Private equity in the automotive aftermarket

Aug. 6, 2015
Private equity firms are very active in the collision repair market, and the automotive aftermarket in general; yet for as active as private equity groups are in the industry, these groups are not well understood.

Private equity firms are very active in the collision repair market, and the automotive aftermarket in general. The rapid growth of the large consolidators has resulted in very attractive investment returns for these groups, further increasing the interest of other private equity investors hoping to invest in the industry. Of the “Big Four” consolidators, ABRA, Caliber, and Service King are all majority owned by global private equity groups. Boyd is publicly traded and not private equity backed, but the President of a Canadian private equity firm sits on Boyd’s board of trustees. CARSTAR also is backed by private equity, as is MAACO. Fix Auto recently received debt funding from a large Canadian investment fund that is active in private company investments. Kadel’s, the Pacific Northwest MSO recently acquired by ABRA, was backed by a smaller private equity group. Joe Hudson’s in the Southeast recently brought on a private equity partner as well. Yet for as active as private equity groups are in the industry, these groups are not well understood.

What is private equity?
In the most basic sense, private equity is a type of investment, or asset class. It can be thought of as a mutual fund for investing in privately held companies. A mutual fund pools together money from many different investors. The fund manager then invests the pool of money on behalf of the investors. Many of us have heard of Peter Lynch, the famous investor of the ‘80s who ran multi-million dollar mutual funds, or Carl Icahn, the famed corporate raider who invests in publically traded companies with the intent on very publicly shaking up management to increase the share price. Both Lynch and Icahn on behalf of investors buy stocks they believe to be undervalued in the stock market and generate millions of dollars for investors as the value of the stock increases over time.

Private equity is similar to a mutual fund, except rather than investing in publically traded companies they invest in privately held companies (hence private vs public equity). Private equity managers pool investment dollars to invest in private companies they believe have significant strategic value or are undervalued and/or underperforming. The largest private equity groups pool investment dollars from large pensions, endowments, insurance companies and investment funds. Smaller private equity groups attract capital from wealthy individuals and smaller investment funds. Some smaller groups, often referred to as family offices, invest on behalf of a single wealthy family.

Investing in private companies is unique. Financial information often is rather opaque, audited financial statements are less common, and determining the fair value of a company is much more complex relative to publicly traded firms. Private companies also are less liquid, meaning that shareholders have fewer options when it comes to selling (liquidating) their shares. As such, it usually takes longer and is more difficult to find a buyer or arrange financing compared to a publicly traded firm. Yet while buying or selling a private company is more difficult than buying or selling stock in a public company, investing in private companies can be substantially more lucrative. Private equity groups provide large pensions and wealthy individuals exposure to an asset class they otherwise would not be able to access.

Leverage, growth and operational improvement: How private equity generates massive returns
The most successful private equity groups are famous for generating massive returns on capital invested often in very short periods of time. Private equity firms often express returns inmultiples rather than percentages. In other words, these groups return two, five, or even ten times the original investment rather than 10 or 15 percent. Often the way this is done is by employing leverage, otherwise known as debt, to acquire a business. The use of debt to acquire a business minimizes the cash (equity) required to purchase a business and allows the new owners to supercharge the value of equity. Continue reading here.

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