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Why the money men still love British manufacturing

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UK manufacturing, the sector the coalition government is relying on to lead Britain out of the recession, has had a tough autumn.

According to the CBI, UK factory orders fell to their lowest level in two-and-half years, prompting the lobby group to forecast that British manufacturing would shrink by 0.6 per cent this quarter. 

Precision tools manufacturer Renishaw has said revenues for the three months to the end of September came in below expectations. 

Bombardier, the owner of the last train manufacturing plant in the UK, has had an even harder time of it. The firm has begun cutting 1,400 jobs at its Derby plant after losing out to German rival Siemens in the bid for a £1.4bn (€1.6bn) contract to supply trains for the cross-London Thameslink service. It is feared that by 2014, the Derby factory will have run out of work altogether.

Despite the stream of bad news and the constant fears about competition from Asia, where labour and overheads are significantly cheaper, private equity firms have shown great affection for UK manufacturers. 

Last year they invested £5bn in 31 British manufacturers, accounting for close to a third of total deal value, according to the Centre for Management Buyout Research. Grant Thornton’s most recent Private Equity Barometer suggests that interest in the sector has remained strong, with a third of GPs identifying manufacturing as a key target sector, ranking it one of the most popular spaces for new deals. And LDC has been so convinced by the prospects for UK manufacturing that it has set aside £200m specifically for specialty engineering and manufacturing businesses in the £10m to £150m enterprise value range.

“Despite the current economic challenges, we regard this sector as highly attractive and its success remains central to wealth creation to UK plc,” LDC chief executive Darryl Eales enthused when unveiling the £200m commitment.

So, why have private equity firms identified UK manufacturing as one of the best places to put their money when almost every statistic and index suggests that it is one of the worst?

James Benfield, a director at Baird Capital Partners Europe, says that although the sector as a whole might not look attractive, niche sub-sectors within manufacturing are thriving. “Manufacturing is a key sector for us. During the last four years approximately 55 per cent of the businesses we have bid for have been in the manufacturing sector,” he says. “Our analysis has shown that in the UK there are 2,000 mid-market manufacturing businesses that fit the criteria for investing. That is a very good pool of companies.”

All the businesses that fall into this group have strong product sets, good earnings and enjoy margins of 30 per cent or more on their key products. It is also easy to forget that although manufacturing’s contribution to UK GDP is smaller than it was 20 years ago, it still accounts for 12 per cent of the UK’s economic output – a bigger share than the much vaunted financial services sector. 

The UK also remains one of the world’s ten largest manufacturers, and although its share of the global market is less than it used to be, overall output is still 50 per cent higher than it was in 1990.

Manufacturing companies do pose challenges for investors. They are not always quick to grow, infrastructure costs and capital expenditure are high and fixed-cost manufacturing poses risks for dealmakers when economies wobble and order books thin out. Behind the concerns of shrinking manufacturing output and competition from Asia, however, there are several companies in the UK making high-end, high-margin goods that it would be remiss of private equity firms to ignore.

Long live British manufacturing.

Read our Great Debate on British manufacturing here.

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