28. October 2015
Industry 4.0 (I4.0) applications are on the rise. By 2020, German industry plans to invest 40 billion euros per year in Industrie 4.0 applications. According to a study conducted by PriceWaterhouse Coopers and Strategy& in October 2014, two-thirds of the companies surveyed are already actively working on digitizing and networking their value chain. What is the relevance here for the private equity industry?
For this 3 questions to Founding partner of PINOVA Capital in Munich
1. I 4.0 is a much-discussed topic, please explain what you understand by it.
The topic is indeed en-vogue and receives a lot of coverage in the media. My impression is also that it has reached the political arena, where it stirs up fears. There are different terms, the most common are “Internet of Things” (IoT), “Industry 4.0” or “Digital Transformation”. The latter is often used in connection with medium-sized companies.
In my opinion, the best definition comes from Prof. Kagermann (AcaTech): I4.0 is the networking of machines and storage systems via global cyber physical systems, whereby a component controls its own production route. The goal is to manufacture individualized batch size one products.
The topic of networking production resources is not new. This already existed when I was a student and was referred to as CIM = Computer Integrated Manufacturing. The time was not yet ripe at that time and the technology disappeared again into oblivion. However, I4.0 is an unstoppable megatrend that affects all industry segments and companies.
2. Why is the topic interesting for private equity (PE)?
In contrast to CIM, technology is only one building block in I4.0. Much more essential is the customer focus that results. Now that data is available in real time, it will be possible to create so-called “smart services” around products and extend the value chain. In general, the boundaries between products and services are becoming blurred, which opens up enormous potential for medium-sized companies in particular, but is also associated with risks.
PEs generally have 5 years to get a portfolio company “ready” for sale. The PEs’ value enhancement toolkit comprises three dimensions (1) multiple arbitrage, (2) growth and related increase in profitability, and (3) deleveraging. The first point is more speculative in classic PE, the emphasis is on value levers (2) and (3).
I4.0 now enables the portfolio company to sell the customer a solution and not just a product. If the business model of a medium-sized portfolio company can be expanded to include smart services, this can have a positive impact on all value levers.
3. Relevance for the PE industry? Where are the concrete opportunities, where are the risks?
In my opinion, SMEs are in a good position to implement I4.0 because — unlike corporates — they can act flexibly. I4.0 belongs on the agenda of a financial investor just like process or cost optimization. Even before investing, a PE should consider how to deal with this aspect. This should be laid down in the investment memorandum and the 100-day plan with concrete implementation steps.
The opportunities have been described above; I see risks essentially in the mindset of the management. Often portfolio companies are product companies, which means creating smart services is new territory for the midmarket company. Additional personnel will be needed here, and possibly even a new set-up for the organization. In addition, many of the classic SMEs are actually “analog” companies that have some catching up to do in terms of IT use, not to mention the implementation of an I4.0 agenda.
In my opinion, this is where the main risk lies: the loss of customer loyalty. You can see this in banking through the rise of small service providers, FinTechs. Extremely flexible service providers can displace medium-sized companies from their pole position with customers. As a consequence, his products and, in the end, he himself become “commodities”. In addition, risks inevitably arise from the opening up of corporate networks. A sensible IT security strategy is needed here at the portfolio company.
Prior to founding PINOVA, Marko Maschek spent ten years at 3i in Germany and the USA, most recently as a partner in the Boston office. There he was responsible for small cap investments in environmental technology, semiconductors and new materials. During his time at 3i, Marko Maschek made 19 investments, served on numerous supervisory boards, successfully sold several companies to strategic investors and took 4 investments public.
After training as an officer, Marko Maschek worked for many years in industry, at Cambridge Consultants and Robert Bosch. At Bosch, he developed several technical innovations that were later patented worldwide. Marko Maschek’s family background is entrepreneurial. He studied electrical engineering at the TH Karlsruhe (Dipl. Ing.) and computer science at INSA Lyon. He also completed an MBA at the University of Cambridge.
GmbH is an independent investment company based in Munich with a focus on equity financing of fast-growing, innovative medium-sized companies in German-speaking countries. All PINOVA partners have a background in medium-sized business and know the opportunities and risks of medium-sized companies from their own many years of experience.