Braham Moondi:
Hello everyone!
Welcome to the July episode of BDO Market Pulse, where we invite a leader in the private equity ecosystem to share their insights on current market activity. I'm your host, Braham Moondi, national leader of BDO Canada's PE Practice and Assurance, and I have the immense pleasure of having Ali Akbar join us today.
Ali is a partner at Ironbridge Equity Partners, a Canadian private equity firm that invests in the manufacturing, distribution, consumer products and services, and business products and services sectors. As an accomplished senior leader, Ali has significant experience across private equity management, consulting, and investment banking. Having worked in Toronto, London, and New York, he has in-depth industry knowledge within the manufacturing and distribution sectors, which is the focus of our episode today.
Welcome, Ali. Thank you so much for joining us today.
Ali R. Akbar:
Thanks. I'm excited to be here.
Braham Moondi:
Perfect.
So a major driver of the Canadian economy, the manufacturing and distribution industry has been undergoing significant transformation. This will definitely be an interesting discussion.
To start us off, the last couple of years, high interest rates and higher operating costs have made it challenging for M&A and dealmaking in the manufacturing and distribution space, which is one of the top sectors for investments in Canada. With market expectations of interest rate stabilization, how do you foresee the remainder of 2024 shaping up for Canadian private equity firms, especially with deals in the manufacturing and distribution sector?
Ali R. Akbar:
Yeah, of course, that's a great question. I think it's something we've all been thinking about in the space. To set the stage, you're absolutely right. We've all seen deal activity come down over the last couple of years, particularly from the peaks of 2021 and 2022. This is widely held true across all sectors, including manufacturing and distribution.
As I think about going forward, I do suspect that we should start to see some recovery in the second half of the year, probably more so towards Q4. This is driven by a few key themes. First, on a very high level, we should see continued easing of monetary policy. The feds have made it clear they want to deliver a soft landing, which should hopefully lead to more interest rate relief, driving general stability and economic confidence.
At the fund or GP level, where I am, there are really two dynamics at play that I think should accelerate deal volume. The first one you've heard before is that there is a significant amount of dry powder out there. Funds that have been on the sidelines and waiting for the last few years will face increasing pressure to deploy that capital.
The second piece, which I find more interesting, is the age of the assets within the portfolios of many funds has increased significantly. This means that sponsor-backed exit processes that have been on hold will start to unwind as GPs look to return capital and generate liquidity to satisfy their LPs.
If I go very macro at the deal level, tying this all together, my sense is that the bid-ask spread on valuation has been a major cause of the stalemate in deal activity over the last few years. While it hasn't gone away, I think we're starting to see it narrow somewhat, especially with the use of run outs and other risk-sharing structures to help bridge the gap, which I believe will drive more transactions.
Combining all these factors, we should see increased activity over the next six to 12 months. For sectors like manufacturing, where input cost volatility and labor markets have largely returned to a steady state, this should also be positive.
Braham Moondi:
Now, that's fantastic, Ali. You touched on a couple of very key pieces. You talked about the dry powder and the bid-ask spread.
In the Canadian PE market, and globally, there's a lot of investment coming from PE firms within Canada, including a significant number of U.S. funds entering the Canadian market. With that backdrop of the bid-ask spread and the amount of dry powder in the market, how do you find the current competitive landscape for manufacturing and distribution deals in Canada?
Ali R. Akbar:
Yeah, again, that's a great question. For Ironbridge, which solely focuses on Canadian businesses, Canada is an incredibly attractive market for global private equity, and I believe it will continue to be so. Particularly for our southern neighbors, it's an attractive spot due to language similarities, geographic proximity, and relatively more favorable valuations. Therefore, I expect to see more U.S. funds coming to Canada.
The landscape for manufacturing and distribution is no different. It will continue to be challenging, with international firms trying to gain access to well-built Canadian businesses. For Ironbridge and our Canadian peers, this means finding ways to differentiate ourselves. Home ice advantage and being local certainly help, but ultimately, having the right expertise and demonstrating that you are the best partners and stewards of the business will lead to success in differentiating yourself.
Braham Moondi:
You talked about productivity and labor. Shifting gears a bit, the Canadian manufacturing and distribution sector has undergone significant changes over the past decade. There's been increased pressure for digital transformation and Industry 4.0 investments to mitigate risk and uncover value, with big data analytics and AI becoming more prevalent. Are there specific areas within manufacturing or distribution businesses that you foresee having the biggest impact, or any trends and opportunities that particularly interest you?
Ali R. Akbar:
For sure. I should caveat that I'm by no means a tech or AI expert; my iPhone is about five models old, which probably says a lot. However, from what I've seen, areas like AI or machine learning with predictive analytics will be very powerful. Whether it's predictive maintenance, real-time demand forecasting, or automated supply chain management, these technologies have the potential to be massive value drivers going forward.
One thing to note is that manufacturing is generally slow on the adoption curve for new technologies, especially in the lower middle market. While these technologies will be significant value unlocks in the future, many Canadian owner-operator businesses are not fully there yet. There's still substantial opportunity in getting the fundamental operations right, such as optimizing production flow, process design, and data collection. Mastering these basics is crucial before diving into emerging technologies.
There's a lot of buzz around these terms, and emphasizing the importance of having your foundational elements in place will resonate with many businesses.
Braham Moondi:
Returning to Ironbridge, which focuses on Canadian companies with EBITDA ranging from $5 to $20 million, what are some key attributes you look for when investing in manufacturing or distribution companies, beyond traditional quantitative metrics?
Ali R. Akbar:
It's a fantastic question. There's no secret sauce here. We and many of our peers look for similar attributes. For manufacturing, key attributes include whether the business has real, tangible performance improvement opportunities. We assess if there are levers we can pull to drive manufacturing efficiencies, reduce costs, or implement basic robotic automation. Additionally, we look at the potential for high return on capital investments to drive output. We seek businesses where we can add real value based on our expertise and experience in the space.
I think that's something we look for in manufacturing companies. They shifted distribution. One of the things I like to look at as a bit more academic is the shape of the value chain. I ask, what does the shape look like?
If you imagine having suppliers at the top, distributors in the middle, and then your customers or end users at the bottom, ideally, you want a shape that somewhat resembles an hourglass. You would have a massive variety of suppliers up top, a few distributors in the middle, and a very fragmented customer base at the bottom. A gut check is that the closer you resemble that type of shape, the stronger the distributor value product tends to be. This usually leads to more sustainable returns in the long term and a defensible distribution position.
Braham Moondi:
That’s awesome. Would you like to share an example with our viewers of how you partner with a manufacturing or distribution business?
Ali R. Akbar:
That's a tough one because there’s no one-size-fits-all approach. Every business we’ve worked with, every management team we’ve encountered, has their own unique needs. There are different ways we can be good partners and add value.
One example is our access to the manufacturing business, where we’ve seen strong industry growth and high demand. Our focus has been on helping management think about capacity and what the future volume demand might look like. We spent a lot of time thinking about the right paths, which eventually led us to a significant investment in a new facility with high-efficiency equipment. It was a heavy lift in the beginning, but it has been very successful, driving growth and volume.
On the other end, we worked with a paper manufacturing business with a much more stable or flat demand profile. Our focus there was on driving manufacturing efficiencies and optimizing costs, including process redesign, implementing robotic automation for packaging, and modifying production scheduling. These efforts aimed to improve margin by 100 to 200 basis points. There’s no one playbook, but hopefully, this gives a sense of the goals we work with.
Braham Moondi:
That’s amazing for our listeners to hear about because it not only speaks to the legacy but also the strategic expertise that Ironbridge brings to their partners.
So those were all of our manufacturing and distribution questions, but we do have a quick lightning round just to get to know you a little bit better.
Excellent. So, just very quickly, the first thing that comes to mind: best source to stay up to date on any market dynamics or market intelligence?
Ali R. Akbar:
Honestly, for me, nothing beats getting out there. Leave your office, leave your desk, go meet people, and talk to your peers. Have conversations just like we're having today—what are you seeing, what’s giving you pause, and so forth. I think that’s probably the best way to stay up to date compared to any podcast or article.
Braham Moondi:
Stick to the roots. If you had to invest in a manufacturing company right now, what subsector would you choose?
Ali R. Akbar:
Wow, that’s a tough one and a bit of a curveball. Outside of ones we’re currently in or potentially looking at, one that comes to mind is sustainable or green packaging, particularly in the food sector. Canada is not there yet, but we’re starting to see this come up more in some of our portfolio companies. I think there will be continued pressure to move away from plastics, and any business or entrepreneur that’s ahead of that curve and can find an innovative or pragmatic solution will be very well positioned.
Braham Moondi:
For sure. And what’s the first thing that comes to mind when you think of AI?
Ali R. Akbar:
A mix of exciting, probably transformative, and then all wrapped up in a bit of scary at the same time.
Braham Moondi:
If you were to start a manufacturing business tomorrow, what would be your founding principle or core value?
Ali R. Akbar:
That’s a great question. For me, the number one founding principle or core value, which applies to many businesses beyond manufacturing, is customer centricity. At the end of the day, it’s all about the customer—what do they want, what delights them, how can you continue to provide a positive customer experience or journey, and simply outperform your competitors? That’s the key to success.
Braham Moondi:
That’s amazing. And any current or recent book that you read that you would like to share with us?
Ali R. Akbar:
To be fully honest, the last book I read was called Fatherhood. Not sure that’s overly relevant for this episode, but if there are any future dads in the audience looking for a crash course on changing diapers or swaddling techniques, I highly recommend it.
Braham Moondi:
Perfect. Well, thank you so much, Ali. It was a pleasure to have you here and thank you for all the great insights. And thank you to our viewers for joining in on this episode today.
Ali R. Akbar:
Thanks, Braham. I appreciate you having me.