internal software platforms that run these trading desks being written by an AI tool that you have no control over. Someone has to be responsible for that. It needs to be continually upgraded and quality assured.”
That said, tech services could draw increasing interest from private equity firms in the near term as a result of the disruption.
“Software has been a highly desirable market for some time, but I suspect some of them are going to be asking more challenging questions, particularly around the impact of AI on horizontal software. We are already seeing more interest in tech services firms, particularly those that can help their clients to navigate and implement data and AI solutions.”
Cybersecurity is another area of interest, among others.
“Even in the broader IT and comms landscape, there are companies that have attractive growth profiles and are going to be the winners because they are focusing on the same themes: excellence, differentiation, specializations, and the use of automation and AI in those business models. There aren’t that many businesses that are doing it yet, but that’s what PE is looking for.
“AI is increasingly going to impact the tech services sector. It’s going to become a critical part of service providers’ success – or otherwise.”
Such is the impact of AI, that when Lincoln is preparing companies for a sales side process, in most situations Brooks’ number one question is: “What is your automation and AI strategy for your clients, and what are you actually doing yourself internally?”
“Investors are going to be asking all of these very detailed questions about the AI opportunity and threat. Organizations, whether they’re services or software businesses, have to have that properly embedded in their organization and their workflows.
“It’s not good enough just to have an AI strategy.”
So where will AI play within tech services? Some of the impact will be reactionary, answering phones or emails, said Brooks. But there will also be an active impact, where a service provider’s own systems can detect a fault in the network.
“What we’ll see increasingly – we’re just starting to see this happen – is AI dealing with those issues that a service provider has,” he added. “A business can generate some of its own IP. Some companies call them accelerators to help deal with those service desk matters, which means that a lot of those formally human orientated tasks will be dealt with by an AI type agent solution, which will increase the profitability of a business.”
Forging ahead
Europe’s increasing spend on defense and private equity’s potential role in the trend is something we’ve talked about a lot here at PE Hub. We’ve got another deal in the sector to report – one that readers will know was up for sale.
PE Hub’s Michael Schoeck reported in May that Arlington Capital Partners was conducting a bake-off for the retention of an investment bank to shop aerospace parts company Forged Solutions Group, according to three sources briefed on the matter.
Now, JF Lehman has bought the company, which is headquartered in Sheffield in the UK and has roots going back to 1836.
FSG is a provider of high specification forgings for the aerospace, defense, and space end markets with a particular focus on flight-critical, rotating aeroengine components. The company maintains vertically integrated rolled rings, closed die, extrusion, and open die forging capabilities across a range of alloys, including nickel, titanium, steel, and aluminum in support of global OEM and Tier 1 customers.
FSG operates seven manufacturing facilities across the UK and US and employs approximately 840 people.
The sale price was not disclosed, but two of the sources told Michael last year that FSG had generated about $50 million-$60 million of EBITDA in the last 12 months.
Aerospace manufacturers have sold for 12x-15x EBITDA multiples over the past few years between strategics and PE firms, one of the sources said. Using that range, Arlington could fetch $600 million-$900 million for FSG, Michael wrote at the time.
Fastening on
It’s a big day for Sheffield private equity.
Waterland Private Equity has acquired a majority stake in Cooper Turner Beck Group, a provider of safety-critical fastener services based in the city.
CTB Group operates 21 facilities across Europe, North America, Asia Pacific, employing over 1,000 people. In the last financial year, CTB Group achieved revenues of £170 million ($226.3 million; €194.6 million), a statement read.
The company’s end markets include renewable energy, oil and gas, power generation, nuclear, rail, tunnelling, construction, and heavy equipment.
The partnership will help the company open up new markets, including through acquisition, a statement read.
That’s everything from me today. Obey Martin Manayiti will write to you in the New York morning and I’ll bring you tomorrow’s Europe Wire.
Cheers,
Craig
Leave a comment