“Software is eating the world.” “Every deal is a tech deal today.”
We’ve heard statements like this repeatedly from some of the most influential deal makers today. Virtually every industry is impacted by technology in one way or another today. Even sectors that seem immune to the tech creep are no longer safe. The growth in technology is bringing efficiencies and new areas of growth to markets.
Today, there are private equity firms that are focused primarily on buying technology companies that will disrupt different verticals. ParkerGale, a Chicago-based private equity firm that closed its second fund in November with $375 million, is one example. “Deal flow is consistent in the smaller end where we play. There are lot more smaller companies looking for financial partners than there are bigger ones. The challenge is finding the right deals that meet our criteria,” says Devin Mathews, a founder of ParkerGale.
For its first deal in 2015, ParkerGale bought Aircraft Technical Publishers, a software tool used by aircraft mechanics to improve and accelerate servicing planes. Aircraft servicing can be a highly manual process — e.g., looking up parts and checking FAA guidelines — and ATP’s software automates the workflow of a typical maintenance process. Because of the strict regulations governing aircraft maintenance, software like ATP’s reduces errors and increases safety. After ParkerGale’s initial acquisition, they added on new products through the purchase of CaseBank Technologies in 2017. “We not only have the mechanic workflow solution with ATP to help mechanics fix what is already broken, but with the CaseBank acquisition we also have software that predicts when things will break so that airlines and military customers can stay ahead of problems. That’s really powerful,” says Mathews.
The company has 4,500 customers and more than 50,000 users today. “ATP’s products make the aircraft industry more efficient and much safer,” says Mathews.
While this is a win for aircraft companies and perhaps for ParkerGale upon exit, what does technology like ATP’s mean for private equity firms that often buy aircraft maintenance, repair and overhaul (MRO) companies? This is a key consideration for any investor in tech companies. For every technology that helps one aspect of the industry grow, another part of the industry can be negatively impacted. Ride-sharing apps are a great example — Uber and Lyft made it much more convenient for people to connect with rides, but has cratered the traditional taxi industry.
“Private equity buyers in traditional services or manufacturing industries now must consider how technology will change their business model and they have to be ready to make adjustments. ATP’s software can make aircraft servicers more profitable by increasing efficiency and predictability. There’s less downtime waiting on parts or having airplanes out of service. It doesn’t mean it’s bad to own the parts company. But the owners have understand that sooner or later technology will change the game and that can help them or hurt them,” says Mathews.
ParkerGale also owns OnePlus, a company that develops sensors and software to track the fullness of garbage compactors and other waste receptacles for large real estate owners such as The Home Depot, Simon Malls, Amazon, and UPS. The sensors can predict when the compactor will be full and send an alert to the hauler that it’s time to come pick it up. Over the past couple decades, the waste hauling business has been a popular one for private equity firms to buy and consolidate. In fact, the U.S. waste management industry includes approximately 24,000 companies — many of them single-location establishments and divisions of multi-location firms — with about $90 billion in combined annual revenue, according to Dun & Bradstreet’s First Research.
How does a company like OnePlus change the traditional waste hauling business mode? “It saves money for companies such as Home Depot because they don’t have haulers coming twice a week to pick up half full containers. How does it impact the hauler? Well, hauler revenue will go down because their customers will need fewer pick ups. But hauler efficiency should improve dramatically — they can schedule tighter routes, use fewer trucks to handle the same volume, and reduce wear and tear on their equipment,” says Mathews.
Technology is disrupting the norms even in traditional industries like agriculture. S2G Ventures is a venture firm that looks to invest in companies in the food and agriculture sector, spanning the entire food supply chain. “Farms are going from data-poor to data-rich,” says Aaron Rudberg, a managing director with the firm. “There are new technology solutions being thrown at farmers every day. Everything from helping farmers better manage their acreage or how to best apply fertilizer based on crop production. These are tools that farmers never had access to before. This creates a significant learning curve, but it’s worth it for the farmers to learn.”
S2G has invested in Grower’s Edge, a crop insurance company that helps farmers drive increased profitability by insuring their adoption of new technologies. By offering income assurance, farmers are able to take the risk of new products that will increase yields and drive greater profits per acre. Access to unique data sets and machine learning algorithms allow companies like Grower’s Edge to better understand farmer behavior and iterate to provide products that de-rick agriculture technology adoption.
To keep up with the consumer trends in the food industry many of the bigger lumbering giants are working hard to innovate. Companies like Kraft Heinz and Chobani have both launched incubators. In 2018 Kraft launched a platform called Springboard, which focuses on supporting developing brands that make health organic and experiential products. Chobani, meanwhile, has invested in Skyben Technologies, which sources thermal energy from the sun and supplements industrial boilers with zero-fuel heat, and CinderBio, which uses extreme microbes to make cleaning solutions for the dairy processing industry that are sustainable and biodegradable and use fewer chemicals, fewer steps, less water, and reduce hazardous waste. Other big U.S. food companies are making similar forays into the startup world include Campbell Soup Co (CPB.N), General Mills (GIS.N) and Kellogg Co (K.N).
The growth and number of new business opportunities is already significant and is accelerating. “The difficult part is picking the best entrepreneurs and then working to position them to compete with the larger companies that desperately need to innovate,” says Rudberg.