Industry 4.0 relevant for private equity?

The topic is indeed en-vogue and recei­ves a lot of coverage in the media. My impres­sion is also that it has reached the poli­ti­cal arena, where it stirs up fears. There are diffe­rent terms, the most common are “Inter­net of Things” (IoT), “Indus­try 4.0” or “Digi­tal Trans­for­ma­tion”. The latter is often used in connec­tion with medium-sized companies.
In my opinion, the best defi­ni­tion comes from Prof. Kager­mann (AcaTech): I4.0 is the networ­king of machi­nes and storage systems via global cyber physi­cal systems, wher­eby a compo­nent controls its own produc­tion route. The goal is to manu­fac­ture indi­vi­dua­li­zed batch size one products.
The topic of networ­king produc­tion resour­ces is not new. This alre­ady exis­ted when I was a student and was refer­red to as CIM = Compu­ter Inte­gra­ted Manu­fac­tu­ring. The time was not yet ripe at that time and the tech­no­logy disap­peared again into obli­vion. Howe­ver, I4.0 is an unstoppable mega­trend that affects all indus­try segments and companies.

In contrast to CIM, tech­no­logy is only one buil­ding block in I4.0. Much more essen­tial is the custo­mer focus that results. Now that data is available in real time, it will be possi­ble to create so-called “smart services” around products and extend the value chain. In gene­ral, the boun­da­ries between products and services are beco­ming blur­red, which opens up enorm­ous poten­tial for medium-sized compa­nies in parti­cu­lar, but is also asso­cia­ted with risks.
PEs gene­rally have 5 years to get a port­fo­lio company “ready” for sale. The PEs’ value enhance­ment tool­kit compri­ses three dimen­si­ons (1) multi­ple arbi­trage, (2) growth and rela­ted increase in profi­ta­bi­lity, and (3) dele­ver­aging. The first point is more specu­la­tive in clas­sic PE, the empha­sis is on value levers (2) and (3).
I4.0 now enables the port­fo­lio company to sell the custo­mer a solu­tion and not just a product. If the busi­ness model of a medium-sized port­fo­lio company can be expan­ded to include smart services, this can have a posi­tive impact on all value levers.

In my opinion, SMEs are in a good posi­tion to imple­ment I4.0 because — unlike corpo­ra­tes — they can act flexi­bly. I4.0 belongs on the agenda of a finan­cial inves­tor just like process or cost opti­miza­tion. Even before inves­t­ing, a PE should consider how to deal with this aspect. This should be laid down in the invest­ment memo­ran­dum and the 100-day plan with concrete imple­men­ta­tion steps.
The oppor­tu­ni­ties have been descri­bed above; I see risks essen­ti­ally in the mind­set of the manage­ment. Often port­fo­lio compa­nies are product compa­nies, which means crea­ting smart services is new terri­tory for the midmar­ket company. Addi­tio­nal person­nel will be needed here, and possi­bly even a new set-up for the orga­niza­tion. In addi­tion, many of the clas­sic SMEs are actually “analog” compa­nies that have some catching up to do in terms of IT use, not to mention the imple­men­ta­tion of an I4.0 agenda.
In my opinion, this is where the main risk lies: the loss of custo­mer loyalty. You can see this in banking through the rise of small service provi­ders, FinTechs. Extre­mely flexi­ble service provi­ders can displace medium-sized compa­nies from their pole posi­tion with custo­mers. As a conse­quence, his products and, in the end, he hims­elf become “commo­di­ties”. In addi­tion, risks inevi­ta­bly arise from the opening up of corpo­rate networks. A sensi­ble IT secu­rity stra­tegy is needed here at the port­fo­lio company.

About Marko Maschek 

Prior to foun­ding PINOVA, Marko Maschek spent ten years at 3i in Germany and the USA, most recently as a part­ner in the Boston office. There he was respon­si­ble for small cap invest­ments in envi­ron­men­tal tech­no­logy, semi­con­duc­tors and new mate­ri­als. During his time at 3i, Marko Maschek made 19 invest­ments, served on nume­rous super­vi­sory boards, successfully sold seve­ral compa­nies to stra­te­gic inves­tors and took 4 invest­ments public.
After trai­ning as an offi­cer, Marko Maschek worked for many years in indus­try, at Cambridge Consul­tants and Robert Bosch. At Bosch, he deve­lo­ped seve­ral tech­ni­cal inno­va­tions that were later paten­ted world­wide. Marko Maschek’s family back­ground is entre­pre­neu­rial. He studied elec­tri­cal engi­nee­ring at the TH Karls­ruhe (Dipl. Ing.) and compu­ter science at INSA Lyon. He also comple­ted an MBA at the Univer­sity of Cambridge.

PINOVA Capi­tal

GmbH is an inde­pen­dent invest­ment company based in Munich with a focus on equity finan­cing of fast-growing, inno­va­tive medium-sized compa­nies in German-spea­king count­ries. All PINOVA part­ners have a back­ground in medium-sized busi­ness and know the oppor­tu­ni­ties and risks of medium-sized compa­nies from their own many years of experience.