Private equity (PE) is a form of investment capital that is raised and managed by private equity firms to directly invest in private companies or take public companies private, thus removing them from public stock exchanges. The goal of PE investments is typically to improve the performance of the acquired companies over a period (usually 5 to 10 years) and eventually sell them for a profit, either through a public offering, sale to another company, or recapitalization.

Key Characteristics of Private Equity:

1. Private Ownership: PE involves investments in companies that are not listed on public stock exchanges.
2. Long-Term Investment: Unlike hedge funds, which may focus on short-term profits, private equity is usually a long-term investment strategy. PE firms often hold their investments for several years to allow time for operational improvements and growth.
3. Active Management: Private equity investors typically play an active role in the management of the companies they invest in, aiming to increase operational efficiency, improve profitability, and ultimately increase the company’s value.
4. Various Investment Strategies: PE firms employ strategies like buyouts (acquiring a majority stake in a company), venture capital (investing in early-stage companies), growth equity (investing in growing companies without full buyouts), and distressed investments (acquiring underperforming or struggling companies with the intent of turning them around).

The industrial sector presents fertile ground for PE, providing growth opportunities and attractive returns. Among many others, a concrete example is the private equity-backed acquisition of Siemens Gamesa by Siemens Energy, boosting green energy capacity and aligning with Europe’s energy goals. This sector offers attractive returns through government support and rising demand for sustainable solutions.

In 2023, several trends have emerged in the wake of the pandemic, the drive for digitization, increased focus on sustainability, and growing geopolitical tensions. These dynamics are pushing PE funds to redefine their strategies to maximize returns while adapting to a rapidly evolving industrial landscape.

Convergence of Industry and Technology

One of the most significant trends is the increased convergence between industry and advanced technologies, transforming how private equity funds approach investments in this sector. Advances in robotics, automation, artificial intelligence, and the Internet of Things (IoT) are revolutionizing production processes and operational management. This transformation, known as Industry 4.0, has become a priority focus for investors.

PE funds are leveraging this shift by investing in industrial companies committed to digitizing their processes. In 2023, acquisitions of firms that offer technology solutions for the manufacturing sector—particularly in cybersecurity and predictive analytics—have grown considerably. This convergence of technology and industry presents a dual opportunity: it allows industrial companies to modernize their processes and increase profitability while providing high returns often associated with tech-focused investments.

A key example is Blackstone’s very recent acquisition of AirTrunk, a major data infrastructure provider, reflecting the rising demand for cloud and IoT capabilities in manufacturing and other sectors. This trend toward technology-driven industrial investments aligns with the sector’s need for enhanced data security and AI-driven predictive analytics as companies digitize and modernize operations.

The Push for Sustainability and Environmental, Social, and Governance (ESG) Impact

The pressure to adopt environmentally responsible practices has never been higher. Regulators, consumers, and investors demand greater transparency and tangible steps toward sustainability from industrial companies. As a result, the PE sector is shifting its focus toward companies that embrace sustainable, environmentally friendly practices, often through the integration of ESG criteria.

Investments in renewable energy, material recycling, and carbon footprint reduction in industrial processes have become priorities. Some funds are even committing to measurable environmental impacts alongside financial returns. This trend is doubly beneficial: it reduces financial risks associated with potential future environmental regulations and addresses the growing expectations of stakeholders regarding social and environmental responsibility.

Reshoring and Reducing International Dependence

The COVID-19 pandemic and geopolitical tensions have exposed the vulnerabilities of global supply chains. Many countries, supported by public policies, now encourage the reshoring of specific industrial activities to reduce dependence on certain foreign suppliers. This trend is particularly prominent in strategic sectors such as semiconductors, energy, and critical components for manufacturing.

PE funds are capitalizing on this trend by investing in local industrial companies or encouraging their portfolio companies to bring certain activities back onshore. Investments in infrastructure and technologies that expedite reshoring are increasing. Manufacturing sites closer to consumer markets reduce delivery times, minimize transportation costs, and strengthen supply chain resilience.

Growth in Build-Up and Add-On Deals

In the industrial sector, growth strategies through “build-up” and “add-on” acquisitions are gaining traction. These approaches allow private equity funds to expand their portfolio companies by acquiring complementary or competing companies, creating synergies and economies of scale. This trend is particularly relevant in the industrial sector, where consolidating fragmented markets enhances efficiency and competitiveness.

Build-up deals have an added advantage in a high-interest-rate, slowing economic environment. They enable growth without the same level of financial risk as traditional acquisitions. Funds can integrate acquired companies gradually, optimizing costs and aligning production processes. This strategy minimizes integration risks while offering enhanced profitability potential.

A notable recent example of PE firms using a “build-up” or “add-on” acquisition strategy in the industrial sector can be seen with Bain Capital. In 2024, Bain Capital applied this strategy to expand its platform company by acquiring multiple smaller companies that complement its core industrial services portfolio. By strategically integrating these acquisitions, Bain leveraged economies of scale and captured cost efficiencies, which aligned well with current market needs for improved operational margins and reduced expenses.

In the current landscape, this “buy-and-build” strategy offers PE firms a more sustainable path to value creation and aligns with broader economic conditions that favor operational consolidation over new ventures. This approach, which has been especially prevalent since early 2023, continues to grow as PE firms seek resilient models in a fluctuating market.

Managing Geopolitical and Regulatory Risks

Geopolitical tensions and regulatory changes are reshaping private equity investment strategies across global markets, as sectors like defense, energy, and technology grow increasingly sensitive to international risks. To safeguard investments, PE firms are increasingly incorporating geopolitical risk assessments that consider potential sanctions, regulatory shifts, and regional instabilities affecting portfolio companies.

In Europe, the European Commission has intensified its scrutiny of foreign investments in critical sectors to protect strategic assets from foreign control. As a result, many PE funds are adjusting by diversifying portfolios and seeking investments less exposed to international tensions. This regulatory landscape requires PE firms in Europe to adopt proactive risk management practices, balancing local resilience with the global scope of their investments.

In the United States, regulatory bodies such as the Committee on Foreign Investment in the United States (CFIUS) similarly monitor foreign acquisitions in sectors related to national security, particularly technology and critical infrastructure. PE firms in the U.S. are increasingly cautious about investments that may prompt regulatory reviews or lead to restrictive measures, particularly when Chinese investments or partnerships are involved. This has led many U.S.-based PE firms to emphasize transparency and compliance as part of their investment strategies to avoid regulatory entanglements.

In Asia, PE investors must navigate a complex landscape shaped by both regional tensions—such as those between China and Taiwan—and broader international trade conflicts. For instance, investments in Chinese technology or defense sectors often involve significant regulatory oversight by both Chinese and foreign governments. Firms are, therefore, focused on sectors with less direct exposure to geopolitical risk, such as consumer goods or health tech, to minimize potential disruptions. Moreover, in response to U.S. export restrictions on advanced technology, some PE firms are directing investments into local Asian markets, supporting regional manufacturing and tech innovation.

In emerging markets like Latin America and parts of Africa, geopolitical risk can manifest in political instability, resource nationalization, or regulatory unpredictability. For example, investments in energy infrastructure may face abrupt policy changes driven by national governments. In these regions, PE firms are increasingly implementing tailored risk mitigation strategies, such as partnering with local firms or focusing on sectors with strong regulatory backing, like renewable energy.

For further readings, you may consult these sources:

https://www.weforum.org/stories/2024/04/five-surprising-facts-about-investing-in-frontier-markets

https://rankiapro.com/en/insights/small-cap-opportunities-2024

https://economictimes.indiatimes.com/industry/renewables/its-in-the-wind-tpg-jsw-and-inox-in-fray-for-siemens-gamesa/articleshow/113862012.cms?from=mdr

https://www.financierworldwide.com/blackstone-acquires-airtrunk-in-a24bn-transaction

https://www.baincapitalprivateequity.com/strategy-and-approach