Skip to Content
Two professional men shaking hands
Article

Targeting sectors for investment

September 3, 2015 / 5 min read

With a significant number of private equity groups (PEGs) working to succeed in this market, it has become increasingly difficult to identify targets poised for significant growth based on financial analysis alone. Plante Moran has noticed that the leaders in this area are increasingly turning to niche analysis to single out businesses that have the financial stability necessary to take full advantage of near-term trends in the market to outpace their competitors. Fund managers who search for businesses in a particular sector that have the knowledge, experience, and capital to take full advantage of the next shift seem to be outpacing managers who aren’t seeing the full picture.

To understand what sectors are poised for growth, and which businesses are poised to lead that growth, PEGs should analyze various specialized industry niches to determine where potentially game-changing innovations have been underutilized or where competitors are struggling to adjust to a new technology or market shift. Plante Moran has identified four sectors where such conditions exist and the characteristics of businesses that may be best suited to outperform competitors over the next few years. This section highlights some trends and indicators that we believe will drive growth in the following sectors: automotive suppliers, food and beverage manufacturers, franchise systems, and healthcare.

Automotive Suppliers

It’s hard to ignore the fragility of today’s supply chain as the automotive industry undergoes dramatic change and post-recovery restructuring. The industry has grown to volumes we haven’t seen in a decade, and suppliers are being pressured by their OEM customers to meet increasing demands for new products and expanded production capacity. As a result, supplier business models are being tested as they’re forced to devise new strategies to achieve profitable growth.

The capital requirements and investment risks at play in this dynamic market space can be daunting, but successful suppliers will understand the inevitable impact of industry change, and look to the following strategies to chart their course:

We’ve seen too many suppliers chase volume only to hurt their businesses by accepting razor-thin margins. That’s not to say companies can’t be successful with volume-based business models, but the trade-off must be deliberate if their goal is to increase shareholder value, and mitigate risk, in the long run.

Food and Beverage Manufacturers

Food and beverage manufacturers are working to keep up with shifts in American preferences. Changes in consumption are occurring at both ends of the economic spectrum, with wealthy consumers willing to pay more for organics and premium labels while lower-income households have become more price sensitive than ever. The companies that have been maintaining a focus on consumption trends and economic changes like those described below should be positioned to gain market share over competitors that haven’t planned for these variables.

Increased U.S. obesity rates have driven many consumers toward more health-conscious options and back-to-basics natural foods, such as organic, raw, single serve, low fat, no GMOs, and no preservatives.

Distribution channels are fundamental to success in this sector. Companies must choose between direct-store delivery or central distribution, whether to fight for space at large retail outlets or focus on targeted smaller stores. Once a company decides on what stores and how to get the goods there, it also has to work hard to manage product locations within the stores.

Other factors to consider in this sector include food safety audits and innovative packaging concepts.

Franchise Systems

Franchise businesses are expected to grow and create more jobs at a faster pace than the rest of the economy in 2015 for the fifth consecutive year, according to The Franchise Business Economic Outlook: 2015. This makes businesses operating with a franchise operating model appealing targets. However, not all franchise concepts are created equally and funds that have chosen this model for investment all agree there are some key indicators that make one concept more appealing than another for investment.

Healthcare

The healthcare industry has been experiencing fundamental structural changes to meet regulatory requirements and financial goals while maintaining focus on patient care and health. High earnings before interest, taxes, depreciation, and amortization (EBITDA) multiples are luring sellers into the market ahead of plan, and the competition among investors looking for strong operating companies and management teams has intensified.

Related Thinking

Professionals in the plastics industry inspecting a factory machine.
December 4, 2024

Industry trends to watch for in 2025

Webinar 15 min watch
Two tax professionals talking in a government building.
December 3, 2024

Q3 2024 international updates: Tax and legislative updates from across the globe

Article 11 min read
View of government building reflected in water.
November 21, 2024

2025 tax legislation: The future of business tax

Article 15 min read