In recent years, strategic and private equity buyers have acquired hundreds of U.S.-based testing, inspection and certification (TIC) businesses. It is a large, diverse sector with strong fundamentals, driving this considerable, sustained investor attention.
Based on their extensive experience advising leading TIC companies, Harris Williams professionals Brian Lucas, Luke Semple and Ian Thomas share their thoughts on what is making these businesses a focus area for so many private equity groups.
- The TIC sector continues to attract attention from strategic buyers and investors due to the diversity of the end markets it serves and the non-discretionary nature of its services.
- As competition for larger acquisitions increases, buyers and investors are increasingly interested in building differentiated platforms of scale from smaller acquisitions.
- Three recent client engagements in the space confirm the potential for such platforms, and demonstrate the breadth of the TIC market.
Broad, Essential and Cycle Resilient
Companies in the TIC sector provide a wide range of essential services, from auditing and inspection, to testing, verification, quality assurance and certification. The segment is broad and diverse, spanning virtually every industry.
“From a power plant and the equipment that brings electricity to your home, to the food on your dinner table and everywhere in between, there is testing and inspection being done in some way, shape or form,” says Semple.
Growth is strong, driving robust interest among investors. Analyst estimates place the global TIC sector in excess of $200 billion, projected to grow at 5% to 6% CAGR from 2017 to 2025. Approximately 40% of the market is outsourced to third-party TIC companies, a trend that is expected to accelerate in the coming years.1
As explained by Lucas, this growth is fueled by an increasing focus among businesses and government agencies on ensuring everything consumers use – from critical infrastructure and industrial processes, to food and electronic devices – meets required standards and regulations in terms of quality, health and safety, environmental protection and social responsibility.
Brand risk is another growth driver, as companies work to avoid reputational damage from issues related to gaps in testing, inspection and certification. Recent examples include pipeline explosions, fire and safety issues with electronic devices, and food safety incidents.
Because TIC services are typically non-discretionary and recurring, these businesses tend to resist economic cycles. Many leading companies in the sector have a history of stable revenue growth and strong margins, often in the double digits.
“As investors look for opportunities in what may be the late stages of this current economic cycle, these TIC platforms represent a unique, and relatively safe, opportunity,” says Thomas. In fact, a recent Harris Williams analysis shows that private equity represented 24% of TIC transaction volume from 2016 to 2018, up from just 11% of total volume from 2011 to 2014.
One Key Consideration
Semple, Lucas and Thomas say buyers and investors should know that the attractiveness of the sector has led to an uplift in valuation multiples, particularly for increasingly scarce platforms of scale. That, in turn, is boosting investor interest in smaller companies – a space that has been historically dominated by strategic activity.
Despite much recent acquisition activity, TIC remains a fragmented sector. The four largest businesses in the sector – SGS, Bureau Veritas, Intertek and Eurofins – control less than half of the market.2 Many regional players operating in niche segments round out the industry. That creates opportunities for investors seeking to build platforms of scale.
“Bureau Veritas, SGS, Intertek and Eurofins have reached their size, in part, through acquisition of smaller businesses in the sector where they dominated M&A activity,” adds Semple. “Recently, we've seen increased competition from private equity across all deal sizes and scopes.”
As shown in the figure, from 2015 through 2018, financial buyers were involved in 17% of smaller deals and 58% of larger ones – up from 9% and 38% respectively between 2011 and 2014. Overall, this represents increasing involvement by private equity in deals of all sizes, including a near-doubling in participation in sub-$100 million transactions.
Percentage of Deals by Type of Buyer
Professionalization is one key factor separating the most promising new TIC platforms from the rest. “As private equity has moved down into these smaller deals, they're adding a level of sophistication that hasn't been in the smaller end of the market,” says Semple. “Data tracking and customer reporting, for example, are especially valuable in this market. If you have a background in professionalizing and creating platforms of scale, that’s a real advantage.”
A Wealth of Opportunities for Differentiated Firms
Harris Williams has extensive experience in the TIC sector, and firsthand knowledge of the opportunities it presents to investors. “Over the last six months, we have worked with TIC companies with expertise in material science, pharmaceutical and life sciences, electrical infrastructure and storm water management,” says Thomas. “What the best companies have in common is strong differentiation, whether from proprietary technology, service, expertise or market presence and scale.”
Three recent clients exemplify the results that can be achieved by differentiated TIC businesses.
EAG is a leading global scientific services company, providing analytical testing and consulting services to a diverse and demanding set of end markets.
Headquartered in San Diego, EAG has 21 laboratories in 18 locations worldwide, serving approximately 4,000 customers with revenue generated from more than 50 countries. The company is one of the largest independent U.S.-centric platforms in the TIC market, and is a highly differentiated player in high-science analytical testing and consulting solutions. EAG serves three main markets: material and engineering sciences, agroscience and biopharmaceuticals.
“EAG is an industry-leading scientific services company with one of the strongest platforms across the material, life and engineering sciences spaces that it serves,” says Lucas. “The platform is led by an outstanding management team who has established market leadership positions and accelerated growth upon what was an already strong foundation.”
Harris Williams advised EAG on its sale to Eurofins Scientific, a leader in food, environment and pharmaceutical products testing, and in testing and laboratory services for agroscience, genomics, discovery pharmacology and clinical studies.
Restoration and Recovery (R+R)
Restoration and Recovery (R+R) was founded to help commercial, retail, industrial and governmental entities manage their above- and below-ground stormwater assets to ensure environmental compliance. It is now a leading provider of post-construction stormwater management services, including inspection, maintenance, repair, consulting services and emergency response.
The company’s experience, approach, scope of services and geography enable it to provide high- level stormwater management services for any size entity, from individual property owners and businesses to large, national and multi-state organizations.
As Thomas explains, “Unlike the many regional companies in this sector, R+R is national in scale, which provides significant competitive advantage relative to R&R’s regional peers.”
R+R received a significant growth investment in June 2018 from DFW Capital Partners (DFW), a private equity investment firm focused exclusively on the lower-middle market.
Shermco is a leading provider of safe and reliable acceptance testing, commissioning, maintenance, and repair of electrical equipment and power distribution systems. Also a leader in electrical safety and technical training, Shermco focuses on industrial electrical contracting, power infrastructure, wind turbine maintenance and disaster recovery services. Shermco services the entire electrical line, from high-voltage substations to the distribution equipment within facilities.
With service centers located throughout North America, Shermco’s certified technicians and engineers deliver technical solutions for premier customers across utility, industrial, commercial, data center and other diverse end markets.
“With a highly skilled, and the largest, technician base in the industry, Shermco has a great reputation for quality and safety,” says Semple. “The company is uniquely positioned to capitalize on increasing demand for safe, efficient and reliable electrical systems across a large installed base of aging infrastructure.”
Shermco was acquired by Gryphon Investors in June 2018. Based in San Francisco, Gryphon is a leading private equity firm focused on profitably growing and competitively enhancing middle- market companies in partnership with experienced management teams.
Overall, Harris Williams sees substantial long-term opportunity for savvy investors in the TIC space. Recent experience in this dynamic segment confirms the potential to build differentiated platforms that stand to benefit from strong demand across a rich variety of end markets.
Published September 2018
1. Barclays TIC Outlook, 2018; Transparency Market Research, 2018