Industrial Growth Partners: Leveraging Data Throughout the Investment Lifecycle
This episode of the Expert Insights Series, hosted by Blue Margin Co-Founder Jon Thompson, features investment professional John Parent of Industrial Growth Partners (IGP). John has a background in investment banking, has been with IGP for seven years, and serves or has served as a director of APCT, Redco Group, Royal Power Solutions, and SPL.
For the past 25 years, IGP has specialized in the industrial sector, focusing on engineered products and industrial services. They have raised over $3.4 billion, just closed their sixth fund, and have invested in over 40 platform companies. Their mission is straightforward: to invest in and build global, market-leading industrial companies.
Watch the full interview, listen to the podcast, or read the highlights below. The episode covers four themes: assessing a target’s potential to leverage data as a value driver during diligence, using data visibility to enable operational efficiency during the hold period, using detailed forecasting supported by granular data to increase exit valuations and buyer confidence, and how specialization helps PE firms win in an increasingly competitive landscape.
Leading PE Firms Use Data Analytics During Deal Sourcing and Diligence
S&P Global’s 2022 Data Analytics for PE Report surveyed 30 senior executives from U.S. PE firms with a minimum of $2 billion AUM. The report found that during the investment lifecycle, the deal origination and diligence stages most benefit from data analytics. For firms without these capabilities, adoption is less a question of innovation and more a matter of catching up with competitors already using data to inform sourcing decisions. PE firms and their advisors are increasingly using data stored on sellers’ systems to go beyond the financials and investigate synergies buried in the data behind the numbers.
Using data for diligence in this way is an approach IGP embraces. According to John, acquiring a business with underdeveloped data capabilities comes with both opportunity and risk. While these businesses may be adept at day-to-day operations, their growth is limited by poor data visibility. Lacking insight into untapped growth opportunities across potentially thousands of customers and hundreds of thousands of SKUs, investors have an opportunity to pay attractive prices for unfurrowed ground, under which lie the golden nuggets buried in the data.
At the same time, John points out that buying companies without a handle on their data also comes with risk. Ramping up their data practice can take as long as 18 months, increasing the risk of falling behind the market. Knowing when and how to build data infrastructure in the first 100 days is a key differentiator for firms that move quickly through this ramp.
“If there isn’t great control of their data, their systems, their processes, their key metrics, that can create some risks, such as operational hygiene. Investors are exposed because their competitors are doing certain things and they are not, and it makes a buyer question the longevity of the company.”
John Parent, Industrial Growth Partners
Why Private Equity Must Prioritize Data Visibility During the Hold Period
Would you rather drive looking through your front windshield or your rear-view mirror? When decisions must be made and the road ahead is rough, you need to see ahead to avoid potholes. Data visibility enables portco executives to manage their companies proactively and with intention, rather than reacting after the fact.
Because IGP considers companies with underdeveloped data capabilities to be diamonds in the rough, during diligence they ask: what systems and capabilities does this company have today, and what do we want it to look like going forward? John tells the story of an IGP investment that had no yearly interim financials. When IGP created a simple monthly reporting package with basic financials and operational and sales metrics, all three rose. In essence, IGP monetized the data.
Blue Margin hears similar real-world stories from executives who for the first time see operations improve by simply surfacing the right metrics to the right people. NewVantage’s 2022 Data and AI Leadership Executive Survey found that over 92% of surveyed companies reported strong returns on their data and AI investments. S&P Global’s 2022 report corroborates this, finding that the most important attributes of PE firms’ data analytics processes are automated reports and high-quality data visualizations, and that 90% of mid-sized firms surveyed rely on an outside vendor for data management and analytics.
Private Equity Uses Detailed Forecasting Data for a Successful Exit
“Every buyer is skeptical of the future. There is always an element of ‘Hey, prove it to me.’ The amount of granularity and specificity that you can point to as a seller increases the confidence that a buyer has in underwriting that forecast.”
John Parent, Industrial Growth Partners
Data visibility makes it possible to provide detailed forecasting that boosts buyer confidence, translating to higher valuations. PE firms with these capabilities can quantify trends on key performance metrics identified during diligence and tracked throughout the hold. With this data in hand, they can tell an empirical growth story and substantiate the foundation for future growth. The more granular the data buyers can drill into, the more confident the underwriting.
Adam Coffey, serial PE-backed CEO, consultant, and bestselling author of the Exit Strategy Playbook, confirms the real-world observation that strong data forecasting correlates to higher valuation levels. In his experience buying and selling 58 companies, those with good visibility into data and analytics are perceived as better companies and trade at the higher end of their multiples range.
“Saying, ‘We grew 10% the last three years, and we are going to do that for the next six years,’ doesn’t give a buyer the same comfort level as saying, ‘Here are our exact customers and our exact platforms that we have been tracking historically. Here was our forecast five years ago, and we were spot-on based on production builds. Here are the platforms we are on, and we’re going to do the exact same thing for the next five years. So, Mr. Buyer, you should pay us for our entire forecast, you shouldn’t be haircutting it, discounting it, or risk-adjusting it.'”
John Parent, Industrial Growth Partners
Overcoming Private Equity’s Increasing Competition and Complexity with Specialization
Fading are the days when PE firms could rely solely on multiples arbitrage. Deal theses are increasing in complexity as more capital enters the market and valuations rise. Competition is fierce, particularly in the U.S., where American firms represented 62% of the $2.1 trillion in global PE transactions in 2021. All respondents in S&P Global’s PE survey agreed that increased competition for assets drives their firms to reassess the use of data and technology. One managing director surveyed noted that firms must move swiftly and employ data analytics to weigh available options because the modern investment environment demands faster and better decisions.
In addition to harnessing the power of data, more firms are creating advantage by planting a flag in specific sectors. IGP was an early trendsetter in specialization. For the past 25 years, they have invested solely in manufacturing and industrials. This strategic, singular, long-term focus has produced a solid foundation of expertise that helps IGP weather market volatility and stay in the upper quartile of an increasingly crowded industry.
Connect with John Parent and IGP
If you would like to hear more from John, find him on LinkedIn or at Industrial Growth Partners.
About Blue Margin
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