After “Liberation Day” in April, the markets felt anything but liberated, especially in the industrials sector, which many anticipated to be particularly affected by tariffs. But now dealmakers have more than warmed to the sector – they are quite excited about it.
Secular tailwinds are driving demand for those specific parts of the economy, which include more than just things like building products and manufacturing. Among these are services businesses, which have attracted a lot of attention.
“While you have to be selective, there are pockets within industrials with strong long-term potential,” said Aaron Wolfe, co-founder and managing partner of specialty industrials sponsor Point 41 Capital. “The excitement comes from long-term trends like automation, infrastructure and electrification.”
The largest industrials deal so far this year was the $3.6bn debt financing in September supporting Warburg Pincus’ acquisition of Park Place Technologies, a maintenance provider for data centers, which are becoming regarded as critical infrastructure.
The package included a $2.9bn term loan on which Ares Management served as administrative agent and Blackstone as joint lead arranger with participation from Blue Owl Capital.
“Core industrial services are the regulated, mission-critical, code-driven activities that generate recurring revenue. Examples include testing, inspection and certification; fire safety; and electrical system maintenance. These sectors are sticky because demand is mandated,” said Lara Hughes-Francis, founder and partner of M&A origination firm Clavana.
She pointed to Blackstone’s $1.6bn acquisition of Shermco from Gryphon Investors in August as an example. Irving, Texas-based Shermco provides electrical system maintenance and engineering services, putting it in a position to benefit from the electrification tailwind.
While financing details of the new transaction are unclear, under Gryphon’s ownership Shermco was financed in the private credit markets with capital from Ares Management and Cliffwater.
In another infrastructure services deal, USG Water Solutions closed a dividend recapitalization in June with a term loan led by Overland Advantage, the joint venture between Wells Fargo and Centerbridge Partners. The borrower manages the physical assets, such as pipes and treatment plants, for small and medium-sized public water utilities in the US.
“From an analytical perspective, we’re observing heightened private equity activity in the industrials sector this year, with sponsors particularly targeting business services and distribution companies that operate in fragmented markets,” said Matt Woodruff, a CreditSights analyst who leads aerospace and defense as well as transportation coverage.
Infrastructure investment has created “sustained demand visibility” and proven to be a factor that can justify higher valuations in related subsectors, he said.
One banker said the industrials sector is “compelling,” citing the potential for these businesses to have large total addressable markets and that the companies are not necessarily capex intensive. If the borrower has more US exposure than international exposure, that makes them less susceptible to tariffs, the banker noted.
A second banker said that industrials is a “massive universe” and that to get deals done, companies need to be able to quantify risk. If a number can be attached to that, it is easier for lenders to get comfortable with the company.
For all its potential, the industrials sector does have several headwinds, including labor market constraints, CreditSights’ Woodruff said, a factor that is becoming a “key due diligence focus.”
“[B]uyers [are] carefully evaluating targets’ exposure to skilled trades shortages and wage inflation pressure, often requiring detailed workforce planning and automation roadmaps to justify investment theses,” he said.
When it comes to underwriting the business from a lending perspective, several factors stick out as important metrics to look for, noted Point 41’s Wolfe.
“What lenders should look at are long-term demand for the company’s products. How much performance is driven by pricing versus volume? Price-volume analysis is critical. In addition, they should look at supply chain resilience. Can they source competitively if tariffs or political issues arise?” he said.
Other critical things to look at are tariffs, concentration among customers and end-markets, and ESG and regulatory tailwinds, Clavana’s Francis-Hughes said.
Onshoring’s possible tailwinds
There have been some deals outside industrial business services. Truelink Capital acquired maintenance, cleaning and sanitation products company Zep from New Mountain Capital. WhiteHorse Capital provided a first-lien credit facility priced at S+500 to help finance the purchase.
The sale was particularly notable because Zep had refinanced its debt in 2023 with a $345mn first-lien and second-lien package to deal with a near-term maturity with ratings of Caa2/CCC+.
A reshoring of US manufacturing jobs would be a boon to that part of the industrials space, though it would play out over years rather than months, making it somewhat of an open question.
“Industrials are attractive because people think the manufacturing jobs are coming back to America. For so long, the industry was unattractive because the likelihood that the jobs would be offshored,” Deerpath Capital Head of Origination Reed Van Gorden said.
That reshoring will likely occur, but it “won’t happen tomorrow,” he said, making the sector a compelling investment thesis for the equity side of the capital structure. Industrial companies may still be a tougher sell for cashflow lenders because there is uncertainty about the future timing of onshoring of jobs.
Sponsors also are taking the long view on this variable as well.
“We do think long-term onshoring is a positive trend for traditional U.S. manufacturers,” said Point 41’s Jordan Wadsworth, also a managing partner at the firm. “Companies are diversifying their supply base and shortening supply chains, sourcing more domestically than before.”
The industrial sector’s role in powering the economy plays a large part in its attractiveness, according to John May, founder and managing partner of sponsor CORE Industrial Partners.
“The sector’s essential role in supporting broader economic activity translates to significant dollars being invested by both the public and private sector,” he said. “Over the long term, companies that can balance cost discipline with pursuing strategic opportunities should be able to capitalize on the growth of the sector.”
Ultimately, private equity firms aren’t pursuing what Clavana’s Hughes-Francis described as broad cyclical manufacturing, rather, they are looking for “distinct technical input, sticky maintenance revenue, and supply chain independence.”
“From a lending standpoint, the winners aren’t those built for boom times, but those structured for staying power,” she said.
Andrew Hedlund
andrew.hedlund@levfininsights.com
+1 480 313 1334
