Shore Capital Partners Industrial Automation Insights: PE Perspective on 3 Headwinds & 3 Tailwinds Impacting Entrepreneurs, and 3 Trends Impacting Investor Outlook

Rhea-AI Summary

Shore Capital Partners shares insights on industrial automation through Partner John Sznewajs's perspective, who previously served as CFO at Masco (NYSE: MAS). The analysis highlights three major headwinds facing entrepreneurs: shortage of experienced control engineering talent, volatile capital planning due to economic uncertainties, and challenges in developing sustainable go-to-market strategies.

The report also identifies three significant tailwinds: increasing automation demand driven by labor shortages, opportunities in post-sale customer support, and accelerating automation adoption due to declining implementation costs. For 2024-2025, key investment trends include industry consolidation, manufacturing re-shoring, and disproportionate impact of headwinds on independent operators.

Shore Capital focuses on businesses with $1M to $20M in EBITDA, emphasizing that automation investments now frequently yield ROI in 3-9 months, making them increasingly attractive for budget-conscious customers.

Positive

• Quick ROI on automation investments (3-9 months payback period)
• Growing demand for automation solutions due to labor shortages
• Declining costs of automation technology implementation
• Higher margin opportunities in post-sale support services

Negative

• Severe shortage of experienced control engineering talent
• Volatile customer capital expenditure due to economic uncertainties
• Challenges in customer and sales rep concentration risk
• Market fragmentation creating competitive pressures

Insights

Private Equity & Investment Analyst

The industrial automation sector is experiencing a transformative shift, driven by three key catalysts that present compelling investment opportunities. First, the convergence of persistent labor shortages and declining automation costs is accelerating adoption rates. Implementation costs have decreased significantly, with ROI periods shortening to 3-9 months from traditional multi-year payback periods. This acceleration creates a robust growth environment for automation solutions providers.

The market is witnessing increased fragmentation and consolidation simultaneously - a phenomenon that typically precedes significant value creation opportunities. Small regional players ($1-20M EBITDA) are particularly attractive acquisition targets for larger strategic buyers seeking to expand their capabilities and geographic reach. This trend is likely to drive premium valuations for well-positioned automation companies.

Most notably, the reshoring trend represents a structural shift in manufacturing strategy. Recent geopolitical tensions and supply chain disruptions have accelerated this movement, creating sustained demand for domestic automation solutions. This trend particularly benefits U.S.-based automation companies and their suppliers.

The sector faces some headwinds, including talent scarcity and economic uncertainty affecting capital expenditure cycles. However, these challenges disproportionately impact smaller independent operators, potentially accelerating industry consolidation and creating opportunities for well-capitalized players to gain market share.

For investors, these dynamics suggest several strategic implications:

• Companies with strong service and maintenance revenue streams may command premium valuations due to their recurring revenue profiles
• Businesses demonstrating successful talent retention and development programs will likely outperform peers
• Firms with expertise in high-growth end markets (e.g., electric vehicles, semiconductors) could see accelerated growth trajectories
• Regional leaders with strong customer relationships are prime acquisition targets in the consolidating market

CHICAGO--(BUSINESS WIRE)-- Partner John Sznewajs shares his learnings from launching Shore Capital Industrial Partners Fund and beginning its buy-and-build strategy; John also lays out his view on the investor landscape.

John’s automation perspective is shaped as investor, operator, and customer. He coheads the Industrial team and recently formed Ondex Automation, a Shore-backed process and factory systems integrator. Prior to Shore, John spent over twenty years at Masco Corporation (NYSE: MAS), a building products manufacturer with $8 billion in annual revenue. As Chief Financial Officer, John was integral to over 20 acquisitions and approved tens of millions of dollars in automation investments.

The Industrial Automation industry is growing rapidly, and entrepreneurs are experiencing opportunities and challenges to win in an increasingly competitive market. Shore Capital focuses on businesses with $1M to $20M in EBITDA and partnering with great companies to navigate the complexities of growth. Our proven playbook was developed over 15 years and 1,000 partnerships.

By addressing industry challenges head on, entrepreneurs can better position a company for a successful PE partnership. John notes that “we often tell founders that they've forgotten more about their business than we'll ever know, but as a financial partner coming in, we've done a lot of homework and we're pretty in tune with the market and the opportunity for that company.” He adds, “we have a repeatable 360° process” that focuses on growth and partnerships, operations and infrastructure, client relationships and solutions, balancing performance and trust, and continuous improvement.”

Shore Perspective: 3 Headwinds & 3 Tailwinds Impacting Entrepreneurs

Headwinds to small- and medium-sized businesses:
1. Cost and Availability of Experienced Control Engineering Talent: The industrial automation sector is grappling with a shortage of experienced talent. Skilled control engineers are essential for designing, implementing, and maintaining complex automation systems. However, the talent pool is limited, and competition for professionals is intense.
	a.	Impact: Smaller companies may struggle to attract and retain top talent. This talent scarcity can lead to project delays, reduced innovation, and the inability to meet client demands effectively.
	b.	Strategy: Entrepreneurs should invest in training programs to develop in-house talent and explore partnerships with trade schools and local associations.
	c.	Insight: The importance of providing a long-term career path for engineers cannot be overstated. Specializing in high-growth markets can attract talent excited about cutting-edge projects. Additionally, developing your network of relationships with deep knowledge of OEMs can provide valuable insights and connections to help navigate talent challenges.
2. Persisting inflation, recessionary concerns, and geopolitical risks heighten the volatility of customers’ capital planning: Customers' capital expenditure plans are often cyclical and influenced by economic conditions. During periods of uncertainty, companies may delay or reduce investment in new automation projects.
	a.	Impact: Fluctuations in customer spending can lead to unpredictable revenue streams. Projects may be postponed or canceled, affecting cash flow and growth projections.
	b.	Strategy: Managing your backlog and pipeline requires intimate involvement in your customers' capital planning. By understanding their CapEx cycles and being part of their planning process, you can better anticipate project timelines and adjust strategies accordingly.
	c.	Insight: Building strong relationships allows you to be involved in long-term planning, providing insights into upcoming projects. This proactive approach helps smooth out the effects of CapEx cycles and ensures a more stable pipeline.
3. Sustainable Go-to-Market Strategy for Reps, End Markets, and Customers: Developing a sustainable go-to-market strategy is a significant challenge. Balancing the needs and career path of sales representatives, targeting the right end markets, and effectively reaching customers requires careful planning but can future-proof your business.
	a.	Impact: An ineffective strategy can result in missed opportunities, inefficient resource use, customer or sales rep concentration, and failure to grow share. Aligning sales efforts and talent with market demand and your 5 year plan is crucial for sustained growth.
	b.	Strategy: Identify high-potential industries and tailor sales strategies accordingly. Focusing on the right end markets, managing concentration, and understanding OEM relationships enhances your market position.
	c.	Insight: Partners with strong industry knowledge can assist in refining market focus, reducing risk of concentration, and leveraging OEM partnerships and connect with a broader network of key players in the industry.
Tailwinds to small- and medium-sized businesses:
1. Labor Shortages in Customers and End Markets Driving Automation: Many industries are experiencing labor shortages, increasing the appeal of automation solutions. Companies seek ways to maintain productivity despite a limited workforce, if the ROI is clear.
	a.	Opportunity: businesses can capitalize on this trend by providing solutions that help companies overcome labor constraints. Demand for automation technologies is likely to grow as firms automate repetitive or labor-intensive tasks.
	b.	Strategy: Business owners can best explain to operators the reasons to invest in automation by highlighting how it addresses labor shortages, increases productivity, and improves operational efficiency.
	c.	Insight: Emphasizing quick ROI is crucial. With declining implementation costs, ROI on smaller (<$150k) automation investments frequently yield paybacks in months instead of years, making it a compelling proposition for customers.
2. Ongoing Customer Support Post-Sale as Their Needs Evolve: Customers' needs evolve after the initial sale, especially as they integrate automation solutions. Providing exceptional post-sale support enhances customer satisfaction and loyalty, and many will pay for it at stronger margins than project revenue.
	a.	Opportunity: Offering ongoing support, training, and updates builds long-term relationships. This approach can lead to repeat business, upselling opportunities, and positive referrals.
	b.	Strategy: Understanding your customers' pain points is essential. By addressing specific challenges and adapting solutions over time, you ensure your offerings remain relevant and valuable, plus you can expand your business within businesses.
	c.	Insight: Regular communication helps identify opportunities to enhance systems, further cementing your role as a trusted partner. Understanding their dynamics can benefit your long term prospects and tailor services to customer needs.
3. Adoption of Automation is Rapidly Accelerating while Costs to Deploy Automation Technology Decline, Further Growing Demand for Automation Solutions.: There's increasing demand for solutions and the costs to adopt automation are declining due to advancements and increased competition.
	a.	Opportunity: Lower barriers to entry make it easier for more companies to invest in automation. This expanding market potential allows businesses to reach new customers who were previously priced out.
	b.	Strategy: Highlight the cost-effectiveness and accelerated ROI of modern automation solutions. If you pencil the ROI, lower implementation costs now yield returns in 3-9 months, pulling forward the financial benefits. Also demonstrate the downstream benefits of “an ounce of prevention or pound of cure” for their challenges like managing talent, human capital costs, and CapEx planning.
	c.	Insight: Emphasizing these advantages can drive adoption and open new market segments. Positioning your offerings around quick payback periods while driving long-term value appeals to budget-conscious customers in competitive markets.
John's three key trends impacting Industrial Automation investments in 2024-2025:
1. Consolidation and Market Fragmentation Trends: Investors are increasingly influenced by ongoing consolidation in the industrial automation sector. While the market remains fragmented with numerous small players, there's a noticeable trend toward consolidation as larger companies acquire smaller ones to enhance capabilities and reach. Consolidation can lead to more comprehensive service offerings and increased market share. Companies that position themselves as attractive acquisition targets or proactively pursue strategic acquisitions can capitalize on this trend.
2. Re-shoring and Near-shoring Manufacturing: Recent global events have prompted companies to reconsider supply chain strategies. There's a growing trend of re-shoring and near-shoring. This shift increases demand for industrial automation solutions domestically, as companies seek to enhance efficiency and reduce costs associated with local manufacturing. Understanding end market growth prospects and customers' capital planning is crucial.
3. Headwinds Hit Independent Operators Harder: Smaller companies often face compounded operational challenges due to industry, economic, and local headwinds. Businesses may struggle with rising costs, supply chain issues, and technological advancements requiring significant investment. Investors that understand end markets and customer are in a great position to partner, scale, and create long-term success for strong regional companies.

In summary:

Small and mid-sized business entrepreneurs and investors are experiencing similar opportunities and challenges. Those with a solid plan can build a competitive advantage and gain market share. It starts with knowing which levers to pull and aligning them with where your business is today.

View source version on businesswire.com: https://www.businesswire.com/news/home/20250122590298/en/

Shore Capital Partners

Jordan Niezelski, Edelman Smithfield

jordan.niezelski@edelmansmithfield.com

Source: Shore Capital Partners

FAQ

What are the main challenges facing industrial automation companies according to Shore Capital Partners?

The main challenges include shortage of experienced control engineering talent, volatile capital planning due to economic uncertainties, and difficulties in developing sustainable go-to-market strategies.

How has the ROI timeline changed for automation investments in 2024?

Automation investments now yield returns in 3-9 months instead of years, due to declining implementation costs, particularly for smaller investments under $150,000.

What are the key investment trends in industrial automation for 2024-2025?

The key trends include industry consolidation, manufacturing re-shoring/near-shoring, and increased challenges for independent operators facing industry headwinds.

How is the labor shortage affecting automation demand in 2024?

Labor shortages are driving increased demand for automation solutions as companies seek to maintain productivity despite workforce limitations, making automation investments more attractive when ROI is clear.

What is Shore Capital's investment focus in the industrial automation sector?

Shore Capital focuses on businesses with $1M to $20M in EBITDA, partnering with companies to navigate growth complexities using their proven playbook developed over 15 years and 1,000 partnerships.