In the Capstone Headwaters September 2020 report of Precision Manufacturing: Private Equity Firms Drive M&A, Capstone spoke with Sean Edmonson, Vice President at Tecum Capital Management, to discuss what the firm looks for in precision machining investments and COVID-19 impacts on the industry. Tecum Capital is a Pittsburgh-based private equity firm that has invested over $650 million (with over $450 million of current committed capital). The firm seeks investments in lower middle-market companies with an enterprise value of $10-$50 million, $8-$100 million in revenue, and $2-$10 million in EBITDA. Since 2006, Tecum Capital has invested in 80+ platforms and add-on acquisitions.
How would you differentiate Tecum Capital from other firms?
We specialize in family-owned, founder-owned, or closely held businesses where they’re looking for first institutional capital investments to help fuel growth in their business. We approach our partners in a very collaborative and humble manner. We have a group of true Midwesterners on our team and that bleeds through into everything we do. Our partners often find we admit when we know our blind spots and we’re happy to bring in the right people to collaborate and help accelerate our valuate creation plans. The other key dynamic is we tend to be more value-oriented in nature and focus on sustainable growth in our value creation plans. For example, you often see in PE-backed Precision Machining platforms, there’s a lot of forced add-on strategies to drive multiple arbitrages. Frankly, we’ve found more often than not, a heavy organic play, in an over-equitized manner with opportunistic tuck-ins tends to be much more accretive in nature over the long-term to driving sustainable growth, versus an aggressive buy-and-build over the investment period in a highly levered environment to afford richer multiples without natural hard synergies.
What are your key investment criteria for add-ons or platform investments in Precision Machining?
First, operational excellence, with a focus on OTD and PPM. Those two KPIs provide a very easy litmus test to assess operators in respective platforms. Second, we’re really trying to understand the geography in which they operate and how they retain and grow their labor force. There’s still a lot of specialized, and highly-skilled labor required in the industry and we’re finding the best firms have some type of formal apprenticeship program or allocated executive leadership, focused specifically on targeting high schools and trade schools early on in order to recruit a bench of talent to replace the aging labor force. Third, companies who really understand their equipment’s useful life and associated maintenance programs to extend equipment life and still maintain the necessary manufacturing tolerances. The last thing I would add, as more of a caveat, is customer concentration doesn’t bother us. We’ve found some of the best companies we’ve been a part of tend to have some customer concentration and it has allowed them to scale. All it takes is one really good blue-chip customer to invest some time and energy that gives them credibility to go out to the marketplace and win similar, large programs.
What have been the largest COVID impacts on the Precision Manufacturing industry?
There’s a lot of uncertainty around the production schedules within the Commercial Aerospace OEM platforms, and the associated engine platforms, for example, the LEAP engine program. Then I’d say number two is we’ve seen meaningful compression within orthopedic component demand and launch of new platforms. Specifically, elective surgery-oriented components were in a lull and we’re just trying to get a good feel for when it is going to come back.
How has COVID impacted your industrials holdings and what are businesses doing to mitigate issues?
Overall, there’s a lot of uncertainty on capital spending (both customers and our port cos). If we have any companies that are doing discretionary service work or recurring maintenance work, it’s being delayed and/or stretched. We’ve been fortunate from the standpoint that many of our businesses fall on more of the essential category and they’ve been able to weather the storm quite well. But most of our portfolio is flat to slightly up, and there are certain pockets, especially on the non-discretionary consumer side, like packaging tooling, that’s way up.
Anything to add?
Folks are looking for a flight to safety in durable businesses and one of the challenges we’re beginning to see is large, foreign-owned multinationals getting aggressive on quality platforms with all equity purchases and their hurdle return rates are much lower than a PE fund so they’re paying healthy valuations for some of these businesses and we simply cannot compete. I think that’s going to continue to make it more challenging as we look for quality assets.
As Vice President at Tecum Capital, Sean Edmonson is responsible for sourcing and analyzing investment opportunities, underwriting, and portfolio management for existing investments. His experience ranges from buy-side investing, strategic and sell-side advisory, as well as capital raising across the middle market for both privately held companies and publicly traded corporations. He currently serves as a director of BP Express, Connecticut Electric, FSC Lighting, National Power, and MWE Sales.
Contact Mr. Edmonson at sedmonson@tecum.com