Investment banker Mike Benson: Private-equity investment is one of the best ways for suppliers to consolidate.
Analysts say that means private-equity companies will be bigger players in auto supplier acquisitions, despite high-profile failures such as Collins & Aikman Corp. and Oxford Automotive Inc.
One private-equity manager says supplier executives who previously didn't want to talk to him suddenly are eager to meet.
"A year ago, the CEO of one of the largest companies out here wouldn't entertain a meeting," said Greg Ledford, managing director of the Carlyle Group, a Washington private-equity company. "Now its like, 'Let's talk.' "
Private-equity buyers were part of about 20 percent of automotive mergers and acquisitions in the last year. The rest are what are known as strategic buyers, which are companies that buy other companies.
But that could increase as large suppliers look to sell divisions and plants, Ledford said. Large suppliers also are seeking private-equity money to bail out their lower-tier suppliers.
High raw-material costs and low production from the Big 3 have put suppliers in a pinch, making bank financing difficult.
"As sources of capital dry up, private equity is one of the sources available," said Ledford, who spoke at Ernst & Young's Automotive Insight breakfast in Troy, Mich., this month.
But private-equity funds also have changed, says investment banker Mike Benson, managing director at Stout Risius Ross Inc. in Farmington Hills, Mich.
The knock on private-equity firms is that they're looking for a quick financial reward and are not interested in the operational health of their investments. That's no longer the case, says Benson, who works with private-equity and traditional buyers.
"They've become more wise to the fact that you have to understand operations, and you need people to do it," he says. "They realize financial engineering doesn't get you anywhere in manufacturing. You need the support of your customers."
Benson sees the auto industry, even automakers, warming up to private equity: Suppliers need to consolidate, and private-equity investment is one of the best ways to do it right now.
Bill Windle, vice president of consulting firm A.T. Kearney Inc., says automakers still prefer strategic buyers to private equity.
While he agrees private-equity firms will play a bigger role in automotive, their short-term focus isn't always the right long-term fix for a company.
"For example, a lot of private-equity companies will make a deal with the union," he says.
"They'll say, 'We'll bring in work that was outsourced and we'll create some jobs.' So you have a happy union and some growth, but from a long-term competitive standard, is that the best course?"
Ledford said private-equity buyers have just as good a track record as strategic buyers: "Private equity, in my opinion, has a role, when done properly."