Private Equity Steers Back To Auto Industry

Once bitten, twice shy.

You would think this might be the moral of the private equity industry’s last flirtation with the auto industry. Apparently not.

Private equity’s appetite for auto deals appears to be on the rise again with firms looking hard at properties and shopping around portfolio companies.

Obviously they hope not to suffer the losses they did several years ago when the global downturn forced firms, such as Cerberus Capital Management, to hemorrhage hundreds of millions of dollars. But doing so will mean keeping a lid on valuations, even as sellers see the industry’s renewed health as cause to raise them.

Among the firms said to be looking closely at the space are Carlyle Group, Cerberus, Platinum Equity, Sun Capital Partners, American Industrial Partners and Perseus.

Industry insiders say the activity level has risen since the fourth quarter of last year. “I think there is a lot of looking,” says Aleksandra Miziolek, director of the automotive practice at the law firm of Dykema Gossett in Detroit. “Buyers are very interested.”

Clearly these investors should maintain some skepticism about the industry’s recovery, as impressive as it has been. Is the burst of sales the result of pent up demand or will it continue? Will the industry ever get back to 15 million units?

Caution aside, though, there are good reasons to consider investing in Detroit (and elsewhere) in the wake of the General Motors and Chrysler bankruptcies. Car makers are trying to regain their footing as broad technical change takes hold with the introduction of electric cars and new pressures to improve the efficiency of the internal combustion engine. Cars meanwhile are becoming connected vehicles, with broad implications for communications, entertainment and safety (imagine one vehicle talking to another and heading off a collision). All this creates dislocation and opportunities for new products and vehicle designs.

The industry similarly faces broad new opportunities in emerging global markets, such as China.

Yesterday’s losses may have hurt. Hope springs eternal.