“…if you want to make a bet on American industrial strength, find a company that makes weird stuff in small volumes.” This is a good definition of niche manufacturing, succinctly stated by William Baldwin, contributor to Forbes Magazine, in an article last year in Forbes.
At Ironwood Capital, a middle market mezzanine and minority equity investment firm, we like niche manufacturers and we are seeking – and finding – high performance manufacturing companies in which to invest. These companies may not make “weird stuff” but they do have a few things in common: they make precision-manufactured custom products that are not mass-produced; they sell on a promise of product quality; they know how to service their customers; and they are growing.
In fact, we just made a new investment in Capewell Aerial Systems LLC (CAS). CAS is a leading provider of engineered products for aerial delivery, life support and tactical gear for military, law enforcement and humanitarian agencies worldwide.
Manufacturing Revival in the USA
We are excited about the expansion we’re seeing in our manufacturing portfolio. Our most recent investments, companies such as NSA, Blue Bell Mattress, BrandFX, Bush Industries and Industrial Timber epitomize the manufacturing revival in the USA.
We are a non-control investor, but the case study that follows illustrates how Ironwood Capital can be non-control AND hands-on to benefit our business partners. The key is that our capital truly is “patient” – we aren’t looking for a fast payout. We have a longer-term outlook and work with our portfolio companies to help them achieve their financial goals so they can prosper.
Case Study: Niche Manufacturing Company
A venerable Connecticut manufacturing company (“Company A”) had moved from basic manufacturing into the design and manufacture of specialized tools for the industrial, commercial and military markets. As part of a private equity buyout, Ironwood Capital became an investor in the company in early 2014.
During the first 200 days of our investment, Company A made systemic financial, operational and personnel improvements. Enhancements included streamlining reporting, a faster contract closing process, reduction of debt and an improved working capital position. In addition, Company A implemented an ERP system, eliminating two physical inventories and had multiple Kaizen events to improve flow at one of its divisions. The company also implemented succession planning for the retirement of key managers.
In late 2014, when the company approached our firm about additional funding to enable the purchase of a smaller, high quality contract manufacturer (“Company B”) of complementary and custom made products, Ironwood saw it as an opportunity for the company to further penetrate a niche market. We worked with Company A to develop its strategic plan and encouraged Company A’s other lenders to be supportive as well.
Ironwood Capital recognized that the purchase of Company B would:
- expand Company A’s existing product line to increase market share in both overlapping and adjacent niche markets;
- create an opportunity to develop more integrated, higher value-add products than currently manufactured at either business on a stand-alone business;
- move Company A from a niche component company to being the provider of complete systems, increasing the win-rate of the combined company;
create new cross-selling opportunities between existing customers of Company A and Company B;
- streamline the ordering process and reduce overhead for existing customers of both entities by offering a “one-stop shopping” experience; and
- improve revenue outlook due to backlog at Company B that was not subject to contract delays, unlike the situation at Company A.
Ironwood worked with Company A leadership, the equity sponsor and the senior lender to negotiate the purchase of Company B and provided additional capital with terms that allowed the new combined entity to grow without being hindered by debt.
During the successful integration of Company B under parent Company A’s banner, Ironwood maintained its hands-on involvement, working closely with the new CEO to set goals and develop further growth plans.
A Strategic Split
In 2015, parent Company A created two distinct operating subsidiaries. One subsidiary then acquired a complementary fiber optic testing manufacturer, expanding its product suite in a growing market niche and adding testing capabilities to its existing portfolio of hand tools. This purchase also expanded the shared base of telecom end users. Ironwood Capital again provided additional capital to facilitate this acquisition.
Good Planning, Excellent Execution and Patient Capital are Rewarded
Parent Company A continued to execute on its strategic plan and each of its subsidiaries became an attractive acquisition target. The equity sponsor hired an investment banker, who ran a successful sale process in 2018 for one of the subsidiaries.
In summary, over the course of several years the Ironwood Capital team worked closely with the sponsor and management of the parent company to develop a shared vision that would strengthen and grow all divisions of the company. Ironwood Capital provided a consistent voice and financing arm and strategic guidance at each critical juncture. Company A’s revenues grew at an annual compounded growth rate of 22% from Ironwood Capital’s initial investment in 2014 to the successful sale of one of the subsidiaries in 2018.The hand tools subsidiary was not sold and remains a separate Ironwood portfolio company. It continues to grow revenues and EBITDA, showing strength in its niche market.
Every Deal Starts With a Conversation. Give Us a Call.
Ironwood Capital’s “patient capital” sets us apart from many other kinds of capital providers and our expertise in niche manufacturing has enabled us to participate as true partners with our portfolio companies.
Ironwood Capital is always interested in opportunities to invest in well-managed, profitable and growing companies. The firm’s expertise can add value and may lead to further growth. If you’d like to learn more about how we can work together, please get in touch.