Triton Partners sees rise in industrial tech corporate carve-outs in 2024

Public-to-privates, family-backed businesses managing generational change and debt-for-control opportunities will also be in vogue, says Triton's Claus von Hermann.

Thomas Hofvenstam and Claus von Hermann, Triton Partners.

Triton Partners expects a “significant number” of corporate carve-outs in its target sectors, particularly in industrial tech, Claus von Hermann and Thomas Hofvenstam, managing partners and co-heads of Triton mid-market, told PE Hub Europe in the latest instalment of our outlook series with senior private equity professionals.

London-based Triton is a European mid-market investor that focuses on business services, industrial tech, healthcare and consumer sectors. The firm’s recent transactions include the add-on acquisition of Stylex by its portfolio company Flokk and its acquisition of Siemens Energy’s Trench business.

What do you expect to see in dealmaking in 2024?

Thomas Hofvenstam: We expect 2024 to be quite a flat environment. Now that the ‘era of free money’ is over, those private equity firms that have through-cycle experience and the ability to create value through operational improvements will be well placed to succeed.

What were the highlights of your dealmaking in 2023? How did you overcome challenges?

TH: Triton took a disciplined approach to new deals in 2023. We announced three new platform deals that are in subsectors we have significant experience in, were acquired at attractive below-average multiples and where it is possible to repeat successful investment themes.

The last 12 months have required many of the skills that Triton has developed over the last 25 years of through-cycle investing. Our focus has been on preparing for different downside scenarios so that our management teams have plans ready to go, and then helping our portfolio companies to play both offence and defence simultaneously. While it is important to shore up portfolio companies against potential threats – for example addressing the supply-chain issues Europe has experienced over 2023 – it is also important to help them take opportunities when they arise, such as by pursuing strategic add-ons and capturing market share from rivals.

What opportunities do you see in 2024, and what are you most looking forward to?

TH: Triton is different to many private equity firms in the sense we like it when conditions get trickier, because we are a through-cycle investor. We focus on fundamentally sound companies that are operating below their full potential and take an operational approach to helping them reach that potential. We are excited about the pipeline of opportunities we see, as there are now even more companies that fall into our sweet spot of having the potential to be great, but due to temporary headwinds or operational issues, need help to get there.

What are the deal trends in the industrial tech sector?

Claus von Hermann: We expect to see a significant number of corporate carve-outs in our target sectors and particularly in industrial tech. Over 60 percent of listed corporates in the space mentioned ‘portfolio management’ in their results calls in Q2 2023 and this is an ongoing trend. For example, we recently announced the acquisition of Trench from Siemens Energy. We’ve completed many corporate carve-outs over the last 25 years and we expect to do more.

What were the most significant deals in the sector in 2023?

CH: The most significant deal for us in the industrial tech space was the acquisition of Trench, which we announced in November. The business, which is headquartered in Germany and specialises in manufacturing high-voltage grid components, will be carved out from Siemens Energy and built into a standalone business.

We’re excited by the opportunity Trench represents, given Triton’s long track record in executing successful carve-outs, our in-depth knowledge of the sector and our ability to apply value creation themes developed from investments we’ve made in similar markets, such as EQOS and Seves.

What’s driving deals in the sector?

CH: We see significant opportunities coming from all of Triton’s core sourcing channels – namely corporate carve-outs, public-to-privates, family-backed businesses managing generational change and debt-for-control opportunities. For the latter, we expect to see an uptick in opportunities over the coming 12-18 months, driven by increasing interest burdens and the walls of debt maturity that are rapidly approaching for many companies.

Corporate carve-outs are particularly interesting in the industrial space. There are many large corporates that are now reassessing what is core and non-core in their group and what would be better in the hands of someone else. Many of these disposal processes don’t play out in public, which is why it is important to have the right relationships, strong carve-out credentials and a track record of working successfully with blue chip organisations.

What types of companies are ripe for PE buyers?

CH: We like fundamentally sound businesses that are facing temporary headwinds or operational issues that need to be addressed, with a particular focus on companies that are backed by long-term megatrends, are in growing markets or profit pools and that have recurring revenues.

In industrial tech, we want to invest in companies that are – or can be made – fit for tomorrow. The themes we prioritise investing behind in this space are smart living, the future of the supply chain and the green economy. We’ve done a lot of deals in niches like building technology and industrial automation, where we’ve had a lot of success and can repeat successful investment themes again and again.

Why does the PE model work well for companies in the sector?

CH: The industrial tech sector in Europe tends to be less competitive between private equity firms, as there are fewer GPs that have the necessary knowledge and experience in the space. In DACH, we’ve deployed more capital in the industrial space in the last 10 years than the next three private equity firms combined. This means we know what themes are important, where the hidden gems are and which value creation plays work.

Editor’s note: PE Hub Europe is running 2024 outlook Q&As with senior private equity dealmakers through December and January. The last instalment was with Frida Einarson, partner at Verdane.