Private equity funds, venture capitalists partner with precision parts manufacturers poised for growth

Running a successful machine shop takes more than having advanced machine tools, high-performance cutting tools and machinists that boost productivity. A manufacturer of precision metal parts might also need a strategic partner that has the network, expertise and—last but not least—capital to penetrate new markets, overcome capacity constraints and make investments to help the business grow.

Technicut Tool Inc. is one example of a machine shop that followed this path. The Windsor, Ontario-based company employs 80 people and specializes in machining complex, precision parts for the oil and gas industry, as well as for aerospace customers, at its 44,000-sq.-ft. manufacturing facility. CEO Dino Civiero explained that his partner was looking to retire while he wanted to remain and grow the business. “I was looking for somebody who has the capital and connections to help us do that.”

He turned to Capital Assist (Valuation) Inc., a Windsor-based capital advisory firm, and NewPoint Capital Partners Inc., a Toronto-based investment banking firm, to serve as financial advisers. Capital Assist President Federica Nazzani said the process for securing a financial investor begins by examining an organization’s structure, products and management team while looking at the customers and industries it serves, as well as the direction, opportunities and challenges that exist for the company. From there, an adviser prepares a document called a confidential investment memorandum, which is provided to potential investors as they start to evaluate opportunities, and determine its interest in investing.

“We work closely with management to assess future growth projections,” Nazzani said. “We then look at potential sources of capital required to meet that growth.”

Enter the Equity Fund

After shortlisting those sources, Nazzani noted White Wolf Capital LLC, Miami, was ultimately selected as the most appropriate partner for Technicut. “They have tremendous depth in terms of their technical and financial expertise, as well as their knowledge of the U.S. market, a key target market for Technicut,” Nazzani said.

“From a growth standpoint, they seem to be the best fit,” Civiero added, noting White Wolf is aligned with manufacturers that machine similar types of parts. “They have a lot of connections in the oil and gas industry.”

Civiero said he was also attracted to White Wolf’s focus on long-term investing with a strategy that keeps the administration of a machine shop intact. “They are looking for companies with a strong management team, which is what we have. It’s pretty much business as usual for us.”

A machine shop can be attractive as an investment opportunity, particularly for those in the banking community, because of its high-value, tangible assets. Image courtesy Natoma Corp.

Elie Azar, managing director for White Wolf, noted the equity firm focuses on lower- to mid-market companies with revenues up to $100 million and EBITDA (earnings before interest, taxes, depreciation and amortization) up to $10 million. White Wolf typically looks to acquire 60 to 75 percent of those companies. “We are only interested in situations where we can partner with an existing team,” he said. “We look for situations where the management team has grown the company to maybe $15 million to $30 million in revenue and are looking to take it to the next level, take some chips off the table and take a second bite of the apple—hopefully, a much larger apple—5 to 7 years down the road.”

As a partner, an equity firm isn’t going to recommend what cutting tool to apply when deep-hole drilling or the speeds and feeds for roughing a block of Inconel, but rather it helps in areas such as business development, financing and mergers and acquisitions. “Maybe the business needs a CFO, making investments in strategic IT like ERP (enterprise resource planning) or CRM (customer relationship management),” Azar said. “A lot of times these growing companies have been financed by the owner, so they typically are more conservative. We see an opportunity to seek out strategic acquisitions for the company, expanding lines of credit and investing working capital to help grow the business.”

That conservative nature can translate to owners not wanting to accept 100 percent of the risk when growing a manufacturing operation. “So they take on an investor to help share the risk,” Nazzani said. “That could be a reflection of age or just their own internal resources and what they are prepared to continually invest. In the case of Technicut, it’s not just about providing money to help them grow, but they are really looking for expertise and network.”

Dino Civiero, CEO of Technicut Tool Inc.

Because many founders of private equity groups have an industrial background, their personal relationships can be quite valuable when targeting new markets, according to Nazzani.

Although diversifying a manufacturer’s customer base usually involves serving industries it had not previously, that’s not always the case. “There is an incredible amount of promise in the oil and gas industry, and just diversifying in that industry alone is huge,” Technicut’s Civiero said, adding that the company plans to target other industries as well.

Consolidation Crunch

Strategic investors often seek to consolidate companies in a highly fragmented marketplace, and, with at least 20,000-plus machine shops in the U.S., precision parts manufacturing certainly qualifies, noted Elijah Crotzer, president and CEO of ARCH Global Precision, Livonia, Mich. The company was formed in 2011 with the goal to acquire manufacturers that specialized in producing machined components and cutting tools.

Federica Nazzani,president of Capital Assist (Valuation) Inc.

He explained that large consumers of parts, such as numerous Fortune 500 companies, want to dramatically reduce their supply base. Therefore, a parts manufacturer becomes a more attractive supplier by acquiring additional machining capabilities. “We have different capabilities, from Swiss-style screw machining of very small parts all the way to machining castings and forgings that weigh several thousand pounds—and everything in between,” Crotzer said. “We become a one-stop shop for our customer base.”

Nazzani concurred that it’s an optimal time to consolidate within the parts manufacturing sector. This is because, depending on the industries they serve, machine shops are seeing increased business activity and face several constraints when increasing capacity. These include financial constraints to growth, such as physical, where a facility doesn’t have the space to deploy additional machine tools, people, where even if a facility has the space for new equipment it’s challenged to find a skilled person to operate it, and expertise, because besides machinists, qualified production managers, manufacturing engineers and logistics personnel are also in limited supply.

“All of those things are important,” she said, “and the ability to share those resources through consolidation leads to greater economies of scale and helps with those constraints.”