Viewpoint by Australian Manufacturing Forum member Cyrus Church.
The last few months have been a challenging time for Australian manufacturers. Ai Group’s Performance of Manufacturing Index slipped into negative territory, falling to its lowest levels since August 2016. On top of this, economic and government policy, in the form of lower interest rates and tax cuts, haven’t stimulated growth.
According to the Index, new orders are down, production is down and supplier deliveries have also declined. And while it’s positive to see input prices dropping and selling prices rising, manufacturing businesses cannot rely on low costs and high prices to boost performance.
Treasurer Josh Frydenburg’s message to business is “to back yourself and use your balance sheet to invest and grow.” Whilst we may not agree with all his policies, it is clear there is a significant need to invest in R&D, innovation and ways to enhance productivity, whether that’s through new technologies or processes to improve performance.
Why now is the time to invest
Firstly, saving profits for a rainy day will lose your business money right now, as inflation and the cost of living continues to outpace the low interest you can make on savings.
Secondly, there is a wave of new non-bank credit funds that are willing to lend at leverage levels far beyond domestic banks. These funds have unprecedented levels of money right now given they are backed by pension/super and sovereign wealth funds.
For these multi-billion-dollar pension funds, the problem is equities and property are at an all-time high, making them an expensive investment. On top of that, cash is generating negligible to negative returns. This leaves only one alternative, which is providing their money to non-bank credit funds that can guarantee an absolute return by investing in established private businesses with the potential to grow.
In fact, on average pension funds in developed markets increased their allocation away from property and equities to fixed income from 7.2% to 11.8% from 2008 to 2017, a 63% increase equalling billions of dollars of new debt available to invest into stable growing companies.
A once in a generation growth opportunity
Although private equity continues to form the bulk of the alternative asset class, it has been the credit funds that have been the biggest beneficiaries of the low-interest-rate environment.
This is opening the door to a once in a generation growth opportunity for mid-market businesses (>A$5m EBITDA) in Australia and New Zealand. Once this profitability threshold is met, these businesses fall within the mandate of both the domestic non-bank lenders as well as the huge Asian credit funds looking for opportunities in Australia and New Zealand’s stable legal environments.
For businesses, these credit funds represent an amazing opportunity to gain access to institutional global funders. They operate at risk appetites far beyond traditional banks, giving you the opportunity to be more aggressive with your growth strategy. Additionally, their yields are also coming under downward pressure, making them an ever more affordable option.
Additional capital without losing control
Whilst too much debt can be dangerous for a company, the right level of debt can actually help fuel a company’s profits if they can generate a higher rate of return than the interest rate on its loans.
Historically credit funds chased 15% returns on their money invested in private companies, making them too “expensive” for most growth capital purposes. However, some funds are now charging interest in the high single digits with no equity requirement.
In these cases, they are considerably cheaper, on a weighted average cost of capital basis, to taking on bank debt and supplementing it with selling equity. This means you get the capital you need to grow your business without losing any control by bringing in a new equity partner.
Invest and evolve to maximise the opportunity for growth
There will never be an easier time for manufacturing businesses to raise capital without relinquishing equity, largely thanks to the changing strategies of superannuation and sovereign wealth funds. This presents a once in a generation opportunity to seek significant investment that further enhances your business.
Manufacturing businesses around the world are revolutionising processes, plants and upgrading equipment. We’re also seeing once declining businesses pivot into making new in-demand products. A second-generation family-owned company that specialises in making commercial skip bins, for example, has used external investment to upgrade their operations and use their proven manufacturing processes to make speciality items for the Australian space industry.
There is a world of opportunity out there for manufacturing businesses. There has never been a better time to take advantage of this evolving economic landscape and seek investment.
However, what’s important for these businesses is that they seek the right partner. One that’s looking to help them grow the business. One that has a personal connection with their brand. And, one that connects them to new opportunities at home or further afield.
The manufacturing industry is transforming across the globe. It’s time Australia’s manufacturing sector began to invest in its own journey of evolution, enhancing the prospects of the industry and the individual businesses within it.
Cyrus Church is Co-Head of Deal Execution at Neu Capital.
Subscribe to our free @AuManufacturing newsletter here.