Some investors like heavy involvement with the management decisions of their companies. But Jeremy Thompson, managing director with ONCAP Management Partners, assumes what he calls a "board level" management style, in which a hands-off philosophy can lead to hands-on returns.
"As with any business, the quality of the management team is key to any successful investment," he says. "Whenever we make an investment, we always look at the specific attributes of the business as opposed to just the macro view of the industry. So in general, we look for industry leading companies with strong management teams and then work with the management teams to accelerate the growth of the business under our ownership.
"Our philosophy is always to invest alongside management to properly align our objectives. In this way, all parties are interested in increasing shareholder value," he says.
Thompson notes the aftermarket's inherent stability enhances its appeal. "We're attracted to the stable growth of the aftermarket as opposed to the cyclical ups and downs of the OE cycle," he says. "The aftermarket is characterized by stable end-market demand, which is driven by long-term growth trends and miles driven, an aging vehicle population and a continued shift to do-it-for-me as opposed to do-it-yourself. When we look within the aftermarket, we felt we were able to acquire two industry leaders that are well positioned to consolidate their fragmented industry niche in which they operate."
Beyond the management, it's also integral for investors to look at the "industry value chain," says Thompson. "The aftermarket has many different value chains, depending on the product and service being sold. The buyer of any business needs to know where the target company stacks up in this chain and what the target's value-add really is. So understanding the competitive landscape and the concentration of the customer base is very important."
"Wider economic factors like interest rates, lending structures and bank loans should be considered when investors are targeting their next acquisition.
“From a bank's perspective, if they used to lend to a Fortune 500 company at 4 percent and now they can get 6 or 7 percent from them, why wold they lend to a small automotive aftermarket business that (does not have) as strong a credit?" he asks.
There are many benefits to aftermarket investing, including the need of North Americans to own and drive vehicles, as well as the long-term stability of the segment. However, there are some pitfalls that investors should consider.
"In terms of downsides to the automotive aftermarket, I think the fragmented nature of the aftermarket has led many investors to attempt consolidation of various industry subsectors, and I'd really caution investors to make sure they have the right team and the right systems and prcesses in place before they embark on a consolidation strategy," Thompson says. "Many businesses appear on the surface to be easy to run and appear that there should be a consolidation opportunity, but the devil is always in the details, and so many times synergies on paper may turn out to be dis-synergies in practice."
For example, "you think that when you combine two individual locations, you can cut back on management and that would be a cost savings. Sometimes, you cut back on management, and the business goes south," he cautions.
All in all, the aftermarket is an opportunity with a clear-cut mission and purpose.
"If you believe that North Americans will continue their love affair with the vehicle, then these industries will do OK. I think the lifestyle is such where it's hard to get away from that; you can decide to drive a Prius rather than an Explorer, but more than likely, you're still going to be driving to work, or driving to whatever destination you're going to."