Hospitality Technology and Property Technology Transactions

Hospitality Technology and Property Technology Transactions

Since 2020, the hospitality industry has witnessed notable investments in technology solutions to adapt to the changing landscape and meet the evolving needs of guests. In 2021, the global hospitality technology market reached approximately $19 billion worldwide and is forecast to grow to $133.7 billion by 2031.
Similarly, over the same period the real estate industry has experienced significant investments in technology solutions to drive innovation, improve operational efficiency, and adapt to changing market dynamics. The global property technology market size reached $30.16 billion in 2022 and is projected to reach $133.05 billion by 2032, with a CAGR of 16%. 
In this report, Jahani and Associates will analyze the international capital market transaction activities conducted within the hospitality technology and property technology markets between 2020 and Q2 2023. 
  • The total amount invested was $6.47 billion, over 481 deals in the hospitality market between 2020 and Q2 2023.
  • The highest quarterly deal count was recorded in Q2 2020 with 88 deals. This could signify an early response to Covid-19, as investors looked towards new industries and new technologies to adapt to the potential future changing landscape.
  • The second highest deal number was recorded during Q1 2022 with 49 deals, which conversely could be the result of investors seeing significant growth opportunities post Covid-19 as the hospitality market recovered after quarantine restrictions.
  • Within the period, $2.07 billion total capital was invested in the US over 229 deals, with an average deal size of $9 million, demonstrating the importance and focus on the United States. 
  • The second largest recipient was India with a total of $888 million over 23 deals, with an average deal size of $38.6 million. 
  • Spain is the third largest recipient county with $856 million invested over 13 deals, showing  a strong industry interest in Europe. 
  • Between 2020 and Q2 2023, $2.7 billion in M&A investments were made over 97 deals in the hospitality technology industry. The average deal size of the M&A investments was $28.3 million. Some of the key revenue drivers in the hospitality industry are pricing, direct bookings, loyalty programs, and systems and tools. These drivers increased the investment movement in human-powered, tech-enabled experiences, boosting profitability for hospitality. As shown above the M&A activity within the hospitality tech sector could indicate an appetite for market consolidation. 
  • Venture capital deployed $510 million in the hospitality sector within the period across 187 deals. 
  • Private equity deployed $1.5 billion within the period, with an average deal size of $16.8 million. 
  • Between 2020 and Q2 2023 the total amount of capital invested in the property technology market was $12.5 billion, with a total deal count of 808.
  • The busiest quarters were Q4 2021 and Q1 2022, with 86 and 83 deals respectively. 
  • Investment in the sector has slowed since the first half of 2022 in line with a general decrease in the deal count in the global capital markets. 
  • Between 2020 and Q2 2023, $4.7 billion in M&A investments were made over 229 deals with an average deal size of $20.8 million. The M&A activity within the property technology sector could indicate market consolidation. Private equity groups were the biggest investors with $5.7 billion over 114 deals. 
  • Within the period, $1.6 billion was deployed by venture capital in the hospitality sector across 489 deals.
  • With $9.2 billion over 33 deals, the United States was by far the favored destination for investment, with more than 50% of the total invested. The average deal size was $4 million. 
  • Italy was the second largest recipient of investment with a total of $2.1 billion over 15 deals, and an average deal of $38.6 million. 
  • India has the third largest investment received with $2.1 billion over 30 deals, with a $70 million average deal size.
North America, particularly the United States, has been a significant hub for hospitality technology and property technology transactions over the period. In the hospitality technology sector, North American companies have developed and implemented innovative solutions, leading to numerous transactions such as software acquisitions and integrations and subscription partnerships.
Europe has witnessed significant growth in hospitality technology and property technology transactions. Countries like Italy and Spain have been prominent in these transactions, with a focus on property management systems, guest experience technologies, and smart building solutions.
Overall, globally there was a surge in investments in specific industries until Q1 2020. After that, investments and partnerships to develop and deploy technology solutions in the hospitality, real estate, and property sectors have slowed.
Jahani and Associates predicts a continued increase in capital market activity within the hospitality technology and real estate technology transactions in Southeast Asia and North America as economies become more interconnected and companies expand into new international markets.

Source: PitchBook Data.

Medical Devices and Digital Health in Southeast Asia

Medical Devices and Digital Health in Southeast Asia

Over $1.9 billion has been invested in the medical devices and digital health sectors in Southeast Asia since 2020. The medical devices and digital health sectors are driven by continuous technological advancements and innovations, which play a crucial role in shaping the future of the healthcare industry. 
This report provides a comprehensive analysis of investment activity in these two sectors. The data set analyzed focuses on capital deployment, transaction types, geographical distribution, and the largest deals within the industry over the period. By analyzing the data and trends from Q1 2020 to Q1 2023, this report explores the emerging trends and technologies shaping the current landscape of medical devices and digital health and what it means for the capital markets.
  • The medical device and digital health industry has received over $1.9 billion from investors with over 337 transactions at an average deal size of $141 million since Q1 2020.
  • The second quarter of 2021 saw the largest capital deployment of $426 million in the sector, driven by Sunway Healthcare Holdings, which saw the biggest investment raise of $181 million from Singaporean investor GIC.
  • Since the third quarter of 2021, investment numbers have remained relatively steady until Q1 of 2023, when we see a dip in investment. This could be due to the Silicon Valley Bank collapse in early 2023, which decreased venture capital funding and overall investment in technology-driven healthcare solutions.
  • Vinmec International Hospital is an operator of clinics and hospitals across Vietnam. Vingroup, its parent company, raised capital from Singaporean GIC for $203 million in December 2020. The company is using the proceeds to expand its medical footprint, focusing on healthcare infrastructure, research, and technology.
  • GIC was also behind the second largest deal, investing $181 million in Malaysian company Sunway Healthcare Holdings. They are accountable for 43% of the largest 10 deals in the last three years.
  • Indonesian healthtech company Halodoc raised significant funding in multiple rounds in recent years. In 2020, they raised $65 million in a Series B funding round, followed by another $80 million in a Series C funding round in 2021. Halodoc offers a telemedicine platform and a range of healthcare services, including appointment booking and medicine delivery.
  • Singapore is the leading recipient of funds in the sectors, having received $710 million in investment in the last three years. It accounts for 39% of the total funding in the region. Their modern and ever-growing healthcare ecosystem and infrastructure have attracted investment and fostered innovation in the medical devices sector.
  • Malaysia was the second largest recipient of funding with $419 million of inward investment, composing 23% of the total. An important fact in its success is the progress made by the Malaysian government in working towards streamlining regulations and improving the regulatory environment for medical devices and digital health. This helps facilitate the commercialization and adoption of new technologies, making Malaysia an attractive destination for investment in these sectors.
  • Vietnam surprisingly surpasses Indonesia with $286 million in inward investment. Vietnam has been investing in healthcare infrastructure development, including the establishment of medical centers and hospitals, enhancing the capacity for adopting and utilizing medical devices and digital health technologies, making it an attractive market for investors.
  • From 2020 to Q1 2023, 29% of medical devices and digital health investments were made by private equity firms with $546 million, accentuating the region’s growing strategic value.
  • Secondary transactions take up 25% of the total investment pool. As companies achieve successful exits or liquidity events through secondary transactions, it can signal positive prospects for future investors and attract more capital to the industry. Investors deployed $320 million through mergers and acquisitions within these sectors. Established companies enhance their market position, expand their product offerings, or gain a competitive advantage through domestic and international acquisitions.
The convergence of healthcare and technology has paved the way for digital health solutions and medical devices. The cross-border capital markets in the medical devices and digital health sectors in Southeast Asia have witnessed significant growth and investment in recent years. The region’s expanding healthcare market, favorable regulatory environment, and technological advancements have attracted the attention of investors and spurred a flurry of deals and partnerships.

Cyber Security and Cloud Computing Transactions by US-Based Investors

Cyber Security and Cloud Computing Transactions by US-Based Investors

Since 2020, over $28 billion has been invested in cyber security and $59 billion in the cloud computing sectors by US-based investors.
This Jahani and Associates report on cyber security and cloud computing transactions by US-based investors provides valuable insights into the investment trends and opportunities in these rapidly evolving industries. The report covers the period from 2020 to Q2 2023, revealing significant capital deployment, peak investment periods, and country-specific preferences for both sectors.
  • From 2020 to Q2 2023, US-based investors deployed over $28 billion into cyber security companies across 757 transactions, with an average deal size of about $38 million.
  • The highest investment peak occurred in Q3 2022, with $13 billion deployed in the sector. One noteworthy transaction during this time was the acquisition of SailPoint Technologies Holdings by Thoma Bravo, a private equity and growth capital firm, for $7 billion.
  • The most significant investment surge was in 2022, reaching $18 billion in total. This upswing can be attributed to a series of acquisitions done by Thoma Bravo for more than $10 billion in attempts to consolidate the market, and a range of other factors, including geopolitical and economic events such as the start of the Russian war with Ukraine (increase in cyberattacks) and the implementation of new regulations like the Strengthening American Cybersecurity Act (SACA) and Bipartisan Infrastructure Law (BIL). Those factors led to a rise in cyber security adoptions within organizations, particularly in the US, which has increased interest from US investors.
  • With merger and acquisitions (M&A) transactions being the highest, US-based investors deployed $20 billion in the cyber security sector through 372 deals in M&A, indicating a dynamic and well-established market for strategic acquisitions and significant industry consolidation.
  • US private equity firms invested $7 billion in 170 deals, representing 22% of the total capital deployed. The abundance of private equity growth deals reflects the significant presence of well-established companies with proven track records in this sector.
  • Venture capitalists invested approximately $3 billion in the sector, with an average ticket size of $9 million, highlighting the growth of new market entrants and the appeal of early stage and high-growth companies.
  • Of the deals announced by US-based investors, 81% were deployed in cyber security companies located within the US during the period. Several factors led to that, such as the significant technological adoption, the advanced infrastructure, and the presence of key industry players in this country.
  • Israel is second in terms of capital funded in cyber security as it became one of the world’s largest centers of cyber security innovation. The country’s strong focus on national defense and government support has driven its rapid rise in this field. Three notable Israeli cyber security companies are Check Point, CyberArk, and Radware.
  • Only 11% of the announced deals were in countries other than the US and Israel, likely due to regulatory and geopolitical considerations. US-based investors may prefer focusing on more familiar and stable markets like the US and Israel, where they feel more confident about the legal and political landscape.
  • US-based investors allocated $59 billion in cloud computing companies over 650 transactions from 2020 to Q2 2023, averaging around $90 million per deal.
  • In Q3 2022, the sector witnessed its highest investment peak, reaching $23 billion. Notably, we can see a possible correlation between cyber security and cloud computing, evident from the peak in the cyber security sector during the same quarter. This explains the fact that organizations prioritize cloud-specific cyber security to maximize cloud computing benefits and protect digital assets, making both sectors appealing to investors.
  • The cloud computing sector saw significant consolidation and strategic activity, with $48 billion invested in 345 merger and acquisition deals. This large investment signifies the sector’s high value and attractiveness to major players seeking growth and increased market share.
  • US private equity firms invested $6 billion into this sector split over 121 deals, implying a stable and promising sector in terms of long-term growth prospects. 
  • Venture capitalists invested approximately $3 billion in 265 deals, signaling a thriving entrepreneurial ecosystem and substantial growth opportunities in the sector.
  • US-based investors prioritized domestic opportunities in this period, investing $47 billion (83%) within the United States, driven by established tech hubs, a mature ecosystem, and numerous innovative companies in the country.
  • Germany’s $6 billion investment in eight deals showcases its appeal to US-based investors, driven by a strong economy and tech-friendly environment. The region’s innovation potential attracts strategic partnerships for access to the European market.
  • Despite challenges in doing business there, China’s $2 billion investment in 48 deals highlights the vast potential of its cloud computing market, driven by a thriving tech industry and increasing adoption of cloud services.
  • In the period, $800 million was invested in the UAE, which is known for its growing tech sector and transformation into a knowledge-based economy. US investors are drawn to the region as a hub for innovation in the Middle East.
Overall the report highlights the dynamic nature of these industries, offering various investment opportunities for various players, from established firms seeking growth and market consolidation to venture capitalists supporting early stage innovations. As technology continues to drive global business transformations, understanding the investment landscape in cyber security and cloud computing is crucial for investors looking to capitalize on emerging trends and shape the future of digital innovation. The insights presented in this report serve as valuable guidance for decision-makers navigating the ever-evolving landscape of cyber security and cloud computing investments.

How the DCF Equation Applies to High-Growth Company Valuations 

How the DCF Equation Applies to High-Growth Company Valuations 

Companies seeking to raise money in private capital markets need an understanding of how to create value based on cash flow. This report reviews an aspect of valuing such companies through the discounted cash flow (DCF) method, the primary method used for cash flow analysis across all asset classes.

When evaluating loss-making companies for extended periods, it is difficult to utilize the DCF for anything other than discounting forward looking profitability. In this article, J&A introduces an alternative approacha modified DCF modelthat analyzes a company’s investment worthiness by understanding its risk profile and the investor’s expected returns. 

The DCF model is used as a way to approximate the value of an investment. A DCF valuation starts by forecasting the future cash flows that an investment is expected to generate and considers the expected future growth of the asset’s cash flows. The equation incorporates risk factors by adjusting the discount or interest rate. In practice, the cash flows (CF1) include cash inflows and outflows such as revenue, expenses (excluding non-cash items such as depreciation and amortization), taxes, and other financial metrics related to the investment being evaluated. The discount rate (r) is determined based on factors like the cost of capital, the required rate of return, or a suitable benchmark rate.

Discount Rate Substituted for Interest Rate

For high-growth companies, one uses the cost of capital as a substitute for the discount rate. This number is simply the factor by which future cash flows are reduced to account for the time value of money and the risk profile of a project. Typically, riskier projects require a higher cost of capital to compensate investors for taking on more risks.

The cost of capital includes multiple components, such as the cost of debt (interest rate on borrowed money) and the cost of equity (required rate of return expected by equity investors).

The weighted average cost of capital (WACC) is a weighted average of a company’s cost of equity and cost of debt based on the money the company has already raised or the cost of raising capital at the moment in time. 

Required Return of Equity or Cost of Equity

The required return on equity, also referred to as the cost of equity, is the minimum rate of return that shareholders (equity investors) expect to earn on their investment. 

For high-growth companies that prioritize reinvesting their earnings to fund expansion and growth, the following formula is used:

In this formula, rf represents the risk-free rate of return on a risk-free investment, the beta is the measure of the stock’s risk, and rm is the expected return above the risk-free rate for investing in the overall market.

Abbreviated DCF Equation for High-Growth Companies

By using algebra, the DCF is actually:

The equation above is the correct proper, mathematically detailed equation to calculate a business’s discounted cash flow at a future period. Some of these variables matter more for high-growth companies than others. Variables that are less important can be removed to create a more concise picture of how the DCF behaves.

Focusing on the Variables that Matter

Small, high-growth companies receive investments because investors are betting they will become large companies, so the possible outcomes of these companies should be measured in extremes.

The purpose of a DCF equation for a high-growth company is to evaluate the extremes of potential value based on realistic cash flow scenarios in the future. Said differently, “If the company generates $100 million of cash flow but has to lose $200 million per year for three years, what is the asset’s value?” The DCF equation allows a financial modeler to create cash flow scenarios based on a projected income statement and calculate a likely business value. The DCF model also allows decision-makers to determine how much cash needs to be generated to meet valuation targets. A company that wants to be worth $1 billion will have mathematical cumulative cash generation requirements, taking into account losses based on a determined interest rate, cost of equity, and cost of debt. 

For high-growth companies, one can ignore many variables that a traditional DCF model requires, such as the tax rate. A variable like the tax rate is important when an investor considers deploying large sums of money for low percentage returns, such as investing $100 billion cash into a treasury bond. But the tax rate is meaningless when considering investing $10 million into a company worth $0, $10 million, $100 million, or $1 billion in the future. 

In other cases, companies might:

Based on all this, the appropriate DCF equation for a high-growth, early stage company is:

The variables considered by investors and decision-makers for companies of this profile are beta, the market’s return, and the asset’s cash flow. We will now investigate beta and rm in more detail. 

This more thorough view of the DCF equation allows us to analyze the relationships between its variables more rigorously. Investors in high-growth companies know they take on a lot of risk with their investments. Investors in high-growth companies expect to be compensated through this risk-taking by getting an outsized return. For the DCF model, this return can only come in cash flow that warrants a greater valuation than what the investor is paying for the asset. Based on these assumptions, many parts of the DCF equation become irrelevant because they do not impact the final valuation number the investor seeks to compensate for this risk.

Selecting Beta and rm for High-Growth Companies

There is no perfect answer to determining the right beta for a small, high-growth company. Beta is a statistical measurement derived from the volatility of the S&P Index. The S&P has a beta of 1. If a stock also has a beta of 1, then the stock will move the same amount as the S&P 500 Index. If the S&P goes up by 1%, a stock with a beta of 1 will also go up by 1%. If the S&P goes up by 200%, the stock with a beta of 1 will also go up by 200%. 

Beta plays a role in assessing a stock’s risk and how it moves in the overall market. Beta creates the slope, and it grows (or destroys) the underlying asset’s value based on performance. A beta of 15 is extremely high and would suggest the stock is volatile and risky since it moves 15 times more than the overall market. 

As beta grows, so does the volatility of the stock in relation to the S&P. If a stock has a beta of 7, then it will go up or down seven times as much as the S&P. Suppose the S&P goes up by 10%, the stock with a beta of 7 will go up by 70%. And if the S&P goes up by 15%, the stock with a beta of 7 will go up by 105%. Small changes in the beta lead to large changes, positive or negative, in the underlying stock price as it moves. A larger beta leads to a lower valuation. If an investment is extremely risky, an investor is likely to pay less for it because there is a greater probability that their investment will decline in value.

A perceived beta of 2 is different from 5 and is different from 100. Various qualitative factors, including pending litigation against a company, management changes, negative publicity, and industry sentiment can influence beta. These events introduce uncertainty and risk, which cause a stock’s beta to deviate from 1. Generally, a beta of 5 for NYSE listed equities is considered very high. 

The market return (rm) is easier to estimate and requires less data for statistical analysis. The rm can be calculated by multiplying possible investment outcomes by their probabilities and summing the results to reach a weighted expected return of the market. Venture capital (VC) funds have historical data on the return of different investments, which helps them estimate the expected return on their portfolio of investments. 

Nevertheless, historical performance does not guarantee future results, as investment outcomes vary significantly. Ideally, it will provide a conservative estimate of rm when compared with the asset managers’ future performance. 

Assume an investment in a Series A company has a 25% chance to either go to 0, increase by 50%, double, or quadruple equally. Note that we will not assume negative returns in this scenario since negative returns are most relevant for derivative trading. 25%*0+25%*50%+25%*1+25%*4 = 1.375%, so the rm of this scenario is 1.375%. 

These numbers can be altered to create a different rm based on the investor’s model. One important thing to note is that the rm will remain relatively static. It would be uncommon for any investment opportunity to have an rm of 4, 10, or 100; this suggests the returns are too good to be true. Some high-frequency trading algorithms can reach results of this magnitude, but they are not consistent. 

The selections for beta and rm simply reduce the expected value of the cash flow in a period. Both these variables appear in the denominator of the traditional DCF and the modified one in this report. As the denominator of a fraction grows larger, the ultimate value of that fraction becomes smaller, leading to a decline in the expected value of the asset. 

A larger beta leading to a lower valuation is intuitive. When an investment carries high risk, investors tend to offer a lower price due to the likelihood of potential losses. However, a greater rm also contributes to a lower asset value. How can this happen? Remember, the cost of equity in this equation refers to the return investors require for the risk they are assuming. So, while a higher rm seems like it should increase the asset’s value, this rm is used to calculate the required return of equity to the investor, consequently increasing the company’s cost of equity. This subtle psychological indication of this simple equation holds powerful implications for the issuer raising money. Founders and CEOs often assume that belonging to a high-growth industry increases their value. However, this equation clarifies that the asset’s value only increases based on its ability to generate future cash flow. Mathematically, according to the DCF, the higher the expected market return of the investor, the lower the asset’s valuation—a point of utmost importance.

Since different returns and their likelihoods derive rm, the positive and negative scenarios should be considered together. And counter-intuitively to many business owners, when a market is driving a return of 4, 10, or 40 times, it only puts the pressure on the company to provide higher returns, therefore reducing the valuation in the mind of the investor. 

Key Takeaways for Business Owners

Most of this is very theoretical. The equations used by cash flow and public equity investors were not developed for early stage, high-growth companies. However, there are vital lessons for business owners to grasp regarding investors’ thought processes. Private equity investors have expertise from public markets and were trained on financial fundamentals that include these equations. These equations provide a framework for an alternative investment to any subject seeking one. Investors possess the gift to choose where to allocate their capital. When an investment opportunity presents itself in a promising space, but its offering details are so outside the range of what is reasonable regarding these basic equations, investors will find it very difficult to commit to such an investment. This is particularly the case when these investors manage funds on behalf of their limited partners and are bound by a fiduciary duty to those whose capital they manage. 

Qualitatively, business owners need to consider how they compete with investment assets for investor funds and how the beta or expected market return (rm) of those other assets aligns with opportunities presented in a specific investment offering. 

Quantitatively, there are outbound limits for beta and expected market return (rm) that business owners can consider when determining what set of scenarios makes their investment offering enter the realm of mathematical reasonableness. 

For example, a beta cannot be 100. Generally, public-traded equities can have betas of up to 20. A small, high-growth business that doesn’t trade frequently, will decrease beta since the stock is less volatile. The rm of an offering shouldn’t be greater than 1 because it will lead investors to demand a greater return and therefore increase the cost of equity and lower the valuation of the business. Mathematically, an rm of less than 1 will reduce beta and its subsequent exponential change in the denominator of the DCF equation. 

The most important takeaway from this entire exercise for business owners is that companies must have sound valuations based on their planned profitability. This is now exemplified in the global high interest rate environment and companies like Uber are becoming profitable. Eventually, in a company’s life cycle, all investors will evaluate offerings based on these free cash flow models. Therefore, even if the equation may not be entirely applicable to a Series A company, it will apply to that company as it grows. Cash is king (or queen)—always.

Transaction Structure and Its Impact on Seller Liquidity in M&A

Transaction Structure and Its Impact on Seller Liquidity in M&A

Transaction Structure Impacts M&A Valuations 

Mergers and acquisitions (M&A) occur when one company purchases or combines with another, usually resulting in a change of ownership and control. M&A goals include creating shareholder value by growing profit, gaining market share, expanding into new markets or product lines, and accessing technologies.

A transaction’s structure refers to the combination of assets used to compensate the seller for the fair market value of the business being sold. In a complete sale, the seller is often compensated through a combination of cash, equity instruments, debt instruments, intangible assets, and tangible assets.

Liquidity refers to the ease and speed with which an asset or investment can be converted into cash. 

It measures how quickly an individual or organization can access their funds by selling an asset.

Types of Transaction Structures

Transaction structures are categorized into three types: unstructured, typically structured, and highly structured. These classifications shape the composition of the payout a seller receives based on the mix of assets involved.

An unstructured transaction is where the buyer acquires the target company by offering an all-cash payment in exchange for ownership. In an all-cash transaction, investors and sellers employ different methods to assess a company’s valuation and negotiate a price.

Financial performance, historical cash flows, tangible and intangible assets, and market multiples are common factors in this process. Public companies also have their share price, but negotiating this price is possible, especially in deals that involve significant stakes. In this structure, the buyer is assuming they can generate a return on investment. This return will likely come from revenue synergies, growth, or cost synergies to increase profitability.

In a typically structured M&A transaction, assets are diversified among cash, equity, debt, tangible, and intangible assets. The valuation is a blend of these components allowing both the buyer and seller to negotiate the final price based on the expected return of non-cash transaction components.

For example, a business with a total value of $100 million would be considered typically structured if the sellers received $60 million in cash at close, $20 million of equity in the acquiring entity, $10 million worth of a promissory note paid to the sellers (note holders) over two years, $7 million worth of employment agreements and bonus potential, and the $3 million company yacht at the time of sale.

This approach allows buyers to reduce risk and optimize capital allocation, as well as incentivizes the sellers to support the company’s long-term growth.

A transaction is highly structured when the majority of the fair market value is placed in non-cash assets such as intangibles, equity, and debt. The valuation is more complex, and valuation methods involve assessing the future cash flows of intangible assets, such as intellectual property (IP), contracts and agreements, research and development (R&D), licenses and permits, and customer relationships. For example, a large tech company would acquire a startup with cutting-edge software and IP to enhance the buyer’s product offering, just like a large consumer goods company would acquire a niche brand to increase sales of the niche brand across the large brand’s sales channels.

In a highly structured transaction, the buyer assumes they will achieve a desired return on investment (ROI) within a specified timeline primarily from the acquired intangible assets based on factors like the ability to license the intellectual property (IP) and the market demand on the products associated with the intangible assets.

Equity, Debt, and Intangibles Drive Transaction Structures

Equity-Driven Structures

An equity-driven structure emphasizes the exchange of ownership stakes in the acquiring and target company. Equity instruments are financial securities that represent ownership in a company and give the equity holder a claim to the company’s assets and earnings. Equity instruments include:

  1. Options: Financial derivatives that give the holder the right but not the obligation to buy or sell a specific amount of a company’s stock at a predetermined price within a specified timeline.
  2. Preferred or common equity: Carries preferences or rights over common stock, which include priority in receiving dividends, liquidation preferences, and other rights that may be outlined in the company’s bylaws.
  3. Equity: Public companies’ equity is traded on stock exchanges and subject to market fluctuations, while private companies’ equity is not publicly traded and involves negotiated agreements among investors.
  4. Restricted or controlled stock: Shares that are subject to certain restrictions or conditions on their transferability or sale.

Equity-driven M&A structures attract strategic investors who are typically corporations or businesses looking to expand their market presence, product portfolio, or geographical reach. Strategic investors acquire companies that align with long-term strategic goals.

Consider an example of a large professional services firm acquiring a mid-sized professional services firm. The larger firm would offer profit-sharing units or equity to the mid-sized firm. The mid-sized firm would consider this deal because it creates access to more potential clients and can smooth out the volatility of dividend payments for more niche service lines. 

Intangible Asset-Driven Structures

Intangible asset–driven structures usually create the lowest near-term fair market value but the greatest long-term upside. Intangible assets also possess a slightly riskier profile. Several types of intangible assets and payouts exist, each with distinct characteristics.

  1. Bonus payouts: Additional financial rewards given to key employees or executives as a form of extra compensation, which is based on their performance, achievements, or contributions.
  2. Employment agreements: Legal contracts that outline the terms and conditions of employment for the target company’s key employees after the acquisition.
  3. Earnouts: Arrangements where a portion of the purchase price is contingent upon the future performance of the acquired company and is paid to the seller based on achieving specific financial or operational milestones after the completion of the acquisition.
  4. Reselling agreement: Allows the acquiring company to continue selling the target company’s products or services.
  5. Revenue sharing agreement: Outlines how the revenues generated from products or services will be shared between the acquiring and target companies.
  6. Royalty agreement: Payment of royalties to the target company for the use of its intellectual property.

Large corporations seeking strategic acquisitions focus on intangible assets that complement their existing businesses. A tech giant aiming to strengthen its position in the smartphone industry would acquire a startup known for its innovative smartphone display technology and a portfolio of patents related to this technology. Out of an intangible asset–driven structure, the tech giant would gain a competitive advantage in the smartphone industry and increase returns through sales related to reselling, revenue share, and royalty agreements.

Debt-Driven Structures

In a debt-driven M&A structure, the seller becomes the financier or lender to the company and the buyer. This differs from a leveraged buyout when the note holder is a private lender, not the original seller. In this scenario, the seller transfers control of the business and receives a note entitling that seller to a debt repayment secured by the business just sold, the assets of the buyer, or a combination of the two. A majority debt structure is only common for distressed or semi-distressed assets. Debt instruments include: 

  1. Senior secured debt: Takes precedence in repayment over other debt instruments, often backed by collateral like real estate, and it usually offers lower interest rates due to its lower risk for lenders.
  2. Debentures: Unsecured debts backed by the buyer’s general creditworthiness rather than specific collateral.
  3. Convertible note: Allows the seller to convert the debt into equity (typically common stock) of the acquiring company at a later stage.
  4. Promissory note: A written promise to pay a specific sum of money by a certain date. It outlines the terms of repayment, the principal amount, and the interest rate.

Debt-driven transaction structures are less common in private equity markets. Debt is often a component of the structure but rarely the majority of the fair market value. This is because sellers and buyers generally have access to the same set of debt when they own the same or largely comparable assets.

Transaction Structure Components Effect on Seller Liquidity 

M&A sellers want to know the likelihood they will receive a non-cash asset’s perceived fair market value. For this reason, each part of a transaction structure should be analyzed based on the likelihood that the asset can be liquidated for cash near or equal to the fair market value determined at the time of a transaction. Extremes of non-cash liquidity examples include common stock in Alphabet, the parent company of Google, and shares in a private equity business with $1 million in revenue. Google shares can be sold on a public exchange with relative ease and may only be limited by the SEC Rule 144 volume and timing restrictions. Whereas shares of a $1 million private equity company will likely not be liquid until the company grows significantly. A red-green-yellow ranking of general transaction structure elements and the likelihood that these can be converted to their associated cash value is presented below. Green suggests the highest likelihood, such as in the Alphabet example, and red indicates a lower likelihood, such as with the small privately owned company. 

Business owners need to understand that transaction structures have a significant impact on the fair market value of an asset and the ultimate return a seller can receive from the sale of their business. This can be in either the buyer’s or the seller’s favor. Both parties need to consider what ultimate payout they seek and their risk appetite to achieve it. Cash, equity, debt, and intangible assets can all be structured together to create a wide variety of possible outcomes and payouts for sellers. These require careful consideration by the seller.
One of the best examples of how an M&A transaction can be structured and still benefit the buyer and seller more than an all-cash transaction is when Alphabet bought Double Click. At the time of the transaction, digital advertising was still the minority of spending for most brands. But as this budget item grew, Google was able to accelerate its market share more quickly. The transaction structure of the Double Click acquisition is not public, but a more structured transaction would certainly have benefited both parties.

Tools To Analyze the Balance Sheets of High Growth Companies

Tools To Analyze the Balance Sheets of High Growth Companies

Income and cash flow statements usually play a significant role in the financial analysis of a company, while the balance sheet is often largely ignored. However, the balance sheet can give valuable insights into a business’s liquidity and financial position, including its assets, liabilities, and performance.

This report is designed to give business owners, executives, and investors the tools and frameworks to analyze a company’s financial ratios in order to better read and understand the balance sheet in order to facilitate better decision making.

These ratios enable comparisons of data across companies, sectors, and industries. Tracking changes in these ratios over a period of time can help spot trends that may be developing in a company. Fourteen ratios are presented in this report; they are relatively easy to calculate but can provide deep insights into the performance of a business. Each ratio includes a “how to use” section that explains what each ratio indicates, an “industry perspective” section that describes how each ratio is relevant to different industries, and an “importance to investors section” that explains why a ratio matters to different investor profiles (like common equity holders, preferred equity holders, and debt lenders). 

A red/yellow/green ranking of the importance of the ratio-to-investor decision-making is presented in each section. 

Inventory Turnover

This measures how many times a company’s inventory is sold and replaced over a given time period.

Inventory Turnover Ratio = Cost of Goods Sold (COGS) / Average Inventory

How to Use It

A high inventory turnover ratio indicates effective inventory management with lower holding costs. A low ratio signals slow inventory turnover and unsold products, resulting in higher inventory expenses and reduced profits. To determine if the ratio is high or low, one may conduct a comparative analysis of a company’s inventory turnover to similar companies in the same industry. Comparing the current inventory turnover ratio to previous periods allows for the evaluation of long-term trends, potential seasonality impacts, and areas for improvement in a company’s inventory management efficiency.

Receivable Turnover Ratio

Indicates how quickly a company collects payments from customers and manages its accounts receivable.

Receivable Turnover Ratio = Total / Average Accounts Receivable

How to Use It

A high receivable turnover ratio signifies that the company collects cash more frequently, reflecting a stronger cash position that enables it to meet its financial obligations sooner. A low ratio indicates that the company is less effective in receiving payments or follows a more lenient credit policy. Calculating the average receivable over a year helps mitigate the influence of seasonal fluctuations that can distort financial ratios.

Payables Turnover Ratio

Also known as the Accounts Payable Turnover Ratio, this measures how quickly a company pays its suppliers. 

Payables Turnover Ratio = Total Non-Cash Purchases / Average Accounts Payable

How to Use It

A high payables turnover ratio implies that the company has a strong cash flow position, allowing it to meet its financial obligations, meaning that it takes less time to settle its debts with suppliers. A low payables turnover ratio could result in strained supplier relationships. Some industries have longer payment periods, and seasonal variations can impact the ratio. This can also be impacted by the size and strength of a company’s supplier base, i.e., supermarkets usually demand long credit terms as do many other large companies, putting cash strains on smaller companies.

Current Ratio

Indicates the company’s ability to pay short-term obligations (those due within one year).

Current Ratio = Current Assets / Current Liabilities

How to Use It

A current ratio greater than one indicates that a company has more current assets than current liabilities; a current ratio of less than one suggests that a company may struggle to cover its short-term debts with its available current assets. 

Quick Ratio

Indicates a company’s ability to quickly pay its short-term obligations using its current assets (also known as the “acid test” ratio).

Quick Ratio = (Cash and Cash Equivalents + Marketable Securities + Accounts Receivable) / Current Liabilities

How to Use It

Similar to the current ratio, but only considers immediate cash or cash equivalents, a high quick ratio suggests that a company has a strong ability to meet its short-term obligations without relying on the sale of inventory. A low quick ratio means that the company does not have enough liquid assets to cover its short-term liabilities. However, it may not always mean liquidity issues for the company; this could be seen in businesses that sell on a cash basis like restaurants and supermarkets.

Cash Ratio

A more conservative view of a company’s ability to quickly pay its short-term obligations using only its readily available cash and cash equivalents (excludes accounts receivable).

Cash Ratio = (Cash and Cash Equivalents) / Current Liabilities

How to Use It

The cash ratio is the ultimate liquidity test. If the company’s cash and cash equivalent equal its current liabilities, it means that the company has enough cash in its bank to pay off its short-term liabilities. 

Debt-to-Equity (D/E)

A debt-to-equity ratio compares the equity held by a company to its debt (an indication of a company’s ability to retain earnings).

Debt-to-Equity Ratio = Total Debt / Shareholders’ Equity

How to Use It

Debt-to-equity ratio varies depending on the stage of the company’s growth and its industry sector. Newer and growing companies often use debt to fuel growth; conversely, a high D/E ratio in a mature company can be a sign of trouble that the firm will not be able to service its debts.

Debt-to-Service Coverage Ratio (DSCR)

A debt-to-service coverage ratio measures how much of a company’s cash flow is used to pay off debt: an indication of its ability to meet its debt servicing obligations.

DSCR = Earnings Before Interest and Taxes (EBIT) / Total Debt Service

How to Use It

A DSCR value represents the number of times a company’s operating income (EBITDA) covers its debt service obligations. A DSCR value greater than one indicates that the company’s operating income is sufficient to cover its debt payments, which is generally seen as a positive sign. The higher the DSCR, the more comfortably a company can meet its debt obligations.

Debt-to-Asset Ratio

Measures how much of a company’s assets are financed by debt.

Debt-to-Asset Ratio = Total Debt / Total Assets

How to Use It

An increasing debt-to-asset ratio may indicate that a company is overburdened with debt and may eventually be facing default risk. 

Return on Assets (ROA)

ROA measures how efficiently a company is using its assets to generate profit. 

Return on Assets (ROA) = Net Income / Total Assets

How to Use It

If the return on assets (ROA) goes up over time, it suggests that the company is getting better at making profits with every dollar it invests. If the ROA goes down, it might cause the company to over-invest in assets that didn’t generate more cash, which could be a red flag for the company. 

Return on Equity (ROE)

ROE measures how efficiently a company is using its equity to generate profit.

Return on Equity (ROE) = Net Income / Shareholder’s Equity

How to Use It

This ratio only takes into consideration the shareholders’ capital employed and helps assess how a company utilizes shareholder’s equity. ROE should be analyzed over a five-to-ten year period to develop a better picture of the growth of the company. A higher ROE means better returns for the shareholders with respect to what they have invested. A lower ROE implies that the company is less efficient in generating profits for its equity holders.

Gross Profit 

The profit a company generates from its core operating activities after subtracting the cost of goods sold (COGS).

Gross Profit = Revenue – Cost of Goods Sold (COGS)
Gross Profit Margin = Gross Profit / Revenue

How to Use It

Gross profit represents the residual sum obtained when deducting all manufacturing expenses. This ratio indicates the company’s profitability and shows as a credit balance on the trading account. However, the gross profit does not encompass factors such as taxes, additional expenses, or interest on loans. A higher ratio indicates that the company retains a larger proportion of its revenue as profit before accounting for other operating expenses and taxes. A lower ratio suggests that the company is struggling to generate profits from its core business activities. This could be due to higher production costs or pricing pressures. Higher sales can often lead to higher gross margins as the cost of assets is spread over more units and as economies of scales impact purchasing power.

Net Profit 

The profit a company has earned after deducting all expenses, taxes, interest, and costs from its total revenue or sales.

Net Profit = Total Revenue (or Sales) – Total Expenses
Net Profit Margin = Net Profit / Revenue

How to Use It

Net profit is the money a company has left after it has paid all its bills for a specific time. It shows as a credit balance on the income statement and helps understand how the company performed in a year compared to previous years. A higher ratio indicates that the company is efficient in converting a larger portion of its revenue into profit as it is effectively managing its costs and operations. A lower ratio suggests that the company is less efficient in converting its revenue into profit. 

Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA)

EBITDA measures a company’s operating performance excluding interest, taxes, and non-cash expenses.

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
EBITDA Margin = EBITDA/Revenue

How to Use It

A higher EBITDA indicates that a company is generating earnings from its core operations before accounting for interest, taxes, and non-cash expenses like depreciation and amortization. A lower EBITDA may indicate that a company’s core operations are less profitable or that it has significant interest expenses, taxes, or non-cash expenses that are reducing its net profit.

Balance Sheet and P&L Ratios: Relevance to Investors

The analysis of financial ratios is critical to assessing the financial health and performance of a company. These ratios serve as valuable tools for stakeholders to make informed decisions about investing, lending, or managing the company’s finances, assets, and liabilities, as well as its ability to meet its short-term and long-term obligations and generate profits.
However, to interpret these ratios, one should consider industry benchmarks, economic conditions, and the company’s business model. As the business landscape evolves, an understanding of these ratios is important to guide a company toward sustainable growth and financial stability.

Primary and Secondary Valuation Differences Destroy Investor Returns

Primary and Secondary Valuation Differences Destroy Investor Returns

All investors seek a return on capital. This return on capital can come from selling shares through M&A, secondary public transactions, or receiving dividends. When primary and secondary valuations grow far apart, it can destroy investor returns. This destruction is manifested in three distinct problems: companies fail to raise more money, shareholders cannot exit through M&A, and investors must wait extended periods of time to receive a return on their investment. 

Companies face problems when the primary valuation at which money is raised deviates from the valuation of M&A or secondary transaction comparables. This is referred to as “the bid-ask spread.” The bid is the price the buyer is willing to transact at; the ask is the price the seller is willing to transact at. This terminology is commonly used in public equity market analysis. This article focuses on companies that generate returns through M&A or secondary public transactions. 

Primary and Secondary Transactions

Primary transactions refer to direct investments an external investor makes into a company in exchange for newly issued shares. This investor is the first owner of the shares, hence the term “primary.” This also applies to the initial sale of financial securities such as stocks or bonds through an initial public offering (IPO). In both cases, the proceeds from the sale go directly to the issuing entity. Most companies that seek primary investments are growing and may not yet be profitable. Dividends are uncommon in this sort of company as any profits are generally reinvested back into the growth of the company in the early stages, making it unlikely that primary investors are seeking a return through dividends.

Secondary transactions refer to the buying and selling of existing shares between investors or shareholders. These buyers acquire previously owned shares and are the second or third owners, hence the term, “secondary.” In a secondary transaction, the proceeds from the sale go to the previous shareholder directly, and not to the company.

Motivations for Buyers and Sellers in Primary Transactions

In a primary transaction, the buyers or investors seek returns through capital appreciation. Capital appreciation happens when the company performs well and its value increases, thus, the value of the shares also increases. The investor can then sell these shares for more than they paid, creating a return. Dividends are payments made by a company to its shareholders to distribute profit depending on the number of shares they own. Both payments are in the form of ROI (return on investment) to the shareholder. Capital appreciation is the most common ROI vehicle for high-growth companies.

The sellers, or the companies selling the shares, are motivated to engage in primary transactions to raise money to spend on functions such as: research and development, expanding operations, acquisitions, sales and marketing, global expansion, or paying off debt. Sellers assume these activities will increase corporate value, creating a return through capital appreciation.

Motivations for Buyers and Sellers in Secondary Transactions

Secondary buyer motivations are similar to primary buyer motivations. Buyers believe the monetary gain through appreciation or dividends will be greater than the money paid for the shares. The use of funds between primary and secondary transactions differs greatly. Sellers in secondary transactions are motivated to receive the proceeds through liquidity. When existing shareholders sell their shares, they can obtain cash for other personal or investment purposes. Early investors, founders, or employees who hold equity in a company may seek an exit strategy to monetize their investment or realize gains.

Market conditions and a company’s performance also play a vital role in this analysis, which influences investors’ decision to sell some or all their shares. It is very important to note that all shareholders must engage in a secondary transaction to receive an ROI. Primary transactions do not provide ROIs in the form of dividends or appreciation to shareholders.

Problems When Primary Valuations Eclipse Secondary Valuations

Problem 1: The Company Fails to Raise More Primary Capital

It is important to note that primary investments assume a secondary transaction will happen eventually. In the absence of a secondary transaction that pays the investor more money than the investor originally paid, the only way for the primary investor to get their money back is through dividends.

There is a point where the size of the bid-ask spread becomes insurmountable for any reasonable investor to buy shares. How large of a bid-ask spread is insurmountable? It is not always clear.

A range of 200%, or two times the price paid in a primary round and the current market rate for a secondary round, can be too large to achieve a transaction. Primary round investors seek a price per share higher than they paid, which informs the expectations for future investors and can even widen the bid-ask spread. The investors’ role in the bid or the ask changes between rounds. A buyer, or bidder, in round one becomes the potential seller, or asker, in round two.

The most challenging part about this moment, when the bid-ask chasm becomes too high, is that the company’s position in capital markets becomes frozen. The company can no longer raise equity to grow. These once high-growth, exciting companies begin to turn into slow-growth companies, which can impact their secondary valuation even more (slow-growth companies are valued at lower multiples than high-growth companies).

Again, the company itself may not have any meaningful problems. It is simply stuck, locked out of capital markets because the most recent share price cannot be rationalized based on current secondary market comps. And, as discussed, all companies need a secondary exit eventually; without it, investors will not receive a return on capital.

Problems When Primary Valuations Eclipse Secondary Valuations

Problem 2: Shareholders Cannot Exit through M&A

When the primary valuation (the ask) is considerably higher than the secondary valuation (the bid), investors might have overvalued the company based on optimistic assumptions about its growth potential and future performance.

Once these investors try to sell their shares at the price reflecting the primary valuation, they may encounter difficulties, finding buyers unwilling to meet their price expectations. This creates a situation where investors’ capital becomes trapped.

If an investor from a primary transaction pays $1 per share for a company based on its strategy and product market fit, will it sell those shares for less than $1? This rhetorical question points to the bid-ask divide that can eliminate M&A or secondary transactions as an exit option for shareholders. If the investor engages in this transaction, they will lose money. 

When confronted with this anecdotal example, investors must consider the benefits of holding onto the shares, hoping the bids from other buyers rise above $1 (the original price paid by the investor), or cutting their losses and selling the shares for less than they paid. An investor’s decision between these paths is complex and out of the scope of this report. 

There may not be any problems with the company. The company may be growing, have satisfied customers, strong employee relationships, and a pathway toward profitability. 

The company simply has not reached the growth target that was the basis for a primary valuation. If this bid-ask spread is too great, it simply eliminates M&A as an exit option.

This is bad for shareholders and existing investors. It means new investors are less likely to be interested in the offering, as described in the next section.

Problems When Primary Valuations Eclipse Secondary Valuations

Problem 3: Investor Time to ROI Delayed Significantly

Companies have such disparate primary and secondary valuations because the reasons the investors paid the primary share price are not always part of the secondary buyer’s decision making. This is almost always due to financial KPIs, such as revenue, EBITDA, gross margin, customer retention, etc. 

Companies with large bid-ask spreads must wait months or years for the financial KPIs used in the secondary transactions to match the valuation paid by the primary investor. These long-time horizons are not ideal for most investors. Financial KPIs matter less in IP-heavy and easily IP-protected business models like biotech. This is the exception rather than the rule. 

Valuation increase is driven by a combination of tangible and intangible asset growth, financial performance, financial growth, financial ratios, gross margin improvements, operating efficiencies, scalability, growth potential, customer base retention, potential cash generation, competition, new technology, industry trends, and sentiment.

Valuing a business during a primary transaction is a delicate art, not an exact science. Decision makers need to be careful they do not buy into overly optimistic narratives and pay a price per share that reflects everything going 100% right, 100% of the time. At the same time, undervaluing a business can destroy existing shareholder value. It is Jahani and Associates’ experience that most companies suffer from overvaluing their business, raising millions or tens of millions of dollars, and then getting locked out of the capital markets. 

Semiconductor Transactions by ASEAN-Based Investors

Semiconductor Transactions by ASEAN-Based Investors

Investors based in ASEAN—Association of Southeast Asian Nations, an economic union of 10 nations in Southeast Asia—have invested $18.3 billion in the semiconductor industry between 2020 and Q2 2023. This report provides a comprehensive analysis of the investment activity trend, which decreased between 2020 and 2021, then increased in 2022.

The data set analyzed focuses on capital deployment, transaction types, and geographical distribution. By analyzing the data and trends from 2020 to Q2 2023, this report reviews the dynamic landscape of the sector.

Semiconductor Transactions by ASEAN-Based Investors

Semiconductors are specialized devices that provide the main architecture for electronic products. Some of the most important semiconductor applications include:

  • Consumer and industrial electronics: consumer electronics include televisions and mobile phones, whereas industrial devices span the length of manufacturing plants.
  • Wireless infrastructure: a collection of various communication devices, connectivity standards, and connectivity solutions that work together to provide wireless networks to users.
  • Servers, data centers, and storage: integrated systems that provide resources, data services, and telecommunication and storage systems.
  • Automotive: includes industries associated with the production, wholesaling, retailing, and maintenance of motor vehicles.
  • ASEAN-based investors invested $18.3 billion over 148 deals, with an average deal size of $124 million.
  • Capital deployment peaked in Q1 2021, with the highest average deal size of $550 million.
  • The most active year for deal flow was 2021, with approximately 51 deals with $8.61 billion accounting for the highest investments made, 24 of which were in Q3. This accounts for 35% of the deals between Q1 2020 and Q2 2023.
  • Mergers and acquisitions were the driver of the deal count, attributing 67% of the transactions recorded amounting to $12.2 billion of the total deal value. This may indicate that the highly competitive landscape is driving the large semiconductor players to enhance their capabilities, grow market share, and gain access to new technologies. It could also be a direct result of the decrease in technology stock valuations leading to a search for value through acquisition.
  • Approximately 15% of the transactions conducted were by private equity firms with $2.7 billion deployed. 
  • A significant amount of capital, $1.5 billion, was deployed into venture capital investment by Southeast Asian investors. Despite the smaller ticket sizes, these transactions contributed to 8% of the capital deployed in the sector.
  • ASEAN-based investors made 76% of the investments in foreign companies such as Germany ($5.3 billion), China ($4.4 billion), and Malaysia ($4.2 billion).
  • Investments in the USA ($3.1 billion) represent 17% of total investments.
  • The remaining 7% were into Mexico, Singapore, and others. 
In conclusion, M&A consolidation and appetite for foreign investments by ASEAN-based investors in the semiconductor industry is evident. Although there has been a decrease in investments in the first half of 2023, as confidence in the market grows, scale and consolidation are essential for companies to compete effectively. The industry, market growth, and high returns will attract more investments in the space.

Manufacturing Transactions by USA-Based Investors

Manufacturing Transactions by USA-Based Investors

The manufacturing industry has received $1.47 trillion in investment between Q1 2020 and Q3 2023 from USA-based investors, 71% of which was invested into domestic manufacturing companies. This surge in domestic investments is likely a result of the more recent heightened demand for domestic production driven by geopolitical concerns, trade conflicts, and concerns around the global supply chain. The US manufacturing sector continues to focus on innovation as a competitive advantage and has made significant investments in technology to drive growth.

Announced Manufacturing Investments by USA Investors (2020 Q1 – 2023 Q3)

  • The manufacturing industry has received over $1.47 trillion from USA-based investors, with nearly 22,000 transactions, each quarter accumulating an average of $98 billion since Q1 2020.
  • The third quarter of 2021 saw the highest capital deployed over the period and the following quarters continued to demonstrate a strong market, despite the supply chain disruption and labor shortages that continue to be a drag on the industry leading to production delays and increased costs.
  • Investing in the US can help companies build a more resilient supply chain and become less dependent on overseas production and its inherent vulnerabilities like global disruptions such as natural disasters, political instability, and the recent pandemic.
  • The US is the leading recipient of funds in the manufacturing sector, having received nearly $1 trillion from USA-based investors over the period covered by this report. This accounts for 71% of the total investments made by USA-based investors in the manufacturing sector.  
  • Through initiatives like reshoring, workforce development, and strategic trade policies, the goal is to reduce dependency on foreign suppliers and maintain a competitive edge in global manufacturing markets. Trade wars often result in the imposition of tariffs on imported goods. By investing domestically, USA-based investors can avoid these tariffs, which can help in cost management and maintaining competitiveness.
  • Supply chain disruptions are also one concern investors are taking into consideration. They have become more frequent and severe due to various factors. The COVID-19 pandemic exposed vulnerabilities in supply chains, with lockdowns, travel restrictions, and factory closures leading to disruptions in the availability of raw materials, components, and labor.

Geopolitical tensions can lead to increased market volatility, affecting the stock prices and valuation of manufacturing companies. Investors may experience higher levels of uncertainty and risk in the stock market, making it important to assess how geopolitical events may impact their overall portfolio. Investing domestically is the safer bet.

  • Investors deployed $1.3 trillion through mergers and acquisitions within the sector composing 64% of the deal flow. USA-based manufacturers that rely on imported raw materials or components may face increased costs due to tariffs. By acquiring component companies and smaller manufacturing companies they secure supply of critical raw materials, labor, and technology to reduce exposure to global supply chain disruptions. 
  • During the period covered by this report, private equity firms accounted for 13% of investments, amounting to $262 billion. Private equity investors evaluate companies on their ability to grow and produce returns. Currently, based on their internal evaluations, it appears that they have found the most value within the US. 
  • Venture capital contributes 2% of the total investment pool with $40 billion total. Venture capital investors seek out pioneering companies and cutting-edge technologies at their early stages with the anticipation that their investments will be at the forefront of both technological and market disruption. With the manufacturing sector experiencing significant technological advancements, these firms see opportunities to invest in start-up companies, which are at the forefront of these innovations.
  • Industrial supplies are influenced by the growing emphasis on automation, supply chain resilience, and sustainability. These companies received 36% of the entire investment pool for the last three years, totaling $530 billion. Investors are focusing on companies that offer innovative solutions in industrial automation, 3D printing, and advanced materials. 
  • Information technology has the second largest incoming investment with 19% totaling $280 billion. It remains a high-growth sector due to digital transformation across industries. Investments are directed toward software development, cybersecurity, cloud computing, artificial intelligence (AI), and internet of things (IoT). The shift to remote work has also led to increased investment in collaboration tools, cybersecurity solutions, and infrastructure to support remote operations. One notable deal was the acquisition of Xilinx, a semiconductor manufacturing company for $50 billion.
  • The third largest recipient sector was commercial industrial companies, which collectively received $246 billion in investment. Commercial industrial investments have been impacted by changes in consumer behavior and the shift towards e-commerce. Investments are focusing on modernizing warehousing and distribution facilities, automation technologies, last-mile delivery solutions, and sustainable infrastructure to improve operational efficiency and reduce environmental impact. One such deal was Mileway, a last-mile logistics company that was acquired for $23 billion in 2022.
Companies in the manufacturing industry play a pivotal role in meeting the diverse needs of businesses across various sectors, enabling them to streamline their operations, enhance efficiency, and maintain a competitive edge. Investment in manufacturing services offers investors a chance to diversify their portfolios and gain exposure to this ever-growing industry.
The manufacturing industry investment landscape by USA-based investors is intricately intertwined with the complexities of trade wars. These complexities prompt strategic collaborations and partnerships. The outlook remains exceedingly promising, defined by a landscape teeming with opportunities for both expansion and innovation. With technological advancements continually reshaping the industry’s landscape, companies are positioned to tap into new fields for growth and productivity.

References: Fortune Business Insights, Statista, PWC, McKinsey, Brink

Data Driven Decisions – A book by Joshua Jahani

Data Driven Decisions – A book by Joshua Jahani

Data Driven Decisions

Data Driven Decisions: Systems Engineering to Understand Corporate Value and Intangible Assets offers an insightful exploration into using systems engineering for corporate decision-making. Jahani delves into key considerations for businesses expanding globally, touching on joint ventures, valuations, and more.

The book provides a thorough framework to assess global regions for organizational fit, and techniques to gauge your firm’s intangible asset value. 

Joshua Jahani

Joshua Jahani teaches Systems Engineering at Cornell University and owns Jahani and Associates, a firm headquartered in New York City that provides investment banking advisory, investment banking transaction, and corporate development expertise to clients from around the globe.

Data Driven Decisions

Baruch Lev, Philip Bardes Professor (Emeritus) of Accounting and Finance, New York, NY

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